SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
CNS,INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
CNS, INC.
4400 WEST 78TH STREET
BLOOMINGTON, MINNESOTA 55435
(612) 820-6696
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 3, 2000
------------------
To the Stockholders of CNS, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of CNS,
Inc. (the "Company") will be held on Wednesday, May 3, 2000 at 3:30 p.m., local
time, in the auditorium of the Lutheran Brotherhood Building, 625 Fourth Avenue
South, Minneapolis, Minnesota for the following purposes:
1. To elect seven (7) directors to serve until the next Annual
Meeting of Stockholders or until their successors are duly
elected;
2. To ratify and approve the CNS, Inc. 2000 Stock Option Plan, a
copy of which is attached to the Proxy Statement as Appendix
A;
3. To ratify and approve the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year
ending December 31, 2000; and
4. To act upon any other matters that may properly be presented
at the meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice of Annual Meeting.
The Board of Directors has fixed the close of business on March 15,
2000 as the record date for the determination of Stockholders entitled to notice
of, and to vote at, the meeting and at any adjournments or postponements
thereof.
By Order of the Board of Directors,
/s/ Daniel E. Cohen
Daniel E. Cohen
CHAIRMAN OF THE BOARD
Dated: March 29, 2000
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY
CARD IN THE REPLY ENVELOPE PROVIDED AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE
YOUR REPRESENTATION AT THE ANNUAL MEETING. THE PROXY IS SOLICITED BY MANAGEMENT
AND MAY BE REVOKED OR WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS EXERCISED.
- --------------------------------------------------------------------------------
<PAGE>
CNS, INC.
4400 WEST 78TH STREET
BLOOMINGTON, MINNESOTA 55435
(612) 820-6696
------------------
PROXY STATEMENT
------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 2000
GENERAL MATTERS
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CNS, Inc., a Delaware corporation (the "Company"),
from holders of Company Common Stock of proxies in the accompanying form to be
voted at the Annual Meeting of Stockholders on Wednesday, May 3, 2000 at 3:30
p.m., local time (the "Annual Meeting"), and at any adjournments or
postponements thereof.
The Company intends to mail this Proxy Statement and the accompanying proxy
card on or about March 29, 2000 to all holders of Common Stock of the Company as
of the record date of March 15, 2000, who are entitled to vote at the Annual
Meeting.
Any stockholder giving a proxy will have the right to revoke it by written
notice to the Secretary of the Company or by filing with the Secretary another
proxy bearing a later date at any time before it is voted at the Annual Meeting.
A stockholder wishing to vote in person after giving his or her proxy must first
give written notice of revocation to the Secretary. All shares represented by
valid, unrevoked proxies will be voted at the Annual Meeting and any
adjournments or postponements thereof.
Under Delaware law, each item of business properly presented at a meeting
of stockholders generally must be approved by the affirmative vote of the
holders of a majority of the voting power of the shares present in person or by
proxy and entitled to vote on that item of business. However, if the shares
present and entitled to vote on that item of business would not constitute a
quorum for the transaction of business at the meeting, then the item must be
approved by a majority of the voting power of the minimum number of shares that
would constitute a quorum. Votes cast by proxy or in person at the Annual
Meeting of Stockholders will determine whether or not a quorum is present. If a
stockholder abstains from voting on any matter, the Company intends to count the
person abstaining as present for purposes of determining whether a quorum is
present at the Annual Meeting of Stockholders for the transaction of business
but as not having voted for any proposal, although there is no definitive
statutory or case law authority in Delaware as to the proper treatment of
abstentions. Additionally, the Company intends to count broker "non-votes" as
present for purposes of determining the presence or absence of a quorum for the
transaction of business. A "non-vote" occurs when a nominee holding shares for
a beneficial owner votes on one proposal, but does not vote on another proposal
because the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner. Therefore, abstentions and
broker "non-votes" have the same effect as votes against the proposals.
OUTSTANDING VOTING SECURITIES
Only stockholders of record as of the close of business on March 15, 2000,
will be entitled to vote at the Annual Meeting. On that date, the Company had
outstanding 14,436,561 shares of common stock, $.01
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<PAGE>
par value ("Common Stock"), each of which is entitled to one vote per share on
each matter to be voted upon at the meeting. As provided in the Certificate of
Incorporation of the Company, there is no cumulative voting. The Company has no
class of voting securities outstanding other than the Common Stock.
SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of the close of business on March 15,
2000, the number and percentage of outstanding shares of Common Stock of the
Company beneficially owned (i) by each person who is known to the Company to
beneficially own more than five percent (5%) of the Common Stock of the Company,
(ii) by each director and nominee of the Company, (iii) by each executive
officer named in the Summary Compensation Table below, and (iv) by all directors
and executive officers of the Company as a group:
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2) OF CLASS
---------------- ------------------------ --------
Dimensional Fund Advisors, Inc.(3) 966,500 6.7%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 9041
Citigroup, Inc.(4) 868,740 6.0%
153 East 53rd Street
New York, NY 10043
Eubel Brady & Suttman Asset Management, Inc.(5) 746,055 5.2%
7777 Washington Village Drive, Suite 210
Dayton, OH 45459
Daniel E. Cohen(6)(7)(8) 830,664 5.7%
Richard W. Perkins(7)(9)(10) 396,148 2.7%
Marti Morfitt(7)(8) 161,257 1.1%
Patrick Delaney(7)(9) 110,066 *
R. Hunt Greene(7)(11)(12) 110,000 *
Andrew J. Greenshields(7)(9)(13) 84,000 *
John J. Keppeler(8) 42,828 *
Carol J. Watzke(8) 25,000 *
Teri P. Osgood(8) 17,756 *
H. Robert Hawthorne(7)(9) 5,000 *
All directors, nominees and officers
as a group (14 persons)(14) 2,092,496 13.6%
- ------------------------------
*Indicates ownership of less than one percent.
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(1) Except as otherwise noted, all shares beneficially owned by each owner were
owned of record, and each owner held sole voting power and sole investment
power for all shares held.
(2) Includes the following number of shares which could be purchased under
stock options exercisable within sixty (60) days of March 15, 2000: Mr.
Cohen, 200,000 shares; Mr. Perkins, 90,000 shares, Ms. Morfitt, 110,000
shares; Mr. Delaney, 90,000 shares; Mr. Greene, 70,000 shares; Mr.
Greenshields, 80,000 shares; Mr. Keppeler, 26,000 shares; Ms. Watzke,
25,000 shares; Ms. Osgood, 15,000 shares; Mr. Hawthorne, 5,000 shares; and
all directors, nominees and officers as a group, 989,996 shares.
(3) The disclosure is based upon information filed with the Securities and
Exchange Commission on Schedule 13G on February 3, 2000.
(4) The disclosure is based on a Schedule 13G filed with the Securities and
Exchange Commission on February 14, 2000 by Citigroup, Inc. on behalf of
itself, Salomon Smith Barney Inc., Salomon Brothers Holding Company Inc.
and Salomon Smith Barney Holdings Inc. (collectively, the "Group"). The
Group shares voting and dispositive power. Salomon Smith Barney Holdings
Inc. and Citigroup, Inc. disclaim any beneficial ownership of the shares.
(5) The disclosure is based upon information filed with the Securities and
Exchange Commission on Schedule 13G/A on February 15, 2000. The principals
of Eubel Brady & Suttman Asset Management, Inc., Mark Brady, Robert J.
Suttman, Ron E. Eubel, William Hazel and Berrie Holtgreive, retain
discretionary authority over the reported shares. Beneficial ownership
listed does not include 1,500 shares owned directly by William Hazel.
(6) Includes 327,332 shares of Common Stock owned of record by Mr. Cohen's
spouse for which he has no voting or dispositive power.
(7) Serves as a director of the Company and has been nominated for re-election.
(8) Serves as an executive officer of the Company.
(9) Does not include an option to purchase 5,000 shares of Common Stock held by
such individual which will vest if re-elected to the Board of Directors at
the Annual Meeting.
(10) Includes 225,109 shares of Common Stock held for the accounts of clients of
Perkins Capital Management, Inc., a registered investment advisor of which
Mr. Perkins is the controlling shareholder, a director and President.
Perkins Capital Management has no voting power with respect to such shares
and has sole dispositive power with respect to such shares. Mr. Perkins and
Perkins Capital Management, Inc. disclaim beneficial ownership of such
shares. This total also includes 67,039 shares held in trusts for which Mr.
Perkins is the sole trustee, 10,000 shares held in the Perkins Capital
Management Profit Sharing Plan, and 4,000 shares held by a corporation of
which Mr. Perkins is sole shareholder.
(11) Includes 10,000 shares of Common Stock which could be purchased by stock
options exercisable within sixty (60) days of March 15, 2000 held by a
general partnership of which Mr. Greene is a general partner.
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<PAGE>
(12) Does not include 5,000 shares of Common Stock which could be purchased by a
general partnership of which Mr. Greene is a general partner which will
vest if Mr. Greene is re-elected to the Board of Directors at the Annual
Meeting.
(13) Includes 4,000 shares of Common Stock held by Mr. Greenshields jointly with
his spouse for which he has shared voting and dispositive power.
(14) Includes 327,332 shares of Common Stock owned by spouses and 4,000 shares
owned jointly with spouses.
5
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL #1)
Seven directors will be elected at the Annual Meeting. The Board of
Directors has nominated for election the seven persons named below and each has
consented to being named a nominee. If elected, all directors will serve until
the next Annual Meeting or until their successors have been elected and
qualified. Mr. Cohen has been a director of the Company since its formation in
1982; Mr. Delaney has been a director since 1983; Mr. Greene has been a director
since 1985; Mr. Greenshields has been a director since 1986; Mr. Hawthorne has
been a director since 1999; Ms. Morfitt has been a director since 1998; and Mr.
Perkins has been a director since 1993. If for any reason any of the nominees
becomes unavailable for election, the proxies solicited by the Board of
Directors will be voted for such nominee as is selected by the Board of
Directors. The Board of Directors has no reason to believe that any of the
nominees is not available or will not serve if elected.
All of the nominees named below have been nominated by the Board of
Directors of the Company. It is intended that proxies solicited by the Board of
Directors will (unless otherwise directed) be voted "FOR" the election of the
nominees for Director named below.
The nominees are listed below with their ages, their present positions with
the Company, their present principal occupations or employment and their
principal occupations or employment for at least the past five years. Mr. Cohen
and Ms. Morfitt devote their full working time to the business of the Company.
Messrs. Delaney, Greene, Greenshields, Hawthorne and Perkins devote such time as
is necessary to fulfill their duties as directors.
DANIEL E. COHEN, 47, has served as the Company's Chairman of the Board
since 1993, its Chief Executive Officer since 1989 and as Treasurer from 1982 to
March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and
board-certified neurologist.
PATRICK DELANEY, 57, has served as a director of the Company since 1983 and
as the Company's Secretary since 1995. Mr. Delaney is a partner in the
Minneapolis law firm of Lindquist & Vennum P.L.L.P., counsel to the Company. He
has been in the private practice of law since 1967. He is also a director of
Community First Bankshares, Inc., a multi-bank holding company, and the
secretary of Cardia, Inc., a manufacturer of medical devices.
R. HUNT GREENE, 49, has been an investment banker for over fifteen years.
He is presently Managing Director of Greene Holcomb & Fisher LLC, a Minneapolis
investment bank that provided investment banking services to the Company in
1996-1999 and that may provide investment banking services to the Company in
2000. Mr. Greene was a Managing Director of Piper Jaffray Inc., a
Minneapolis-based investment bank and general broker-dealer in investment
securities, from 1979 to 1995.
ANDREW J. GREENSHIELDS, 62, has been President of Pathfinder Ventures,
Inc., Minneapolis, Minnesota, since 1980. He is also a general partner of
Pathfinder Venture Capital Fund III and a general partner of Spell Capital
Partners, LP, both of which are Minneapolis-based financial limited
partnerships. Mr. Greenshields is also a director of Aetrium, Inc., a
manufacturer of semi-conductor handling equipment.
H. ROBERT HAWTHORNE, 55, has been President and Chief Executive Officer of
Ocean Spray Cranberries, Inc., a Boston-based food and beverage company, since
February 2000. From 1997 to 1999, Mr. Hawthorne served as a director, President
and Chief Executive Officer of Select Comfort Corporation, a Minneapolis-based
company that manufactures air beds and sleep related products. From 1986 to
1997, Mr. Hawthorne served in a series of positions of increasing responsibility
with The Pillsbury Company, a
6
<PAGE>
Minneapolis-based manufacturer and distributor of food products, most recently
serving from February 1992 to December 1997 as President of The Pillsbury Brands
Group, a subsidiary of The Pillsbury Company.
MARTI MORFITT, 42, has served as the Company's President and Chief
Operating Officer since March 1998. From September 1982 to February 1998, Ms.
Morfitt served in a series of positions of increasing responsibility with The
Pillsbury Company, a Minneapolis-based manufacturer and distributor of food
products, most recently serving from May 1997 to February 1998 as
Vice-President, Meals, and from February 1994 to May 1997 as Vice-President,
Green Giant Brands. She also serves as a director of Graco, Inc., a
Minneapolis-based manufacturer of fluid handling systems.
RICHARD W. PERKINS, 69, has been President, Chief Executive Officer and a
director of Perkins Capital Management, Inc., a Minneapolis-based investment
management company, since 1985. He is also a general partner of Spell Capital
Partners, LP, a Minneapolis-based venture capital limited partnership. He is
also a director of the following publicly-held companies: Bio-Vascular, Inc., a
manufacturer of prosthetics and surgical appliances; Intellefilm Corp., a
producer of television and internet commercials; Eagle Pacific Industries, Inc.,
a manufacturer of plastic pipes; Lifecore Biomedical, Inc., a medical device
company; Nortech Systems, Inc., a contract manufacturer for the electronics
industry; Quantech, Ltd., a development stage medical products company; Vital
Images, Inc., a medical diagnostic software company; and Harmony Holdings, Inc.,
a producer of television commercials, music videos and related media.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED.
-----------------------------
7
<PAGE>
OTHER INFORMATION REGARDING THE BOARD
BOARD MEETINGS
The Board of Directors met five times during 1999. Each director attended
at least 75% of the aggregate of the total number of Board meetings and
Committee meetings on which he served during the fiscal year 1999.
COMMITTEES
AUDIT COMMITTEE. The Audit Committee of the Board of Directors, which is
comprised of Messrs. Greene, Chairman, and Greenshields, met two times during
1999. The Audit Committee reviews and evaluates significant matters relating to
the audit and internal controls of the Company, reviews and approves
management's processes to ensure compliance with laws and regulations, reviews
the scope and results of audits by and the recommendations of the Company's
independent auditors, and approves services provided by the auditors. The Audit
Committee also reviews the audited financial statements of the Company.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors, which is comprised of Messrs. Greenshields, Chairman, Hawthorne and
Perkins, met two times during 1999. Among other duties, the Compensation
Committee makes recommendations to the Board of Directors regarding the
employment practices and the policies of the Company and the compensation paid
to executive officers of the Company. The Compensation Committee therefore also
has the authority to make awards under and adopt and alter administrative rules
and practices governing the Company's Stock Option Plans and Stock Purchase Plan
("Plans") and interpret the terms and provisions of the Plans and any award
issued under those Plans.
NOMINATING COMMITTEE. The Nominating Committee, which is comprised of
Messrs. Greenshields, Chairman, and Delaney and Ms. Morfitt meet two times
during 1999. The responsibilities of the Nominating Committee, whose name was
changed to the Governance Committee in 2000, include Board evaluation, Board
membership recommendations and chief executive officer succession planning.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ending December 31, 1999,
1998 and 1997, the cash compensation paid by the Company, as well as certain
other compensation paid or accrued for those years, to Daniel E. Cohen, the
Company's Chief Executive Officer, and each of the other four most highly
compensated executive officers of the Company as determined in accordance with
the Securities and Exchange Commission rules (together with Mr. Cohen, the
"Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
- --------------------------- ---- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Daniel E. Cohen 1999 $253,750 $83,864 -0- $135
Chief Executive Officer 1998 235,000 74,025 -0- 261
and Chairman of the Board 1997 219,750 -0- -0- 300
Marti Morfitt 1999 275,000 90,889 60,000 90
President and 1998 185,647(2) 73,479 150,000 127
Chief Operating Officer 1997 -0- -0- -0- -0-
John J. Keppler 1999 167,515 41,718 18,000 81
Vice President of 1998 74,240(3) 73,700 50,000 49
Worldwide Sales 1997 -0- -0- -0- -0-
Teri P. Osgood 1999 158,487 31,428 15,000 81
Vice President of 1998 58,721(4) 72,500 30,000 41
U.S. Marketing 1997 -0- -0- -0- -0-
Carol J. Watzke 1999 155,963 30,927 15,000 207
Vice President of 1998 62,500(5) 52,500 50,000 216
Consumer Strategy 1997 -0- -0- -0- -0-
</TABLE>
- ---------------------------
(1) Represents the payment by the Company of life insurance premiums on behalf
of the Named Executive.
(2) Ms. Morfitt became Chief Operating Officer in March 1998 and received a
salary for the remainder of the year.
(3) Mr. Keppeler became Vice President in July 1998 and received a salary for
the remainder of the year.
(4) Ms. Osgood became Vice President in August 1998 and received a salary for
the remainder of the year.
(5) Ms. Watzke became Vice President in July 1998 and received a salary for the
remainder of the year.
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STOCK OPTIONS
The following table contains information concerning grants of stock options
to the Named Executives during the fiscal year ending December 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
PERCENT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
OF SECURITIES OPTIONS EXERCISE OR PRICE APPRECIATION
UNDERLYING GRANTED TO BASE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED (#) IN 1999 ($/SH) DATE 5% 10%
- ---- ----------- ------- ------ ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen -- -- -- -- -- --
Marti Morfitt 60,000(2) 17.0% $2.813 04/15/09 $106,126 $268,944
John J. Keppeler 18,000(3) 5.1 2.813 04/15/09 31,838 80,683
Teri P. Osgood 15,000(4) 4.2 2,813 04/15/09 26,532 67,237
Carol J. Watzke 15,000(4) 4.2 2.813 04/15/09 26,532 67,237
</TABLE>
- -------------------
(1) Potential realizable values shown above represent potential gains based
upon annual compound price appreciation of 5% and 10% from the date of
grant through the full option term. The actual value realized, if any, on
stock option exercises will be dependent upon overall market conditions and
the future performance of the Company and its Common Stock. There is no
assurance that the actual value realized will approximate the amounts
reflected in this table.
(2) The option vests as follows: 20,000 shares on each of April 15, 2000, 2001
and 2002.
(3) The option vests as follows: 6,000 shares on each of April 15, 2000, 2001
and 2002.
(4) The option vests as follows: 5,000 shares on each of April 15, 2000, 2001
and 2002.
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OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executives concerning the exercise of options during the fiscal year ending
December 31, 1999 and unexercised options held as of December 31, 1999:
AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
ON VALUE -------------------- -----------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen -0- -0- 200,000 -0- (2) (2)
Marti Morfitt -0- -0- 60,000 150,000 $658,125 $ 78,750
John J. Keppler -0- -0- 20,000 48,000 183,750 23,625
Teri P. Osgood -0- -0- 10,000 35,000 124,688 19,687
Carol J. Watzke -0- -0- 20,000 45,000 175,313 19,687
</TABLE>
- ---------------------
(1) Based on the closing sale price of $4.125 Per share of Common Stock on
December 31, 1999.
(2) The exercise price for these options was greater than the closing sale
price on December 31, 1999.
REPORT ON EXECUTIVE COMPENSATION
This is a report of the Compensation Committee of the Board of Directors of
the Company, which is composed of the undersigned Board members. This report
shall not be deemed incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 and shall not
otherwise be deemed to be filed under either such Act.
COMPENSATION PHILOSOPHY. The compensation philosophy of the Company is to
provide competitive levels of compensation that are consistent with the
Company's annual and long-term performance goals, recognize individual
initiative and achievements and assist the Company in attracting and retaining
qualified executives. It is intended that, in judging appropriate levels of
compensation, the Compensation Committee will take into account internally set
performance goals and comparisons with the performance of other publicly-held
consumer products companies which had rapidly growing revenues under $500
million.
BASE SALARY. Executive base salary is reviewed annually and adjustments, if
any, are based on levels of responsibility, experience, internal equity,
external pay practices and the rate of inflation. In 1999, the Compensation
Committee recommended to the Board of Directors and the Board adopted a plan
under which the base salaries of the executive officers were set effective April
1, 1999.
CASH BONUS. Bonuses are awarded to executive officers based upon the
Company's overall performance and upon the attainment of certain strategic
objectives. In 1999, the Board of Directors adopted a plan under which the
Chairman and Chief Executive Officer of the Company and the President and Chief
Operating Officer of the Company would be eligible for cash bonuses equal to
amounts of between 25% and 100% of their base salaries. The specified financial
targets required for various bonus levels were set by the
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Board of Directors. Under the same plan, Vice Presidents of the Company were
eligible for cash bonuses of between 15% and 60% of their base salaries.
STOCK OPTIONS. The Company's Stock Option Plans include executive officers.
Stock options are generally granted to executive officers at the time they are
elected. The Compensation Committee has adopted the position that stock
ownership by management and stock-based performance compensation arrangements
are beneficial in aligning management's and shareholder's interests in enhancing
shareholder value.
CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Cohen's compensation for
1997-1999 is shown in the Summary Compensation Table above. Mr. Cohen has
managed the Company well in an increasingly competitive industry. He has
collaborated with Ms. Morfitt, the Company's President and Chief Operating
Officer, in guiding the development and marketing of Breathe Right(R)nasal
strips and in implementing strategies for the establishment of a new network for
distributing the Company's products in international markets. In addition, Mr.
Cohen has led the Company's development of new products which are expected to be
launched in 2000, including the FlairTM equine nasal strip, the FiberChoiceTM
chewable fiber tablet and new Breathe Right nasal strip products. The
Compensation Committee has determined Mr. Cohen's compensation on these bases
and commends him for his performance.
BOARD ACTION. All recommendations of the Compensation Committee have been
and are subject to Board of Director review and approval. Stock option grants by
the Compensation Committee are not, however, subject to Board of Director review
and approval.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS:
Andrew J. Greenshields, Chairman
H. Robert Hawthorne
Richard W. Perkins
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STOCK PERFORMANCE
The graph below sets forth a comparison of the cumulative shareholder
return of the Company's Common Stock over the last five fiscal years with the
cumulative total return over the same periods for the Nasdaq Market Index and
the Surgical, Medical and Dental Instruments and Supplies Index (the "Medical
Instruments Index") (SIC Code 384, which includes 242 companies). The graph
below compares with the two indicated indexes the cumulative total return of the
Company's Common Stock over the last five fiscal years assuming a $100
investment on December 31, 1994 and assuming reinvestment of all dividends paid.
The Company did not pay any dividends during this period. This graph shall not
be deemed incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.
[PLOT POINTS CHART]
FISCAL YEAR ENDING DECEMBER, 31
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -------
CNS, INC. $100 $340.85 $323.94 $150.70 $ 77.46 $ 92.96
INDUSTRY INDEX 100 167.03 177.87 213.31 277.50 264.67
NASDAQ MARKET 100 129.71 161.18 197.16 278.08 490.46
The Company's Common Stock closed at $4.125 per share on December 31, 1999.
EMPLOYMENT AGREEMENTS
Mr. Cohen, Ms. Morfitt, Mr. Keppeler, Ms. Osgood and Ms. Watzke each have
employment agreements with the Company. The employment agreements with Mr.
Cohen, Ms. Morfitt, Mr. Keppeler, Ms. Osgood and Ms. Watzke provide that they
are entitled to base salaries, respectively, of $260,000, $285,000, $166,374,
$159,650 and $157,950 annually. In addition, they may earn cash bonuses as
established by the Board from time to time. Either the Company or Mr. Cohen, Ms.
Morfitt, Mr. Keppeler, Ms. Osgood or Ms. Watzke may terminate their respective
agreements at any time on 30 days' advance, written notice. Each of the
employment agreements with Mr. Cohen, Ms. Morfitt, Mr. Keppeler, Ms. Osgood
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and Ms. Watzke contains a noncompete obligation which remains in effect for a
period of one year after termination of employment for any reason.
Each of the employment agreements with Mr. Cohen, Ms. Morfitt, Mr.
Keppeler, Ms. Osgood and Ms. Watzke provides that upon the termination of their
employment with the Company during a period of twenty-four months following a
Change in Control of the Company (i) by the Company other than for Cause, death
or Disability, or (ii) by the employee for Good Reason (as such terms are
defined in their employment agreements), then they shall be entitled to a lump
sum payment equal to twenty-four times the average monthly cash compensation
paid to them in the twenty-four months prior to termination and all of their
outstanding options to purchase Common Stock of the Company shall immediately
become fully vested and exercisable. If such a termination had occurred in 1999,
the amounts payable pursuant to these employment agreements would have been as
follows: Mr. Cohen, $646,639; Ms. Morfitt, $711,390; Mr. Keppeler, $414,420; Ms.
Osgood, $406,504; and Ms. Watzke, $390,890.
DIRECTOR COMPENSATION
Directors who served during 1999 and were not otherwise directly or
indirectly compensated by the Company were each paid directors' fees in the form
of an annual retainer and meeting fee during 1999. The annual retainers for each
of Messrs. Delaney, Greene, Greenshields and Perkins, who served the entire
fiscal year, was $5,000. The retainer for Mr. Hawthorne, who served for part of
the fiscal year, was $3,750. In addition, non-employee directors received $1,000
for each board meeting they attended and were compensated for attending
committee meetings not held on the same day as a regular board meeting at a rate
of $750 per meeting. All cash director's fees paid to Mr. Delaney were assigned
to Lindquist & Vennum and deducted from legal fees payable by the Company. Fees
were also paid to Mr. Delaney's law firm, Lindquist & Vennum P.L.L.P., for legal
services rendered to the Company during 1999.
Each of the non-employee directors who was elected or re-elected at the
1998 Annual Meeting of Stockholders (Messrs. Delaney, Greene, Greenshields and
Perkins) was granted a ten-year, non-qualified option to purchase 15,000 shares
of Common Stock at $5.00 per share, the fair market value of the Common Stock on
the date of grant. Mr. Hawthorne, who was elected to the Board on July 30, 1999,
was granted a ten-year, non-qualified option to purchase 25,000 shares of Common
Stock at $3.97 per share, the fair market value of the Common Stock on the date
of the grant. All of the options granted to each of the Company's directors vest
as follows: 5,000 shares on the date of grant and 5,000 shares on the date of
each annual stockholders' meeting held during each succeeding year at which the
director is re-elected to the Board of Directors.
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APPROVAL OF CNS, INC. 2000 STOCK OPTION PLAN
(PROPOSAL #2)
INTRODUCTION
On March 13, 2000, the Company's Board of Directors adopted the CNS, Inc.,
2000 Stock Option Plan (the "2000 Plan"). The purpose of the 2000 Plan is to
enable the Company and its subsidiaries to retain and attract executives, other
key employees, non-employee directors and consultants who contribute to the
Company's success by their ability, ingenuity and industry, and to enable such
individuals to participate in the long-term success and growth of the Company by
giving them a proprietary interest in the Company. The 2000 Plan authorizes the
granting of awards in any of the following forms: (i) stock options, both
incentive and non-qualified, (ii) stock appreciation rights, (iii) restricted
stock, and (iv) deferred stock. Please refer to Appendix A attached to this
Proxy Statement for the full text of the 2000 Plan.
The Board of Directors has approved the 2000 Plan in part because as of
March 15, 2000, the Company's existing stock option plan had less than 30,000
shares of Common Stock remaining for issuance.
The principal features of the 2000 Plan are summarized below.
SUMMARY OF THE PLAN
NUMBER OF SHARES. The maximum number of shares of Common Stock currently
reserved for awards under the 2000 Plan is 700,000 shares (subject to adjustment
in the event of possible future stock splits or similar changes in the Common
Stock). Shares of Common Stock covered by expired or terminated stock options
under the 2000 Plan may be used for subsequent awards.
ELIGIBILITY AND ADMINISTRATION. Executives, key employees, non-employee
directors and consultants of the Company and its subsidiaries are eligible to be
granted awards under the 2000 Plan. The maximum shares of Common Stock that may
be awarded under an option to any one person during a fiscal year is 150,000
shares. The 2000 Plan is administered by the Board of Directors or by a
Committee appointed by the Board, consisting of at least two directors, all of
whom are "Outside Directors" and "Non-Employee Directors" as defined in the 2000
Plan. The Board, or Committee as the Board may so appoint, has the power to make
awards, determine the number of shares covered by each award and other terms and
conditions of such awards, amend prior awards, construe the 2000 Plan, and
prescribe, amend and rescind the rules and regulations with respect to the
administration of the 2000 Plan.
STOCK OPTIONS. The Board may grant stock options that qualify as "incentive
stock options" under the Internal Revenue Code or as "non-qualified stock
options" in such form and upon such terms as the Board may approve from time to
time. The purchase price may be paid by tendering a certified or bank check, or
by any other form of legal consideration deemed sufficient by the Board and
consistent with the 2000 Plan's purpose and applicable law, including, but not
limited to, promissory notes and the surrender of previously acquired shares of
common stock of the Company which, in the case of stock acquired upon the
exercise of an option, have been owned for more than six months on the date of
surrender, valued at its then fair market value. No stock option shall be
transferable by the optionee or exercised by anyone else during the optionee's
lifetime.
Stock options may be exercised immediately or in installments, as
determined by the Board or the Committee, and may be exercised during varying
periods of time after an optionee's termination of
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employment by the Company and any subsidiary or parent corporation, dependent
upon the reason for the termination. Following an optionee's death, Disability
(as defined in the 2000 Plan) or Retirement (as defined in the 2000 Plan), the
optionee's incentive stock options may be exercised, to the extent exercisable
at such time (or on such accelerated basis as the Board shall determine at or
after grant), for a period of twelve months from the date of death, Disability
or Retirement (unless the exercise period is extended by the Board) or until the
expiration of the stated term of the option, whichever is less. If the
optionee's employment terminates for any reason other than the optionee's death,
Disability or Retirement, any incentive stock option may be immediately
exercised to the extent it was exercisable at the time of such termination, for
the lesser of three months from such termination, or the expiration of the
stated term of the option, whichever period is shorter (unless the exercise
period is extended by the Board). If the optionee's employment is terminated for
"Cause," as defined in the 2000 Plan, all unexercised stock options granted to
the optionee shall immediately terminate. Unless the Board or Committee
designates otherwise, the exercise period of a non-qualified stock option shall
be the same as for an incentive stock option.
No incentive stock options shall be granted under the 2000 Plan after March
12, 2010. The exercise period of an incentive stock option may not exceed ten
years from the date of grant (or five years if issued to an optionee who owns or
is deemed to own more than 10% of the combined voting power of all classes of
stock of the Company, any subsidiary or parent corporation). The aggregate fair
market value at the time of grant of the Common Stock with respect to which an
incentive stock option is exercisable for the first time by an optionee during
any calendar year shall not exceed $100,000. The exercise price under an
incentive stock option or a non-qualified stock option granted under the 2000
Plan may not be less than 100% of the fair market value of Common Stock on the
date the option is granted (or, in the event the participant owns more than 10%
of the combined voting power of all classes of stock of the Company or any
subsidiary or parent corporation and an incentive stock option is granted, the
option price shall not be less than 110% of the fair market value of the stock
on the date the option is granted).
STOCK APPRECIATION RIGHTS. The Board may grant stock appreciation rights
("SARs") in connection with all or part of any stock option, either at the time
of the stock option grant, or, in the case of non-qualified options, later
during the term of the stock option. SARs entitle the participant to receive
from the Company the same economic value that would have been derived from the
exercise of an underlying stock option and the immediate sale of the shares of
Common Stock. Such value is paid by the Company in cash, shares of Common Stock
or a combination of both, in the discretion of the Board. SARs are exercisable
or transferable only at such times and to the extent stock options to which they
relate are exercisable or transferable. If an SAR is exercised, the underlying
stock option is terminated as to the number of shares covered by the SAR
exercise.
RESTRICTED STOCK. The Committee or the Board may also grant restricted
stock awards under the 2000 Plan that result in shares of Common Stock being
issued to a participant subject to restrictions against disposition during a
restricted period established by the Committee or the Board. The Board may
condition the grant of restricted stock upon the attainment of specified
performance goals. The provisions of restricted stock awards need not be the
same with respect to each recipient. The shares of restricted stock awarded
under the 2000 Plan are to be held in custody by the Company until the
restrictions thereon have lapsed. During the period of the restrictions, a
participant has the right to vote the shares of restricted stock and to receive
dividends and distributions unless the Committee or the Board requires such
dividends and distributions to be held by the Company subject to the same
restrictions as the restricted stock. If a participant terminates employment
during the period of the restrictions, all shares still subject to restrictions
will be forfeited and returned to the Company, subject to the right of the
Committee or the Board to waive such restrictions in the event of a
participant's death, Disability, Retirement or under special circumstances
approved by the Committee or the Board. Unless the restricted stock award or
some other agreement
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<PAGE>
governing the award provides otherwise, all restrictions with respect to
restricted stock lapse 60 days (or less as determined by the Board) prior to the
occurrence of a merger or other significant corporate change, as provided in the
2000 Plan.
DEFERRED STOCK. The Board may grant deferred stock awards that result in
shares of common stock being issued to a participant or group of participants
upon the expiration of a deferral period. The Board may condition the grant of
deferred stock upon the attainment of specified performance goals. The
provisions of deferred stock awards need not be the same with respect to each
recipient. Upon termination of employment for any reason during the deferral
period for a given award, the deferred stock in question shall be forfeited by
the participant, subject to the Board's ability to waive any remaining deferral
limitations with respect to a participant's deferred stock. During the deferral
period, deferred stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered and any dividends declared with respect to the number of
shares covered by a deferred stock award will either be immediately paid to the
participant or deferred and deemed to be reinvested in additional deferred
stock, as determined by the Board. The Board may allow a participant to elect to
further defer receipt of a deferred stock award for a specified period or until
a specified event.
FEDERAL INCOME TAX CONSEQUENCES
STOCK OPTIONS. An optionee will not realize taxable compensation income
upon the grant of an incentive stock option. In addition, an optionee generally
will not realize taxable compensation income upon the exercise of an incentive
stock option if he or she exercises it as an employee or within three months
after termination of employment (or within one year after termination if the
termination results from a permanent and total disability). At the time of
exercise, the amount by which the fair market value of the shares purchased
exceeds the aggregate option price shall be treated as alternative minimum
taxable income for purposes of the alternative minimum tax. If the stock
acquired pursuant to an incentive stock option is not disposed of prior to the
date two years from the option grant date or prior to one year from the option
exercise date (the "applicable holding periods"), any gain or loss realized upon
the sale of such shares will be characterized as a capital gain or loss. If the
applicable holding periods are not satisfied, then any gain realized in
connection with the disposition of such stock will generally be taxable as
compensation income in the year in which the disposition occurred, to the extent
of the difference between the fair market value of such stock on the date of
exercise and the option exercise price. The Company is entitled to a tax
deduction to the extent, and at the time, that the participant realizes
compensation income. The balance of any gain will be characterized as a
long-term or short-term capital gain depending on whether the shares were held
for more than one year.
An optionee will not realize taxable compensation income upon the grant of
a non-qualified stock option. When an optionee exercises a non-qualified stock
option, he or she will realize taxable compensation income at the time of
exercise equal to the amount by which the fair market value of the shares
purchased exceeds the aggregate option price. The Company is entitled to a tax
deduction to the extent, and at the time, that the participant realizes
compensation income.
SARS. The grant of an SAR would not result in income for the participant or
in a deduction for the Company. Upon receipt of shares or cash from exercise of
an SAR, the participant would generally recognize compensation income, measured
by the fair market value of the shares plus any cash received, and the Company
would be entitled to a corresponding deduction.
RESTRICTED STOCK AND DEFERRED STOCK. The grant of restricted stock and
deferred stock should not result in immediate income for the participant or in a
deduction for the Company for federal income tax
17
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purposes, assuming the shares are nontransferable and subject to restrictions or
to a deferral period which would result in a "substantial risk of forfeiture" as
intended by the Company and as defined in applicable Treasury regulations. If
the shares are transferable or there are no such restrictions or significant
deferral periods, the participant will realize compensation income upon receipt
of the award. Otherwise, a participant generally will realize taxable
compensation when any such restrictions or deferral period lapses. The amount of
such income will be the value of the common stock on that date less any amount
paid for the shares. Dividends paid on the common stock and received by the
participant during the restricted period or deferral period also will be taxable
compensation income to the participant. In any event, the Company will be
entitled to a tax deduction to the extent, and at the time, that the participant
realizes compensation income. A participant may elect, under Section 83(b) of
the Code, to be taxed on the value of the restricted or deferred stock at the
time of award. If the election is made, the fair market value of the stock at
the time of the award is taxable to the participant as compensation income and
the Company is entitled to a corresponding deduction.
WITHHOLDING. The 2000 Plan requires each participant, no later than the
date of which any part of the value of an award first becomes includable as
compensation in the gross income of the participant, to pay the Company any
federal, state or local taxes required by law to be withheld with respect to the
award. The Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. With
respect to any award under the 2000 Plan, if the terms of the award so permit, a
participant may elect to satisfy part or all of the minimum required federal
withholding tax associated with the award by (i) authorizing the Company to
retain from the number of shares of stock which would otherwise be deliverable
to the participant, or (ii) delivering to the Company from shares of Company
Common Stock already owned by the participant that number of shares having an
aggregate fair market value equal to part or all of the tax payable by the
optionee. In such event, the Company would pay the tax liability from its own
funds.
REGISTRATION WITH SECURITIES AND EXCHANGE COMMISSION
Upon approval of the 2000 Plan by the stockholders, the Company intends to
file a registration statement covering the shares issuable under the 2000 Plan
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1933, as amended.
VOTE REQUIRED
The approval of the CNS, Inc. 2000 Stock Option Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
represented at the meeting and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE CNS, INC. 2000 STOCK OPTION PLAN.
-------------------------------------
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APPOINTMENT OF INDEPENDENT AUDITORS
(PROPOSAL #3)
The Board of Directors has selected KPMG LLP, certified public accountants,
as independent auditors to make an examination of the accounts of the Company
for the fiscal year ending December 31, 2000, and to perform other appropriate
accounting services. Unless otherwise specified, proxies solicited by the Board
of Directors will be voted "FOR" such appointment of KPMG LLP. In the event the
appointment of KPMG LLP should not be ratified and approved by the stockholders,
the Board of Directors will make another appointment to be effective at the
earliest feasible time.
A representative of KPMG LLP is expected to attend the Annual Meeting of
Stockholders. He or she will have an opportunity to make a statement if he or
she desires to do so and will be available to respond to appropriate questions.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE PROPOSAL TO RATIFY AND
APPROVE THE APPOINTMENT OF KPMG LLP.
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ANNUAL REPORT
An Annual Report of the Company describing the Company's key activities and
containing financial statements for the fiscal year ended December 31, 1999
accompanies this Notice of Annual Meeting and proxy solicitation material.
STOCKHOLDER PROPOSALS
Stockholder proposals for consideration at the Company's 2001 Annual
Meeting must follow the procedures set forth in Rule 14a-8 under the Securities
Exchange Act of 1934 and the Company's Bylaws.
The proxy rules of the Securities and Exchange Commission permit
stockholders of the Company, after timely notice to the Company, to present
proposals for stockholder action in the Company's Proxy Statement where such
proposals are consistent with applicable law, pertain to matters appropriate for
stockholder action and are not properly omitted by action of the Company in
accordance with the proxy rules. In order for a stockholder proposal to be
considered for inclusion in the Proxy Statement for the 2001 Annual Meeting of
Stockholders, the proposal must be received by the Secretary of the Company in
writing at its corporate offices no later than November 30, 2000.
The Bylaws of the Company also establish an advance notice procedure with
respect to certain business to be brought before an annual meeting of
stockholders of the Company. The Bylaws provide that at the annual meeting only
such business may be conducted as is of a nature that is appropriate for
consideration at an annual meeting and has been either specified in the notice
of the meeting, otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or otherwise properly brought before the
meeting by a stockholder who has given timely written notice to the Secretary of
the Company of such stockholder's intention to bring such business before the
meeting. To be timely, the notice must be given by such stockholder to the
Secretary of the Company not less than 45 days nor more than 60 days prior to
the mailing date of the proxy materials for the Company's most recent annual
meeting and comply with certain other requirements. Notice relating to the
conduct of such business at an annual meeting must contain certain information
as described in the Company's Bylaws, which are available for inspection by
stockholders at the Company's principal executive offices pursuant to Section
220 of the Delaware General Corporation Law. Nothing in the Bylaws precludes
discussion by any stockholder of any business properly brought before the annual
meeting in accordance with the Company's Bylaws.
SOLICITATION
The Company will bear the entire cost of soliciting proxies, including the
cost of preparing, assembling, and mailing the proxies and soliciting material,
as well as the cost of forwarding the material to the beneficial owners of
stock. In addition to solicitation by mail, directors, officers and regular
employees of the Company may, without compensation other than their regular
remuneration, solicit proxies by telephone, facsimile or in person. The Company
may also request banks and brokers to solicit their customers who have a
beneficial interest in shares registered in the names of nominees and will
reimburse such banks and brokers for their reasonable out-of-pocket expenses.
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GENERAL
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities, to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission
and the NASD. Executive officers and directors are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file,
including Forms 3, 4 and 5. To the Company's knowledge, all insiders of the
Company filed in a timely manner all such reports, except that one late report
was filed for M. W. Anderson, Ph.D, the Company's Vice President of Product
Development and Regulatory Affairs.
OTHER BUSINESS
The management of the Company does not know of any other business that may
be presented for consideration at the Annual Meeting of Stockholders other than
a possible stockholder proposal which has been properly omitted from this Proxy
Statement in accordance with the rules of the Securities and Exchange
Commission. If this stockholder proposal or any other business should properly
come before the meeting, or any adjournment or postponement thereof, it is
intended that the persons named in the enclosed form of proxy will exercise
their discretionary authority to vote said proxy in accordance with their best
judgment.
ALL PROXIES PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY
STOCKHOLDERS. IF NO DIRECTION IS GIVEN, PROXIES WILL BE VOTED FOR THE ELECTION
OF MANAGEMENT'S NOMINEES FOR DIRECTORS, FOR THE ADOPTION OF THE CNS, INC. 2000
STOCK OPTION PLAN, FOR THE APPOINTMENT OF KPMG LLP AS THE COMPANY'S INDEPENDENT
AUDITORS, AND IN MANAGEMENT'S DISCRETION FOR ALL MATTERS THAT MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Daniel E. Cohen
Daniel E. Cohen
CHAIRMAN OF THE BOARD
Minneapolis, Minnesota
March 29, 2000
PLEASE SIGN, DATE AND MAIL YOUR PROXY NOW
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APPENDIX A
CNS, INC.
2000 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1. General Purpose of Plan; Definitions...............................3
------------------------------------
SECTION 2. Administration.....................................................6
--------------
SECTION 3. Stock Subject to Plan..............................................7
---------------------
SECTION 4. Eligibility........................................................7
-----------
SECTION 5. Stock Options......................................................8
-------------
SECTION 6. Stock Appreciation Rights.........................................12
-------------------------
SECTION 7. Restricted Stock..................................................13
----------------
SECTION 8. Deferred Stock Awards.............................................15
---------------------
SECTION 9. Other Awards......................................................16
------------
SECTION 10. Transfer, Leave of Absence, etc..................................16
-------------------------------
SECTION 11. Amendments and Termination.......................................17
--------------------------
SECTION 12. Unfunded Status of Plan..........................................17
-----------------------
SECTION 13. General Provisions...............................................17
------------------
SECTION 14. Effective Date of Plan...........................................19
----------------------
<PAGE>
CNS, INC.
2000 STOCK OPTION PLAN
SECTION 1. General Purpose of Plan; Definitions.
The name of this plan is the CNS, Inc. 2000 Stock Option Plan (the
"Plan"). The purpose of the Plan is to enable CNS, Inc. (the "Company") and its
Subsidiaries to retain and attract executives, other key employees, non-employee
directors and consultants who contribute to the Company's success by their
ability, ingenuity and industry, and to enable such individuals to participate
in the long-term success and growth of the Company by giving them a proprietary
interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Agreement" means an agreement by and between the Company and
an optionee or recipient of an award under the Plan setting
forth the terms and conditions of the option or award.
b. "Board" means the Board of Directors of the Company as it may
be comprised from time to time.
c. "Cause" means a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony,
willful misconduct, dishonesty or intentional violation of a
statute, rule or regulation, any of which, in the judgment of
the Company, is harmful to the business or reputation of the
Company.
d. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute.
e. "Consultant" means any person, including an advisor, engaged
by the Company, the Parent Corporation or a Subsidiary of the
Company to render services and who is compensated for such
services but who is not an employee of the Company, the Parent
Corporation or any Subsidiary of the Company. A Non-Employee
Director may serve as a Consultant.
f. "Committee" means the Committee referred to in Section 2 of
the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be
exercised by the Board, unless the Plan specifically states
otherwise.
g. "Company" means CNS, Inc., a corporation organized under the
laws of the State of Delaware (or any successor corporation).
h. "Deferred Stock" means an award made pursuant to Section 8
below of the right to receive Stock at the end of a specified
deferral period.
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i. "Disability" means total and permanent disability as
determined by the Committee.
j. "Early Retirement" means retirement, with consent of the
Committee at the time of retirement, from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company.
k. "Fair Market Value" of Stock on any given date shall be
determined by the Committee as follows: (a) if the Stock is
listed for trading on one or more national securities
exchanges, or is traded on the Nasdaq Stock Market or the
Nasdaq Small Cap Market, the last reported sales price on the
principal such exchange or the Nasdaq Stock Market or Nasdaq
Small Cap Market on the date in question, or if such Stock
shall not have been traded on such principal exchange on such
date, the last reported sales price on such principal exchange
or the Nasdaq Stock Market or Nasdaq Small Cap Market on the
first day prior thereto on which such Stock was so traded; or
(b) if the Stock is not listed for trading on a national
securities exchange or the Nasdaq Stock Market or the Nasdaq
Small Cap Market, but is traded in the over-the-counter
market, including the Nasdaq OTC Bulletin Board System, the
closing bid price for such Stock on the date in question, or
if there is no such bid price for such Stock on such date, the
closing bid price on the first day prior thereto on which such
price existed; or (c) if neither (a) or (b) is applicable, by
any means fair and reasonable by the Committee, which
determination shall be final and binding on all parties.
l. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
m. "Non-Employee Director" means a "Non-Employee Director" within
the meaning of Rule 16b-3(b)(3) under the Securities Exchange
Act of 1934.
n. "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option, and is intended to be and is
designated as a "Non-Qualified Stock Option" or an Incentive
Stock Option that ceases to so qualify due to a failure to
comply with section 422 of the Code or an amendment to such
Stock Option.
o. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company on or after age 60.
p. "Other Awards" means those awards granted pursuant to Section
9 hereof.
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q. "Outside Director" means a Director who: (a) is not a current
employee of the Company or any member of an affiliated group
which includes the Company; (b) is not a former employee of
the Company who receives compensation for prior services
(other than benefits under a tax-qualified retirement plan)
during the taxable year; (c) has not been an officer of the
Company; (d) does not receive remuneration from the Company,
either directly or indirectly, in any capacity other than as a
director, except as otherwise permitted under Code Section
162(m) and regulations thereunder. For this purpose,
remuneration includes any payment in exchange for goods or
services. This definition shall be further governed by the
provisions of Code Section 162(m) and regulations promulgated
thereunder.
r. "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if each of the corporations (other than the Company)
owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations
in the chain.
s. "Restricted Stock" means an award of shares of Stock that are
subject to restrictions under Section 7 below.
t. "Retirement" means Normal Retirement or Early Retirement.
u. "Stock" means the Common Stock, $.01 par value per share, of
the Company.
v. "Stock Appreciation Right" means the right pursuant to an
award granted under Section 6 below to surrender to the
Company all or a portion of a Stock Option in exchange for an
amount equal to the difference between (i) the Fair Market
Value, as of the date such Stock Option or such portion
thereof is surrendered, of the shares of Stock covered by such
Stock Option or such portion thereof, and (ii) the aggregate
exercise price of such Stock Option or such portion thereof.
w. "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5 below.
x. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
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SECTION 2. Administration.
The Plan shall be administered by the Board of Directors or by a
Committee appointed by the Board of Directors of the Company consisting of at
least two Directors, all of whom shall be Outside Directors and Non-Employee
Directors, who shall serve at the pleasure of the Board.
The Committee shall have the power and authority to grant to eligible
employees, non-employee directors or consultants, pursuant to the terms of the
Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock,
(iv) Deferred Stock awards, or (v) Other Awards.
In particular, the Committee shall have the authority:
(i) to select the members of the Board, officers, and other key
employees of the Company and its Subsidiaries and other
eligible persons to whom Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock awards and/or Other
Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock awards and/or Other
Awards, or a combination of the foregoing, are to be granted
hereunder;
(iii) to determine the number of shares to be covered by each such
award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder
(including, but not limited to, any restriction on any Stock
Option or other award and/or the shares of Stock relating
thereto), which authority shall be exclusively vested in the
Committee (and not the Board) for purposes of establishing
performance criteria used with Restricted Stock and Deferred
Stock awards and Other Awards; provided, however, that in the
event of a merger or asset sale, the applicable provisions of
Sections 5(c) and 7(c) of the Plan shall govern the
acceleration of vesting of any Stock Option or awards; and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to
an award under this Plan shall be deferred either
automatically or at the election of the participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to
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time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan. The Committee may delegate
to executive officers of the Company the authority to exercise the powers
specified in (i), (ii), (iii), (iv) and (v) above with respect to persons who
are not either the chief executive officer of the Company or the four highest
paid officers of the Company other than the chief executive officer.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 700,000 shares. Such shares may consist, in
whole or in part, of authorized and unissued shares.
Subject to paragraph (b)(iv) of Section 6 below, if any shares that
have been optioned ceased to be subject to Stock Options, or if any shares
subject to any Restricted Stock or Deferred Stock award or Other Award granted
hereunder are forfeited or such award otherwise terminates without a payment
being made to the participant, such shares shall again be available for
distribution in connection with future awards under the Plan. Upon a
stock-for-stock exercise of a Stock Option or the withholding of Stock for the
payment of the option price or taxes, only the net number of shares issued to
the optionee shall be used to calculate the number of shares remaining available
for distribution under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, other change in corporate
structure affecting the Stock, or spin-off or other distribution of assets to
shareholders, such substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under the Plan, in the number and option
price of shares subject to outstanding options granted under the Plan, and in
the number of shares subject to Restricted Stock or Deferred Stock awards
granted under the Plan as may be determined to be appropriate by the Committee,
in its sole discretion, provided that the number of shares subject to any award
shall always be a whole number. Such adjusted option price shall also be used to
determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Option.
SECTION 4. Eligibility.
Officers, other key employees of the Company or any Parent
Corporation or Subsidiary, members of the Board of Directors, and Consultants
who are responsible for or contribute to the management, growth and/or
profitability of the business of the Company and its Subsidiaries are eligible
to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or
Deferred Stock awards or Other Awards under the Plan. The optionees and
participants under the Plan shall be selected from time to
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time by the Committee, in its sole discretion, from among those eligible, and
the Committee shall determine, in its sole discretion, the number of shares
covered by each award.
Notwithstanding the foregoing, no person shall receive grants of Stock
Options under this Plan which exceed 150,000 shares during any fiscal year of
the Company.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form and upon
such terms and conditions as the Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan after March 12, 2010.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of options (in each
case with or without Stock Appreciation Rights). To the extent that any option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Option as
an Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant,
provided however, the option price per share of Stock purchasable under an
Incentive Stock Option or a Non-Qualified Stock Option shall not be less than
100% of the Fair Market Value of the Stock on the date the option is granted. If
an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any Parent Corporation or
Subsidiary and an Incentive Stock Option is granted to such employee, the option
price shall be no less than 110% of the Fair Market Value of the Stock on the
date the option is granted.
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(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 424(d) of the Code) more than
10% of the combined voting power of all classes of stock of the Company or any
Parent Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(c) Exercisability. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant, subject to the
restrictions stated in Section 5(b) above. In the event that the Committee does
not determine the time at which a Stock Option shall be exercisable, such Stock
Option shall be exercisable one year after the date of grant and shall cease to
be on date following the happening of one of the events described in Section
5(f), (g), (h) and (i) or as specified in Section 5(b) whichever is earlier. If
the Committee provides, in its discretion, that any option is exercisable only
in installments, the Committee may waive such installment exercise provisions at
any time. Notwithstanding anything contained in the Plan to the contrary, the
Committee may, in its discretion, extend or vary the term of any Stock Option or
any installment thereof, whether or not the optionee is then employed by the
Company, if such action is deemed to be in the best interests of the Company;
provided, however, that in the event of a merger or sale of assets, the
provisions of this Section 5(c) shall govern vesting acceleration.
Notwithstanding the foregoing, unless the Stock Option Agreement provides
otherwise, any Stock Option granted under this Plan shall be exercisable in
full, without regard to any installment exercise provisions, for a period
specified by the Committee, but not to exceed sixty (60) days prior to the
occurrence of any of the following events: (i) dissolution or liquidation of the
Company other than in conjunction with a bankruptcy of the Company or any
similar occurrence, (ii) any merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will not be the
surviving entity or (iii) the transfer of substantially all of the assets of the
Company or 20% or more of the outstanding Stock of the Company.
The grant of an option pursuant to the Plan shall not limit in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge,
exchange or consolidate or to dissolve, liquidate, sell or transfer all or any
part of its business or assets.
(d) Method of Exercise. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full for the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of Stock
already owned by the optionee
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(which in the case of Stock acquired upon exercise of an option has been owned
for more than six months on the date of surrender) or, in the case of the
exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock
subject to an award hereunder (based, in each case, on the Fair Market Value of
the Stock on the date immediately preceding the date the option is exercised, as
determined by the Committee), provided, however, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares may be authorized only at the time the option is granted, and provided
further that in the event payment is made in the form of shares of Restricted
Stock or a Deferred Stock award, the optionee will receive a portion of the
option shares in the form of, and in an amount equal to, the Restricted Stock or
Deferred Stock award tendered as payment by the optionee. If the terms of an
option so permit, an optionee may elect to pay all or part of the option
exercise price by having the Company withhold from the shares of Stock that
would otherwise be issued upon exercise that number of shares of Stock having a
Fair Market Value equal to the aggregate option exercise price for the shares
with respect to which such election is made. No shares of Stock shall be issued
until full payment therefor has been made. An optionee shall generally have the
rights to dividends and other rights of a shareholder with respect to shares
subject to the option when the optionee has given written notice of exercise,
has paid in full for such shares and, if requested, has given the representation
described in paragraph (a) of section 13.
(e) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(f) Termination by Death. Subject to the rights set forth in Section
5(k), if an optionee's employment by the Company and any Subsidiary or Parent
Corporation terminates by reason of death, any Incentive Stock Option may
thereafter be immediately exercised, to the extent then exercisable (or on such
accelerated basis as the Committee shall determine at or after grant), by the
legal representative of the estate or by the legatee of the optionee under the
will of the optionee, for a period of twelve months (or such shorter period as
the Committee shall specify at grant) from the date of such death or until the
expiration of the stated term of the option, whichever period is shorter. In the
event of termination of employment by reason of death, if, pursuant to its
terms, any Incentive Stock Option is exercised after the expiration of the
exercise periods that apply for purposes of Section 422 of the Code, the option
will thereafter be treated as a Non-Qualified Stock Option.
(g) Termination by Reason of Disability. Subject to the rights set
forth in Section 5(k), if an optionee's employment by the Company and any
Subsidiary or Parent Corporation terminates by reason of Disability, any
Incentive Stock Option held by such optionee may thereafter be exercised, to the
extent it was exercisable at the time of termination due to Disability (or on
such accelerated basis as the Committee shall determine at or after grant), but
may not be exercised after twelve months (or such shorter period as the
Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is
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shorter. In the event of termination of employment by reason of Disability, if,
pursuant to its terms, an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, the option will thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. Subject to the rights set
forth in Section 5(k), if an optionee's employment by the Company and any
Subsidiary or Parent Corporation terminates by reason of Retirement and the
terms of the Stock Option so provide, any Incentive Stock Option held by such
optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement, but may not be exercised after twelve months (or such
shorter period as the Committee shall specify at grant) from the date of such
termination of employment or the expiration of the stated term of the option,
whichever period is shorter. In the event of termination of employment by reason
of Retirement, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(i) Other Termination. Subject to the rights set forth in Section 5(k),
or unless otherwise determined by the Committee, if an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates for any reason
other than death, Disability or Retirement, any Incentive Stock Option may be
exercised to the extent it was exercisable at such termination, for the lesser
of three months from the date of termination or the balance of the option's
term, except that if the optionee is terminated for Cause by the Company or any
Subsidiary or Parent Corporation, the Stock Option shall thereupon terminate
immediately.
(j) Annual Limit on Incentive Stock Options. The aggregate Fair Market
Value (determined as of the time the Stock Option is granted) of the Common
Stock with respect to which an Incentive Stock Option under this Plan or any
other plan of the Company and any Subsidiary or Parent Corporation is
exercisable for the first time by an optionee during any calendar year shall not
exceed $100,000.
(k) Extension of Exercise Period. At any time prior to or upon an
optionee's termination of employment is by reason of death, Disability,
Retirement or other termination, other than termination for Cause by the Company
or any Subsidiary or Parent Corporation, the Committee, in its sole discretion,
may extend the exercise period of part or all of the Stock Option, for any
additional term which the Committee determines is in the best interest of the
Company. An extension of an Incentive Stock Option shall not be effective
unless: (i) the option price is not less than 100% of the Fair Market Value of
the Stock at the time such extension is granted, (ii) the extension is made
before March 12, 2010, and (iii) the extended exercise period ends within ten
years from the date of such extension. If, pursuant to such extension, an
Incentive Stock Option is exercised after the expiration of the exercise period
that apply for purposes of Section 422 of the Code, the option will thereafter
be treated as a Non-Qualified Stock Option.
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(l) Replacement Options. In the event of a merger, consolidation,
acquisition, separation, reorganization or similar occurrence, where the Company
will be the surviving entity, the Committee, at its sole discretion, may assume
or issue Stock Options under this Plan to replace existing Stock Options issued
by acquired entity. The replacement options shall have an option price in which
the excess of the aggregate Fair Market Value of the shares subjected to the
option immediately after the replacement over the aggregate option price of such
shares is not more than the excess of the aggregate Fair Market Value of all
shares subject to the option immediately before such replacement over the
aggregate option price of such shares. The Committee has discretion to issue
replacement Stock Options whose terms conform with those of the existing Stock
Options of the acquired company even if such terms conflict with the terms
provided in this plan. The Committee shall not, in any event, issue replacement
options which give an option of the acquired company any additional benefits not
then existing under the optionee's original Stock Options.
SECTION 6. Stock Appreciation Rights.
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of the grant of the option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related Stock Option shall not be reduced until the exercise
or termination of the related Stock Option exceeds the number of shares not
covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in
accordance with paragraph (b) of this Section 6, by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
optionee shall be entitled to receive an amount determined in the manner
prescribed in paragraph (b) of this Section 6. Stock Options which have been so
surrendered, in whole or in part, shall no longer be exercisable to the extent
the related Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to which
they relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan.
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(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive up to, but not more than, an
amount in cash or shares of Stock equal in value to the excess of the
Fair Market Value of one share of Stock over the option price per share
specified in the related option multiplied by the number of shares in
respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine the form of
payment; provided the Committee may not require the optionee to receive
more than 50% of the aggregate value of such Stock Appreciation Rights
in shares of Stock.
(iii) Stock Appreciation Rights shall be transferable only
when and to the extent that the underlying Stock Option would be
transferable under Section 5 of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Sections 3 and 4 of the Plan on the total
number of shares of Stock to be issued under the Plan and the maximum
number of shares to be awarded to any one person in a fiscal year, but
only to the extent of the number of shares issued or issuable under the
Stock Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an
Incentive Stock Option may be exercised only if and when the market
price of the Stock subject to the Incentive Stock Option exceeds the
exercise price of such Option.
(vi) Each award shall be confirmed by, and subject to the
terms of, a Stock Appreciation Rights Agreement executed by the Company
and the participant.
SECTION 7. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee shall
determine the officers, key employees and Consultants of the Company and
Subsidiaries to whom, and the time or times at which, grants of Restricted Stock
will be made, the number of shares to be awarded, the time or times within which
such awards may be subject to forfeiture, and all other conditions of the
awards. The Committee may also condition the grant of Restricted Stock upon the
attainment of specified performance goals. The provisions of Restricted Stock
awards need not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such award,
unless and until such recipient has executed an Agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the then applicable terms and conditions.
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(i) Each participant shall be issued a stock certificate in
respect of shares of Restricted Stock awarded under the Plan. Such
certificate shall be registered in the name of the participant, and
shall bear an appropriate legend containing the Company's current
address and referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
"The transferability of this certificate and the
shares of stock represented hereby are subject to
the terms and conditions (including forfeiture) of
the CNS, Inc. 2000 Stock Plan and an Agreement
entered into between the registered owner and CNS,
Inc. Copies of such Plan and Agreement are on file
in the offices of CNS, Inc."
(ii) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to the Plan shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the award
Agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock awarded under the Plan. In no event shall the
Restriction Period be less than one (1) year. Within these limits, the
Committee may provide for the lapse of such restrictions in
installments where deemed appropriate.
(ii) Except as provided in paragraph (c)(i) of this Section 7,
the participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a shareholder of the Company, including the
right to vote the shares and the right to receive any cash dividends.
The Committee, in its sole discretion, may permit or require the
payment of cash dividends to be deferred and, if the Committee so
determines, reinvested in additional shares of Restricted Stock (to the
extent shares are available under Section 3 and subject to paragraph
(f) of Section 13). Certificates for shares of unrestricted Stock shall
be delivered to the grantee promptly after, and only after, the period
of forfeiture shall have expired without forfeiture in respect of such
shares of Restricted Stock.
(iii) Subject to the provisions of the award Agreement and
paragraph (c)(iv) of this Section 7, upon termination of employment for
any reason during
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the Restriction Period, all shares still subject to restriction shall
be forfeited by the participant.
(iv) In the event of special hardship circumstances of a
participant whose employment is terminated (other than for Cause),
including death, Disability or Retirement, or in the event of an
unforeseeable emergency of a participant still in service, the
Committee may, in its sole discretion, when it finds that a waiver
would be in the best interest of the Company, waive in whole or in part
any or all remaining restrictions with respect to such participant's
shares of Restricted Stock.
(v) Notwithstanding the foregoing, unless the Restricted Stock
Award or employment agreement of the participant receiving a Restricted
Stock Award provides otherwise, all restrictions with respect to any
participant's shares of Restricted Stock shall lapse on the date
determined by the Committee, but in no event more than sixty (60) days
prior to the occurrence of any of the following events: (i) dissolution
or liquidation of the Company other than in conjunction with a
bankruptcy of the Company or any similar occurrence, (ii) any merger,
consolidation, acquisition, separation, reorganization, or similar
occurrence, where the Company will not be the surviving entity or (iii)
the transfer of substantially all of the assets of the Company or 20%
or more of the outstanding Stock of the Company. The grant of a
Restricted Stock Award pursuant to the Plan shall not limit in any way
the right or power of the Company to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
SECTION 8. Deferred Stock Awards.
(a) Administration. Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the officers, key employees and Consultants of the Company and Subsidiaries to
whom and the time or times at which Deferred Stock shall be awarded, the number
of Shares of Deferred Stock to be awarded to any participant or group of
participants, the duration of the period (the "Deferral Period") during which,
and the conditions under which, receipt of the Stock will be deferred, and the
terms and conditions of the award in addition to those contained in paragraph
(b) of this Section 8. The Committee may also condition the grant of Deferred
Stock upon the attainment of specified performance goals. The provisions of
Deferred Stock awards need not be the same with respect to each recipient.
(b) Terms and Conditions.
(i) Subject to the provisions of this Plan and the award
agreement, Deferred Stock awards may not be sold, assigned,
transferred, pledged or otherwise encumbered during the Deferral
Period. In no event shall the Deferral Period be less than one (1)
year. At the expiration of the Deferral Period (or
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Elective Deferral Period, where applicable), share certificates shall
be delivered to the participant, or his legal representative, in a
number equal to the shares covered by the Deferred Stock award.
(ii) Amounts equal to any dividends declared during the
Deferral Period with respect to the number of shares covered by a
Deferred Stock award will be paid to the participant currently or
deferred and deemed to be reinvested in additional Deferred Stock or
otherwise reinvested, all as determined at the time of the award by the
Committee, in its sole discretion.
(iii) Subject to the provisions of the award Agreement and
paragraph (b)(iv) of this Section 8, upon termination of employment for
any reason during the Deferral Period for a given award, the Deferred
Stock in question shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a
participant whose employment is terminated (other than for Cause)
including death, Disability or Retirement, or in the event of an
unforeseeable emergency of a participant still in service, the
Committee may, in its sole discretion, when it finds that a waiver
would be in the best interest of the Company, waive in whole or in part
any or all of the remaining deferral limitations imposed hereunder with
respect to any or all of the participant's Deferred Stock.
(v) A participant may elect to further defer receipt of the
award for a specified period or until a specified event (the "Elective
Deferral Period"), subject in each case to the Committee's approval and
to such terms as are determined by the Committee, all in its sole
discretion. Subject to any exceptions adopted by the Committee, such
election must generally be made prior to completion of one half of the
Deferral Period for a Deferred Stock award (or for an installment of
such an award).
(vi) Each award shall be confirmed by, and subject to the
terms of, a Deferred Stock Agreement executed by the Company and the
participant.
SECTION 9. Other Awards.
The Committee may from time to time grant Stock, other Stock based and
non-Stock based awards under this Plan including without limitations those
awards pursuant to which shares of Stock are or in the future may be acquired,
awards denominated in Stock units, securities convertible into Stock, phantom
securities and dividend equivalents. The Committee shall determine the terms and
conditions of such Stock, Stock based and non-Stock based awards provided that
such awards shall not be inconsistent with the terms of this Plan.
SECTION 10. Transfer, Leave of Absence, etc.
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For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation
or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or
from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose approved by the Company
if the period of such leave does not exceed ninety (90) days (or such longer
period as the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to reemployment is
guaranteed either by a statute or by contract, and provided that, in the case of
any leave of absence, the employee returns to work within 30 days after the end
of such leave.
SECTION 11. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option, Stock Appreciation Right,
Restricted Stock, Deferred Stock or other Stock-based award theretofore granted,
without the optionee's or participant's consent, or (ii) which without the
approval of the stockholders of the Company would cause the Plan to no longer
comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of
the Code or any other regulatory requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively to the extent such amendment is
consistent with the terms of this Plan, but no such amendment shall impair the
rights of any holder without his or her consent except to the extent authorized
under the Plan. The Committee may also substitute new Stock Options for
previously granted options, including previously granted options having higher
option prices.
SECTION 12. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 13. General Provisions.
17
<PAGE>
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee or participant is acquiring the shares without a view
to distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant
to any Restricted Stock, Deferred Stock or other Stock-based awards shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed, and any applicable Federal or state securities laws, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Restricted Stock,
Deferred Stock and other Stock-based awards under the Plan (other than Stock
Options) are not required to make any payment or provide consideration other
than the rendering of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part
of the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the terms of such award so permit, a participant
may elect by written notice to the Company to satisfy part or all of the
withholding tax requirements associated with the award by (i) authorizing the
Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant; provided however, the value of the shares
retained by the Company shall not exceed the minimum federal withholding
applicable to the amount of the award includible as compensation in the gross
income of the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant
18
<PAGE>
under this Section 13(d). Any such election shall be in accordance with, and
subject to, applicable tax and securities laws, regulations and rulings.
(e) At the time of grant, the Committee may provide in connection with
any grant made under this Plan that the shares of Stock received as a result of
such grant shall be subject to a repurchase right in favor of the Company,
pursuant to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the participant
acquired under the Plan, with the price being the then Fair Market Value of the
Stock or, in the case of a termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant. The Committee may, at the time
of grant of an award under the Plan, provide the Company with the right to
repurchase, or require forfeiture of, shares of Stock acquired pursuant to the
Plan by any participant who, at any time within one year after termination of
employment with the Company, directly or indirectly, competes with, or is
employed by a competitor of, the Company.
(f) The reinvestment of dividends in additional Restricted Stock (or in
Deferred Stock or other types of Plan awards) at the time of any dividend
payment shall only be permissible if the Committee (or the Company's chief
financial officer) certifies in writing that under Section 3 sufficient shares
are available for such reinvestment (taking into account then outstanding Stock
Options and other Plan awards).
SECTION 14. Effective Date of Plan.
The Plan is expressly made subject to the approval by the shareholders
of the Company. If the Plan is not so approved by the shareholders on or before
one year after this Plan's adoption by the Board of Directors, this Plan shall
not come into effect. The offering of the shares hereunder shall be also subject
to the effecting by the Company of any registration or qualification of the
shares under any federal or state law or the obtaining of the consent or
approval of any governmental regulatory body which the Company shall determine,
in its sole discretion, is necessary or desirable as a condition to or in
connection with, the offering or the issue or purchase of the shares covered
thereby. The Company shall make every reasonable effort to effect such
registration or qualification or to obtain such consent or approval.
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Adopted by the Board of Directors: March 13, 2000.
Ratified and Approved by the Shareholders: __________________.
19
<PAGE>
[CNS LOGO]
CNS, INC.
ANNUAL MEETING OF STOCKHOLDERS
MAY 3, 2000
3:30 P.M., LOCAL TIME
LUTHERAN BROTHERHOOD BUILDING
AUDITORIUM
625 FOURTH AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
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[LOGO] CNS, INC.
4400 WEST 78TH STREET, BLOOMINGTON, MN 55435 PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 3, 2000.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify on the reverse side.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" EACH PROPOSAL.
By signing the proxy, you revoke all prior proxies and appoint Daniel E. Cohen
and Patrick Delaney, and each of them, with full power of substitution, to vote
your shares on the matters shown on the reverse side and any other matters
which may properly come before the Annual Meeting and all adjournments or
postponements.
SEE REVERSE SIDE FOR VOTING INSTRUCTIONS.
<PAGE>
<TABLE>
<CAPTION>
\/ PLEASE DETACH HERE \/
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH PROPOSAL.
<S> <C> <C> <C> <C>
1. Election of directors: 01 Daniel E. Cohen 05 H. Robert Hawthorne [ ] Vote FOR [ ] Vote WITHHELD
02 Patrick Delaney 06 Marti Morfitt all nominees from all nominees
03 R. Hunt Greene 07 Richard W. Perkins (except as marked)
04 Andrew J. Greenshields
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(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
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2. Proposal to ratify and approve the CNS, Inc. 2000 Stock Option Plan. [ ] For [ ] Against [ ] Abstain
3. Proposal to ratify and approve the appointment of KPMG LLP
as the independent auditors of the Company. [ ] For [ ] Against [ ] Abstain
4. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDERS.
IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below: Date ____________________________________
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Signature(s) in Box
Please sign exactly as your name(s) appear on Proxy. If
held in joint tenancy, all persons must sign. Trustees,
administrators, etc., should include title and authority.
Corporations should provide full name of corporation and
title of authorized officer signing the Proxy.
- ------- -------
</TABLE>
