-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZefOuuENFDoohYqj4fxdIUiTGV8jTh4g1BHmOoNys3bj5hnhrf/Kk8w+KraNsVU PR0np+93zXLS9lvILUS0vg== 0000897101-99-000286.txt : 19990330 0000897101-99-000286.hdr.sgml : 19990330 ACCESSION NUMBER: 0000897101-99-000286 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNS INC /DE/ CENTRAL INDEX KEY: 0000814258 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411580270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16612 FILM NUMBER: 99575968 BUSINESS ADDRESS: STREET 1: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128206696 MAIL ADDRESS: STREET 1: PO BOX 39802 STREET 2: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _________ to __________ COMMISSION FILE NUMBER: 0-16612 CNS, INC. (Exact name of registrant as specified in its charter) DELAWARE 41-1580270 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) P.O. BOX 39802 MINNEAPOLIS, MN 55439 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (612) 820-6696 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Title of each class ------------------- Common Stock, par value of $.01 per share Preferred Stock purchase rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of March 3, 1999, assuming as market value the price of $3.094 per share, the closing sale price of the Company's Common Stock on the Nasdaq National Market, the aggregate market value of shares held by non-affiliates was approximately $46,500,000. As of March 3, 1999, the Company had outstanding 16,260,026 shares of Common Stock of $.01 par value per share. Documents Incorporated by Reference: Portions of the Company's (i) Annual Report to Stockholders for the year ended December 31, 1998, and (ii) Proxy Statement for its Annual Meeting of Stockholders to be held on April 21, 1999, are incorporated by reference into Parts II and III of this Form 10-K. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business................................................................... 3 Item 2. Properties................................................................. 15 Item 3. Legal Proceedings.......................................................... 15 Item 4. Submission of Matters to a Vote of Security Holders........................ 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 16 Item 6. Selected Financial Data.................................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 16 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................. 16 Item 8. Financial Statements and Supplementary Data................................ 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 17 PART III Item 10. Directors and Executive Officers of the Registrant......................... 18 Item 11. Executive Compensation..................................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 18 Item 13. Certain Relationships and Related Transactions............................. 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................................... 19 SIGNATURES ........................................................................... 20 EXHIBIT INDEX.......................................................................... 22
2 FORWARD-LOOKING STATEMENTS Certain statements contained in this Annual Report on Form 10-K and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts but provide current expectations or forecasts of future events. As such, they are considered "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. Such forward-looking statements can be identified by the use of terminology such as "may," "will," "expect," "plan," "intend," "anticipate," "estimate," or "continue" or similar words or expressions. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements and investors therefore should not consider any list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, the following factors: (i) the Company's revenue and profitability is primarily reliant on sales of a single product, Breathe Right(R) nasal strips; (ii) the Company's success will depend significantly on its ability to effectively market Breathe Right nasal strips; (iii) the Company's competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of its patents on the Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation (see Item 1, "Patents, Trademarks and Proprietary Rights"); (iv) the Company operates in competitive markets where recent and potential entrants in the nasal dilation segment pose greater competitive challenges than those faced by the Company in the past (see Item 1, "Competition"); (v) the Company has faced and will continue to face challenges in successfully introducing new products; (vi) the Company is currently dependent upon 3M for the international distribution of its products under a contractual relationship which has produced less than anticipated results and which the Company expects to modify or replace (see Item 1, "International Distribution"); (vii) the Company is dependant upon contract manufacturers for the production of substantially all of its products; and (viii) the risks associated with the Year 2000 issue as described on pages 11 and 12 of the Company's Annual Report to Stockholders for the year ended December 31, 1998. PART I ITEM 1. BUSINESS GENERAL CNS, Inc. (the "Company") develops and markets consumer health care products, including the Breathe Right nasal strip. The Breathe Right nasal strip improves breathing by reducing nasal airflow resistance. It can be effective in providing temporary relief for nasal congestion, eliminating or reducing snoring and reducing breathing difficulties due to a deviated nasal septum. The Company has also entered into or is exploring a number of agreements to market or license other new consumer products, including a chewable dietary fiber tablet. These new products are in various stages of evaluation, testing and development. MANAGEMENT During 1998, the Company added several executive officers with a diverse body of consumer packaged goods experience to its management team. See "Executive Officers of the Company." The Company also reorganized its management structure into three strategic business teams in order to expand the platform for building the Breathe Right brand and launching additional products: Breathe Right Brand Team; New Business Evaluation Team; and New Business Commercialization Team. The Company believes that the addition of management personnel experienced in the consumer products industry and its new team focus will enable the Company to more effectively implement its business strategies and position itself to become a larger, multi-product consumer products company. 3 BREATHE RIGHT BRAND TEAM. The Company's Breathe Right Brand Team (the "BRB Team") is responsible for the management and development of the Breathe Right nasal strip business and other non-nasal strip products that leverage the Breathe Right brand name. The Breathe Right nasal strip products currently represent the cornerstone of the Company's business. The Company intends to exploit new markets and opportunities that it believes exist for its current nasal strip products and plans to commercialize potential new Breathe Right brand products. The BRB Team will lead this effort. In addition, there are two new Breathe Right brand name products that have recently been introduced to the market by the BRB Team-the Breathe Right saline nasal spray and the Breathe Right allergen barrier pillow cover. See "Products - Breathe Right Brand Products." NEW BUSINESS EVALUATION TEAM. The Company's New Business Evaluation Team (the "NBE Team") is committed to the expansion of its product base through the acquisition and development of unique consumer health care products or technologies that have good market potential. The NBE Team is responsible for identifying and evaluating potential new companies, products, inventions and other business opportunities that will enable the Company to achieve its long-term growth and profit objectives. There are a number of new products, inventions and business opportunities that are currently under various stages of evaluation by the NBE Team. NEW BUSINESS COMMERCIALIZATION TEAM. The Company's New Business Commercialization Team (the "NBC Team") is responsible for evaluating the market potential for new products and developing and implementing strategies for successful product commercialization. The Company has acquired the rights to a number of new products which are at various stages of development, testing and market evaluation by the NBC Team, including a chewable dietary fiber tablet. See "Products - Other Products." PRODUCTS BREATHE RIGHT NASAL STRIPS. The Breathe Right nasal strip is a nonprescription, single-use disposable device that improves breathing by reducing nasal airflow resistance. The Company received 510(k) clearances from the United States Food and Drug Administration ("FDA") to market the Breathe Right nasal strip for improvement of nasal breathing, temporary relief of nasal congestion, elimination or reduction of snoring and temporary relief of breathing difficulties due to a deviated nasal septum. See "Government Regulation." The Breathe Right nasal strip comes both in tan and a nearly transparent product, the Breathe Right clear nasal strip. The Breathe Right nasal strip includes two embedded plastic strips. When folded down onto the sides of the nose, the Breathe Right nasal strip lifts the side walls of the nose outward to open the nasal passages. The product improves nasal breathing upon application and does not include any medication, thereby avoiding any medicinal side effects. The Breathe Right nasal strip is offered in three sizes (junior/small, small/medium and medium/large) to accommodate the range of nose sizes from a child's nose to an adult's nose. The Breathe Right nasal strip is packaged for the consumer market in various quantities ranging between 10 to 38 strips per box. The Company believes that the Breathe Right nasal strip is priced comparably to medicinal decongestants on a daily or nightly dosage basis at suggested retail prices ranging between $4.99 and $11.99 per box. The Company expanded the Breathe Right nasal strip line with the introduction of the Breathe Right clear nasal strip in the second half of 1997. The Breathe Right clear nasal strip is a nearly transparent product that the Company believes may reduce any vanity issues associated with the use of the tan Breathe Right nasal strip product. The Company is currently evaluating additional nasal strip products. BREATHE RIGHT BRAND PRODUCTS. The Company began the national introduction of two products that leverage the Breathe Right brand name during the third quarter of 1998, a saline nasal spray and an allergen barrier pillow cover. The Breathe Right saline nasal spray is a non-habit forming, drug-free product that restores moisture to comfort and soothe dry, irritated nasal passages due to colds, allergies, dry air (low humidity), air 4 pollution and the overuse of nasal decongestants. The Breathe Right allergen barrier pillow cover is a machine washable cover for pillows of various sizes that protects against dust, dust mites and other allergens. The product is placed under a regular pillow case and designed to act as a barrier to dust mites, the number one in-home source of allergens. The Company is optimistic about the potential of both products, but their contributions to 1998 sales were not significant. The Company intends to introduce additional non-nasal strip products that carry the Breathe Right brand name and to extend the product line. There are a number of potential new Breathe Right brand name products that are currently under various stages of evaluation, testing and development. BANISH(TM) PERSONAL SMOKE DEODORIZER. Late in 1997, the Company began the introduction of BANISH personal smoke deodorizer, a water-based nontoxic odorless spray that removes same day odor from clothes and hair. This product does not simply cover up or mask the odor of tobacco smoke; it neutralizes it. In order to evaluate the market potential for this product, the advertising and promotion of BANISH was limited to a regional test market. Overall business results from the market test have been disappointing to date. Sales have been limited and expenses associated with the introduction and test market were approximately $2.8 million in 1998. Although the Company believes that consumer interest in personal smoke deodorizing products is high, the Company is currently evaluating options for BANISH before devoting any further significant financial resources to the commercialization of this product. OTHER PRODUCTS. The Company intends to introduce additional consumer health care products and plans to increase its investment in new product development. A number of potential new products are currently under various stages of evaluation and testing. The Company has recently completed the development of a chewable, dietary fiber supplement in tablet form and is in the final phase of market research which will determine the feasibility and scope of a product launch in 1999. MARKETS BREATHE RIGHT BRAND PRODUCT LINE. The Breathe Right brand of products includes the Breathe Right nasal strip, Breathe Right saline nasal spray and Breathe Right allergen barrier pillow cover. All of these products are sold primarily in the consumer market. The Breathe Right nasal strip is, to a lesser extent, also sold in the athletic market. CONSUMER MARKET. Air impedance in the nose accounts for approximately one-half of the total airway resistance involved in the respiratory system (i.e., half of the energy required for breathing). If the effort to breathe through the nose during sleep is excessive, the person will resort to mouth breathing, promoting snoring, dry mouth, sore throat and mini-awakenings which disrupt sleep. In addition, nasal breathing difficulties during sleep are often caused by nasal congestion found in people who have a common cold, allergies and sinusitis and by those who experience nasal obstruction due to a deviated nasal septum. The Company believes that people with deviated septa or other structural problems or chronic conditions such as snoring or allergies may be more predisposed to use Breathe Right products on a regular or daily basis while seasonal sufferers are likely to use Breathe Right products as needed. People suffering from these conditions are currently the primary users of the Company's products and are the main targets of its advertising. In 1998, the Company began to position the Breathe Right nasal strip as a product that provides drug-free relief for those suffering from nasal congestion and other symptoms due to the common cold, allergies and sinusitis. The Company's new advertising emphasizes the ability of Breathe Right nasal strips to provide immediate relief from nasal congestion due to colds and allergies and the ability of the product to reduce snoring. 5 The Company's marketing efforts capitalize on the benefits of Breathe Right products to consumers in various, and often overlapping, consumer market segments: * Nasal congestion as a result of allergies affects approximately 35 million Americans while virtually all Americans suffer some nasal congestion annually as a result of the common cold. The Company believes that the Breathe Right nasal strip is often used as either an alternative or an adjunct to decongestant drugs (including nasal sprays and oral decongestants). In addition, the Breathe Right saline nasal spray is designed to comfort and soothe dry, irritated nasal passages due to, among other things, congestion resulting from allergies, colds and an overuse of nasal decongestants. * Breathe Right nasal strips were effective in eliminating snoring or reducing snoring loudness in approximately 75% of the participants in a clinical study. The Company believes that approximately 78% of all households have at least one snorer, approximately 37 million people snore regularly, while another 50 million people snore occasionally. * Sleep quality can be enhanced by improving nasal breathing at night with a Breathe Right nasal strip. Nearly 88% of all households in the United States report nightly sleep disruptions, many of which are related to poor breathing. * Approximately 12 million people in the United States suffer from a deviated septum, a bend in the cartilage or bone that divides the nostrils. Breathe Right nasal strips were cleared by the Food and Drug Administration in 1996 to provide temporary relief from breathing difficulties associated with a deviated septum. * Approximately 40-50 million people in the United States suffer from allergies, many of whom are allergic to waste products deposited by hundreds of thousands of microscopic dust mites living inside a pillow. The Breathe Right allergen barrier pillow cover is designed to protect allergy sufferers from dust mites and other allergens contained in pillows. ATHLETIC MARKET. The Company believes that the Breathe Right nasal strip may make nasal breathing more comfortable and may improve endurance during athletic activity, particularly when a mouth guard is used. An exercise physiology study published in peer-reviewed medical literature in 1997 concluded that the Breathe Right nasal strip provided physiologic advantages in ventilation and heart rate during mid-level exercise. Other exercise physiology studies have been conducted and add to the substantiation of the positive effects of the Breathe Right nasal strip during exercise. Breathe Right nasal strips have been used by professional and collegiate athletes in sports such as football, soccer and hockey, by race car drivers and horse racing jockeys and by other professional and recreational athletes, including runners and cyclists. The Company uses athletes to endorse the Breathe Right nasal strip to increase the visibility of the product, which thereby leads to awareness of the product for not only its athletic applications, but also for nasal congestion, snoring and other applications. BANISH PERSONAL SMOKE DEODORIZER. The Company believes that there are approximately 50 million adult smokers in the United States, 16 million of whom are in positions that involve high interaction with others who could be offended by the odor of smoke. There are also a significant number of additional Americans that do not smoke, but are exposed to smoke in environments such as bars, restaurants, offices or factories. The Company believes that BANISH has potential use both for smokers and non-smokers who would like to eliminate the odor of tobacco smoke. 6 BUSINESS STRATEGY The Company's business strategy includes increasing sales of its Breathe Right nasal strip and other Breathe Right brand products, expanding its Breathe Right product line and successfully introducing new products. INCREASING NEW CONSUMER PRODUCT TRIAL AND INCREASING PRODUCT USAGE. The Company uses a combination of advertising, promotions, public relations and celebrity endorsements to increase consumer awareness and to encourage consumer trial of the Breathe Right nasal strip. In 1998, the Company began to position the Breathe Right nasal strip as a product that provides drug-free relief for those suffering from nasal congestion and other symptoms due to the common cold, allergies and sinusitis. The Company's new advertising emphasizes the ability of Breathe right nasal strips to provide immediate relief from nasal congestion due to colds and allergies and reduce snoring as well as capitalizes on the benefits of the product to consumers in various, and often overlapping, consumer market segments. MARKETING NEW BREATHE RIGHT BRAND PRODUCTS. The Company believes that the Breathe Right brand name is one of its most valuable assets. The Company is in the process of evaluating new products that will carry the Breathe Right name. In addition, the Company has recently commenced the introduction of a Breathe Right saline nasal spray and a Breathe Right allergen barrier pillow cover. MARKETING NEW PRODUCTS THAT UTILIZE EXISTING DISTRIBUTION CHANNELS. The Company plans to take advantage of its marketing and distribution strengths by acquiring or licensing the rights to products that it believes have merit and bring them to market. Among the products currently being evaluated is a unique, chewable dietary fiber tablet. There can be no assurance, however, that the Company will ever successfully market the chewable dietary fiber tablet or any of the Company's other new products. EXPANDING COMPANY PRESENCE IN INTERNATIONAL MARKETS. The Company sells its Breathe Right nasal strip products outside the United States and Canada pursuant to an international distribution agreement under which 3M Company agreed to act as an exclusive distributor. Under the terms of the agreement, 3M is obligated to purchase nasal strips from the Company and satisfy certain minimum purchase requirements. The contractual relationship with 3M has produced less than anticipated results in international markets. The Company does, however, believe that there is a significant market potential for the Company's products outside the United States. Accordingly, the Company is currently in the process of attempting to alter its contractual relationship with 3M in order to allow the Company to take a more active role in the sale, marketing and distribution of its products in international markets. The Company believes that the negotiations with 3M will enable the Company to build its international marketing and distribution capacity in preparation for other Company products. See "International Distribution." MARKETING STRATEGY The Company has been engaged in the broad consumer marketing of the Breathe Right nasal strip since September 1994 and began marketing the Breathe Right saline nasal spray and the Breathe Right allergen barrier pillow cover in the fourth quarter of 1998. According to data collected by a nationally recognized consumer market research firm, the Breathe Right nasal strip became a leading sales volume producer during 1995 in the cough, cold and allergy section of drug, grocery and mass merchant stores nationwide. In September 1995, the Company received two REX (retail excellence) awards from Drug Stores News magazine. The first award named the Breathe Right nasal strip as the best new product in the cough, cold and allergy section in United States drug stores. The second award named the product the "market maker of the year," the single most important product which disproportionately increased traffic and profits in United States drug stores. The Company also received a REX award in 1998, for its Breathe Right clear nasal strip in the cough, cold, allergies 7 and sinus product category. In 1998, the Breathe Right brand was the number one ranking brand in annual dollar sales in the nasal products category, with sales exceeding those of familiar brand names such as Afrin(R), Vicks Sinex(R) and Dristan(R). The Company's marketing efforts for Breathe Right products are primarily directed to the consumer market. The Company's advertising, with its emphasis on improved breathing, focuses on the nasal congestion applications for nasal strips and emphasizes the benefits of Breathe Right products for a variety of large consumer markets. The Company has primarily used a mix of consumer and trade promotions and television, radio and magazine advertising to market its products. Marketing communications are generally designed to promote trial of Breathe Right brand products by increasing consumer awareness of the benefits of each product. The Company's paid advertising programs for the Breathe Right brand have been enhanced by media coverage of the use of Breathe Right nasal strips by professional athletes. The Company has also entered into endorsement agreements pursuant to which athletes are providing the Company with endorsement services. The Company believes that the use of Breathe Right nasal strips by professional athletes increases the visibility of the product, which thereby leads to greater awareness of the product for not only its athletic applications but also for nasal congestion, snoring and other applications, and also makes it more acceptable for consumers to wear the highly visible product. The Company also uses product promotion programs, such as coupons, and public relations activities to encourage product trial and repeat purchases. Typically, coupons for the Breathe Right nasal strip appear in free standing inserts (FSIs) that are included in Sunday newspapers and are often tied to a holiday or special event theme such as Super Bowl, Father's Day, or the Christmas holidays. To increase consumer product awareness, the Company also uses public relations programs associated with "special events," such as sponsoring marathons, providing product to certain professional athletic teams and sponsoring radio station contests in conjunction with certain holidays. Because the Breathe Right nasal strip is sold as a consumer product, sales of the product will depend in part upon the degree to which the consumer is aware of the product and is satisfied with its use, which also influences repeat usage and word of mouth referrals. The most recent research data collected by a nationally recognized consumer market research firm indicated that approximately 32% of those in the United States who had purchased Breathe Right nasal strips have purchased additional product. DOMESTIC DISTRIBUTION The Breathe Right nasal strip is sold primarily as a consumer product in drug stores, grocery stores, mass merchant chain stores, warehouse clubs and military base stores in the United States. The Breathe Right saline nasal spray and the Breathe Right allergen barrier pillow cover are sold in a number of the same retail outlets. The Company sells its products to retailers through a network of independent sales representatives referred to in the industry as non-food general merchandise brokers. The Company uses broker groups who call on the chain drug, grocery, mass merchant and warehouse club accounts and the wholesalers who serve primarily the independent drug stores and many of the grocery stores in the United States. The Breathe Right nasal strip is typically positioned in the cough, cold and allergy section of a particular store because the Breathe Right nasal strip provides benefits similar to those obtained with other decongestant products and there is typically no section in stores for snoring relief products. The Breathe Right saline nasal spray and the Breathe Right allergen barrier pillow cover are also usually positioned in the same section of the store as the Breathe Right nasal strip since the products are typically used by those suffering from congestion, allergies and colds. 8 The Company's retail customers include national chains of drug stores, grocery stores and mass merchants such as Eckerd Drug, Walgreens, RiteAid, CVS, Albertson's, Safeway, Wal-Mart and Kmart and warehouse clubs such as Sam's Club and Price Costco, as well as regional and independent stores in the same store categories. In 1998, one retailer accounted for approximately 20% of sales. The loss of this customer or any other large retailer would require the Company to replace the lost sales through other retail outlets and could disrupt distribution of the Breathe Right nasal strip. INTERNATIONAL DISTRIBUTION The Company executed an international distribution agreement with 3M in August 1995 pursuant to which 3M has the exclusive right to distribute the Breathe Right nasal strip outside of the United States and Canada. 3M has operations in over 60 foreign countries. The product is marketed internationally under the co-brand of "3M Breathe Right nasal strips" or "Nexcare Breathe Right nasal strips" in order to benefit from both 3M's brand names and the publicity that the Breathe Right brand name has received. Under the terms of the agreement, 3M is obligated to buy product from the Company either in finished form in 3M boxes or in bulk quantities to be packaged by 3M's international subsidiaries. All sales to 3M are denominated in U.S. dollars. 3M is responsible for obtaining all necessary regulatory approvals outside of the United States and for all marketing and selling expenses. The agreement contains certain minimum performance objectives and breakup provisions. The contractual relationship with 3M has, however, produced less than anticipated results in international markets. International sales for the Company dropped to approximately $1.8 million for 1998, compared to approximately $6.4 million for 1997. The decrease in international sales can be attributed in substantial part to the high inventory levels of nasal strips maintained by 3M and disappointing marketing results in the international sector. The Company is optimistic about the demand for nasal strips outside the United States and believes that international markets require an increased level of advertising and promotion to reach their potential. The Company is currently in the process of attempting to alter its distribution agreement with 3M in order to enable the Company to take a more active role in the sale, marketing and distribution of its products in international markets. In 1995, the Company executed a distribution agreement with LOCIN Industries, a Canadian dental floss company, to establish distribution of the Breathe Right nasal strip in the Canadian market. LOCIN purchases nasal strips from the Company in bulk, does its own packaging and distributes the product in Canada. NEW PRODUCTS The Company is committed to the expansion of its product base through the acquisition and development of unique health care products and technologies that have good market potential. As a result of the Company's established distribution channels and highly visible success with the Breathe Right nasal strip, the Company is approached by individuals and smaller companies to explore the possibility of partnering with the Company to manufacture and market new product ideas. In addition, the Company restructured its management organization during 1998 and formed a New Business Evaluation Team. See "Management." The New Business Evaluation Team is responsible for identifying and evaluating new products, inventions and other business opportunities that will enable the Company to achieve its long-term growth and profit objectives. The Company routinely evaluates the merit of product concepts and, from time to time, may acquire or license the rights to products which it believes could successfully be sold through the Company's established distribution channels. The Company has entered into contractual arrangements for several products which are in various stages of evaluation, testing and development prior to potential market launch. The Company is currently evaluating a unique, chewable dietary fiber tablet and is in the final phase of market research which will determine the feasibility and scope of a product launch. Most, if not all, of these products are regulated to varying degrees by the FDA and some will require extensive clinical studies and 9 regulatory approvals prior to marketing and sale. There can be no assurance that any required regulatory approvals will be obtained or that the Company will market or sell any of these products. MANUFACTURING AND OPERATIONS The Company currently subcontracts with multiple manufacturers to produce the Breathe Right nasal strip, the Breathe Right saline nasal spray and the Breathe Right allergen barrier pillow cover. The Company does no in-house product production itself. These contract manufacturers are capable of providing full turnkey service and shipping product to the Company that is completely packaged ready to be sold to retailers or providing semi-finished goods to the Company that require final packaging. With respect to the Breathe Right nasal strip, the Company has the ability to wrap individual strips in the paper sleeve in-house and subcontracts the final packaging out to qualified packaging subcontractors. Each of the manufacturers builds the product to the Company's specifications using materials specified by the Company and, for the major nasal strip materials, places orders against a supply agreement negotiated by the Company with the material manufacturer. The contract manufacturers have all entered into confidentiality agreements with the Company to protect the Company's intellectual property rights. Company quality control and operations personnel periodically visit the contract manufacturers in order to observe processes and procedures. Finished goods are inspected at the Company to ensure that they meet quality requirements. The Company inspects its contract manufacturers on a regular basis and is not aware of any material violation of FDA Good Manufacturing Practice Standards. The Company works closely with its material vendors and contract manufacturers to reduce scrap and waste, improve efficiency, and improve yields to reduce the manufacturing costs of the product. The Company has received certification that it has established and maintains a quality system which meets the requirements of ISO 9002/EN 46002. To ensure consistent quality and favorable pricing, the Company has entered into a multi-year material supply agreement with 3M for the major components of the Breathe Right nasal strip. Although similar materials are currently available from other suppliers, the Company believes that 3M's materials are of superior quality. Although the Company believes that this relationship will not be disrupted or terminated, the inability to obtain sufficient quantities of these components or the need to develop alternative sources in a timely and cost effective manner could adversely affect the Company's operations until new sources of these components become available, if at all. In addition, while the Company does not expect 3M to do so, 3M has the right to discontinue its production or sale of these products at any time upon 90 days' notice to the Company. COMPETITION The Company believes that the market for decongestant products is highly competitive while there is currently somewhat less competition in the market for products aimed at the reduction or elimination of snoring. The Company's competition in the consumer market for decongestant products and other cold, allergy and sinus relief products consists primarily of pharmaceutical products, other nasal sprays and external nasal dilators while competition in the snoring remedies market also consists primarily of internal nasal dilators, throat sprays and herbs. Although the Company is currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in the fourth quarter of 1998 with an external nasal dilation device. Many of the companies that compete with the Breathe Right nasal strip and other Breathe Right products, including Schering Plough, have significantly greater financial and operating resources than the Company. The Company has developed and implemented marketing strategies aimed at minimizing the impact of competitive products. The patents licensed by the Company on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States. 10 The Company intends to aggressively enforce the patents that it has licensed covering the Breathe Right nasal strip and has engaged in significant litigation to protect its patent rights. In particular, the Company was engaged in patent litigation with Acutek Adhesive Specialties, Inc. ("Acutek") which was settled by the parties in 1998. See "Patents, Trademarks and Proprietary Rights" below. As a result of the settlement of that litigation, the Company retained all of its patent rights on the Breathe Right nasal strip product. The settlement also allows Acutek's licensee, Schering Plough Corp., to market a competitive external nasal dilation device meeting certain design restrictions. The Company has maintained a substantial majority of the market share in the category of external nasal dilation products. It is, however, too early to determine whether the introduction of a competitive nasal strip product will have a significant impact on the Company. There can be no assurance that potential competitors will not be able to develop nasal dilation products which circumvent the Company's patents. In addition, external nasal dilator products compete in the consumer markets with decongestant and sinus relief products and snoring remedies in international markets where the Company does not yet have patent protection on the Breathe Right nasal strip. GOVERNMENT REGULATION As a manufacturer and marketer of medical devices, the Company is subject to regulation by, among other governmental entities, the FDA and the corresponding agencies of the states and foreign countries in which the Company sells its products. The Company must comply with a variety of regulations, including the FDA's Good Manufacturing Practice regulations, and is subject to periodic inspections by the FDA and applicable state and foreign agencies. If the FDA believes that its regulations have not been fulfilled, it may implement extensive enforcement powers, including the ability to ban products from the market, prohibit the operation of manufacturing facilities and effect recalls of products from customer locations. The Company believes that it is currently in compliance with applicable FDA regulations. FDA regulations classify medical devices into three categories that determine the degree of regulatory control to which the manufacturer of the device is subject. In general, Class I devices involve compliance with labeling and record keeping requirements and are subject to other general controls. Class II devices are subject to performance standards in addition to general controls. Class III devices are those devices, usually invasive, for which pre-market approval (as distinct from pre-market notification) is required before commercial marketing to assure the products' safety and effectiveness. The Breathe Right nasal strip has been classified as a Class I device. Before a new medical device can be introduced into the market, the manufacturer generally must obtain FDA clearance through either a 510(k) pre-market notification or a pre-market approval application ("PMA"). A 510(k) clearance will be granted if the submitted data establish that the proposed device is "substantially equivalent" to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for PMAs. The PMA process can be expensive, uncertain and lengthy, frequently requiring from one to several years from the date the PMA is accepted. In addition to requiring clearance for new products, FDA rules may require a filing and waiting period prior to marketing modifications of existing products. The Company has received 510(k) approvals to market the Breathe Right nasal strip as a device that can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing difficulties due to a deviated nasal septum. The Company's proposed dietary fiber product is considered to be a dietary supplement and is regulated under the Federal Food, Drug, and Cosmetic Act (the Act) as amended by the Dietary Supplement Health and Education Act "DSHEA" of 1994, and under the Fair Packaging and Labeling Act. There is generally no 11 requirement that a firm obtain a license or approval from FDA before marketing dietary supplements in the United States. The FDA is developing implementing regulations for certain provisions of the DSHEA which will be published as final rules in the Federal Register. Sales of the Company's products outside the United States are subject to regulatory requirements governing human clinical trials and marketing approval for drugs, and such requirements vary widely from country to country. Under its current agreement with the Company, which is as noted above under "International Distribution" is currently in the process of being renegotiated, 3M is responsible for obtaining all necessary regulatory approvals outside the United States for Breathe Right nasal strips. The Company believes that it has provided 3M with the necessary documentation to enable 3M to obtain the "CE" mark, an international symbol of quality and compliance with applicable European medical device directives, and 3M is affixing the CE mark on the Company's products in Europe. No assurance can be given that the FDA or state or foreign regulatory agencies will give on a timely basis, if at all, the requisite approvals or clearances for additional applications for the Breathe Right nasal strip or for any of the Company's products which are under development. Moreover, after clearance is given, the Company is required to advise the FDA and these other regulatory agencies of modifications to its products. These agencies have the power to withdraw the clearance or require the Company to change the device or its manufacturing process or labeling, to supply additional proof of its safety and effectiveness or to recall, repair, replace or refund the cost of the medical device if it is shown to be hazardous or defective. The process of obtaining clearance to market products is costly and time-consuming and can delay the marketing and sale of the Company's products. Furthermore, federal, state and foreign regulations regarding the manufacture and sale of medical devices are subject to future change. The Company cannot predict what impact, if any, such changes might have on its business. The Company is also subject to substantial federal, state and local regulation regarding occupational health and safety, environmental protection, hazardous substance control and waste management and disposal, among others. PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS The Company entered into a license agreement in 1992 (the "License Agreement") pursuant to which the Company acquired from the licensor (the "Licensor") the exclusive rights to manufacture and sell the Breathe Right nasal strip. Specifically, the Company has the exclusive right pursuant to the License Agreement to manufacture, sell and otherwise practice any invention, including the Breathe Right nasal strip, claimed in the Licensor's patent applications related thereto and all patents issued in any country which correspond to those applications. The Company is obligated to pay royalties to the Licensor based on sales of the Breathe Right nasal strip including certain minimum royalty amounts in order to maintain its exclusivity. The Company is also responsible for all costs and expenses incurred in obtaining and maintaining patents related to the Breathe Right nasal strip. The Licensor has filed patent applications with the U.S. Patent and Trademark Office seeking patent protection for different aspects of the Breathe Right nasal strip technology. Six of these patent applications have resulted in issued patents, including one with claims that cover the single-body construction of the Breathe Right nasal strip. The Licensor also has one patent application which is currently pending. In addition, the Licensor has obtained patent protection on the Breathe Right nasal strip in three foreign countries and has various applications pending which seek further patent protection in these and a number of additional countries. There can be no assurance that the patents on the Breathe Right nasal strip, or any additional patents issued, if any, will effectively foreclose the development of competitive products or that the Company 12 will have sufficient resources to pursue enforcement of any patents issued. The Company does, however, intend to aggressively enforce the patents covering the Breathe Right nasal strip. In order to enforce any patents issued covering the Breathe Right nasal strip, the Company may have to engage in litigation, which may result in substantial cost to the Company and counterclaims against the Company. Any adverse outcome of such litigation could have a negative impact on the Company's business. The Company believes that its licensed patents on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products in the United States. The Company has engaged in significant litigation to enforce its patent rights and in response to claims that it has infringed the patents of others. In particular, the Company was engaged in patent litigation during 1998 with Acutek Adhesive Specialities, Inc., which notified the Company that it, or one of its affiliates, will make or sell a nasal dilation device in the United States and certain other markets. On July 13, 1998, the Company announced that it had settled all claims in that litigation which resulted in the dismissal of the legal proceedings. As a result of the settlement of that litigation, the Company retained all of its rights under the patents covering the Breathe Right nasal strip product. Although the Company believes that its licensed patents provide significant proprietary protection, Acutek's licensee, Schering Plough, has developed and, after the settlement, is able to market a competitive nasal dilation device meeting certain design restrictions. See "Competition." The Company has registered its Breathe Right trademark in the United States and in several foreign countries and is seeking further registration of that trademark and other trademarks. The Company believes its trademarks are important as protection for the Company's image in the marketplace and advertising, and intends to take such steps as are necessary to protect these trademarks. There can be no assurance that the Company's technology will not be challenged on the grounds that its products infringe on patents, copyrights or other proprietary information owned or claimed by others, or that others will not successfully utilize part or all of the Company's technology without compensation to the Company. Nor can there be any assurance that others will not attempt to challenge the validity or enforceability of the Company's licensed patents on the basis of prior art or introduce a nasal dilation product different from that of the Company. In addition to seeking patent protection for its products, the Company also intends to protect its proprietary technologies and proprietary information as trade secrets. EMPLOYEES At March 3, 1999, the Company had 62 full-time and 4 part-time employees, of whom 18 were engaged in operations, 22 in general administration, 24 in marketing and sales and 2 in product development. There are no unions representing Company employees. Relations with its employees are believed to be positive and there are no pending or threatened labor employment disputes or work interruptions. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages of the Company's Executive Officers together with all positions and offices held with the Company by such Executive Officers. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting of Stockholders and until their successors have been elected and have qualified. 13 Name and Age Office ------------ ------ Daniel E. Cohen (46) Chairman of the Board, Chief Executive Officer and Director Marti Morfitt (41) President, Chief Operating Officer and Director M. W. Anderson, Ph.D (48) Vice President of Product Development and Regulatory Affairs Douglas G. Austin (44) Vice President of Operations David J. Byrd (45) Vice President of Finance, Chief Financial Officer and Treasurer Kirk P. Hodgdon (39) Vice President of Breathe Right Brand John J. Keppeler (37) Vice President of Sales Teri P. Osgood (35) Vice President of New Business Commercialization Carol J. Watzke (51) Vice President of Consumer Strategy DANIEL E. COHEN has served as the Company's Chairman of the Board since 1993, its Chief Executive Officer since 1989 and a director since 1982. He also served as the Company's Treasurer from 1982 to March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist. MARTI MORFITT has served as the Company's President and Chief Operating Officer and a director since March 1998. From September 1982 through February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems. M. W. ANDERSON, PH.D has served as the Company's Vice President of Product Development and Regulatory Affairs since 1998,Vice President of Clinical and Regulatory Affairs from 1994 to 1998, and Vice President of Research and Development from 1990 to 1994. He has served in various other capacities since joining the Company in 1984, including Director of Applications Research and Director of Research and Development. Prior to joining the Company in 1984, Dr. Anderson was an Assistant Professor at the University of Minnesota's College of Pharmacy. DOUGLAS G. AUSTIN has served as the Company's Vice President of Operations since December 1998. Prior to joining the Company, Mr. Austin served as: Executive Vice President and Vice President of Operations for Ergotron, Inc., a manufacturer of computer mounting solutions, from February 1996 to December 1998; Director of Logistics and Purchasing for Wilsons - The Leather Experts, a specialty retailer of leather garments and accessories, from March 1993 to February 1996; and Director of System Stores and General Purchasing of Northwest Airlines, Inc. from June 1976 to October 1992. DAVID J. BYRD has served as the Company's Vice President of Finance and Chief Financial Officer since February 1996 and its Treasurer since March 1999. Prior to joining the Company, Mr. Byrd was Chief Financial 14 Officer and Treasurer of Medisys, Inc., a health care services company, since 1991. From 1975 to 1991, Mr. Byrd was employed by Coopers & Lybrand, where he was a partner from 1986 to 1991. Mr. Byrd is a certified public accountant. KIRK P. HODGDON has served as the Company's Vice President of the Breathe Right Brand since 1998 and as the Company's Vice President of Marketing from 1994 to 1998. Prior to joining the Company, Mr. Hodgdon served as: Vice President-Management Supervisor at Gage Marketing Communications, a marketing services company, from 1993 to 1994; Vice President - Account Supervisor at U.S. Communications, a marketing agency, from 1989 to 1993; and Marketing Manager at Land O'Lakes, Inc., a consumer foods cooperative, from 1988 to 1989. JOHN J. KEPPELER has served as the Company's Vice President of Sales since July 1998. From November 1986 to June 1998, Mr. Keppeler served in a series of sales and marketing positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Director of Category & Customer Development for the Green Giant and Progresso Business. TERI P. OSGOOD has served as the Company's Vice President of New Business Commercialization since August 1998. From August 1990 to July 1998, Ms. Osgood served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to July 1998 as Business Team Leader for Old El Paso, and from October 1995 to May 1997 as Business Team Leader for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood was employed in marketing by the Kimberly Clark Corp., from 1988 to 1990. CAROL J. WATZKE has served as the Company's Vice President of Consumer Strategy since July 1998. Prior to joining the Company, Ms. Watzke served in a series of positions of increasing responsibility since 1974 with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Consumer Insights Director from May 1997 to July 1998 and as Market Research Director, Green Giant Brands, from 1994 to 1997. ITEM 2. PROPERTIES The Company leases approximately 80,000 square feet of office, manufacturing and warehouse space in Bloomington, Minnesota. The lease expires in December 2000. The Company also leases approximately 19,000 square feet of warehouse space on a month-to-month basis. ITEM 3. LEGAL PROCEEDINGS Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information as to the principal market on which the Company's Common Stock is traded and market price information for the Common Stock of the Company is incorporated herein by reference from page 20 of the 1998 Annual Report to Stockholders (the "1998 Annual Report"). On March 3, 1999, the last sale price of the Common Stock as reported on the Nasdaq National Market was $3.094 per share. As of March 3, 1999, there were approximately 800 owners of record of Common Stock. The Company has never paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying any cash dividends in the foreseeable future. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial condition of the Company and general business considerations. ITEM 6. SELECTED FINANCIAL DATA Selected financial information is presented on page 1 of the Company's 1998 Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears on pages 8 through 12 of the Company's 1998 Annual Report and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure is primarily interest rate risk related to its cash and cash equivalents and investments in marketable securities. The Company has investment guidelines which limit the types of securities in which it may invest as well as the length of maturities. No investment may exceed 36 months in maturity and the weighted average life of the portfolio may not exceed 18 months. The table below provides information about the Company's cash and cash equivalents and marketable securities as of December 31, 1998: (In thousands) Cost Fair Value ---- ---------- Due within one year $22,277 $22,387 Due after one year through two years 22,599 22,763 Due after two years through three years 15,099 15,232 ------- -------- $59,975 $60,382 ======= ======= 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Balance Sheets of the Company as of December 31, 1997 and 1998, and the related Statements of Income, Stockholders' Equity and Comprehensive Income, and Cash Flows for each of the years in the three-year period ended December 31, 1998, the Notes to the Financial Statements and the Report of KPMG Peat Marwick LLP, independent auditors, are contained in the Company's 1998 Annual Report on pages 13 through 20 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required under this Item with respect to directors is contained in the Section "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 1999 (the "1999 Proxy Statement"), a definitive copy of which will be filed with the Commission within 120 days of the close of the last fiscal year, and is incorporated herein by reference. Information concerning executive officers is set forth in the Section entitled "Executive Officers of the Company" in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION Information required under this item is contained in the section entitled "Executive Compensation" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this item is contained in the section entitled "Security Ownership of Principal Stockholders and Management" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. Documents filed as part of this Report: 1. Financial Statements. See Item 8, Financial Statements. 2. Financial Statement Schedules. Not Applicable. 3. Exhibits. See "Exhibit Index" on the page following the Signature Page. b. Reports on Form 8-K. The Company did not file a report on Form 8-K during the fourth quarter ended December 31, 1998. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNS, INC. ("Registrant") Dated: March 22, 1999 By /s/ Daniel E. Cohen -------------------------------------- Daniel E. Cohen Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on March 22, 1999 on behalf of the Registrant in the capacities indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints DANIEL E. COHEN and PATRICK DELANEY as his or her true and lawful attorneys-in-fact and agents, each acting alone, with the full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. /s/ Daniel E. Cohen - -------------------------------- Daniel E. Cohen Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /s/ Marti Morfitt - -------------------------------- Marti Morfitt President, Chief Operating Officer and Director /s/ David J. Byrd - -------------------------------- David J. Byrd Vice President of Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 20 /s/ Patrick Delaney - -------------------------------- Patrick Delaney Director /s/ R. Hunt Greene - -------------------------------- R. Hunt Greene Director /s/ Andrew J. Greenshields - -------------------------------- Andrew J. Greenshields Director /s/ Richard W. Perkins - -------------------------------- Richard W. Perkins Director 21 CNS, INC. EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Company's Certificate of Incorporation as amended to date (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K")). 3.2 Company's Amended and Restated By-Laws. 10.1* CNS, Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-18, Commission File No. 33-14052C). 10.2* CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-8, Commission File No. 33-29454). 10.3* CNS, Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.4 License Agreement dated January 30, 1992 between the Company and Creative Integration and Design, Inc. (incorporated by reference to Exhibit 10.11 to the 1992 Form S-2). 10.5* CNS, Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K")). 10.6 Distribution Agreement dated August 2, 1995 between the Company and Minnesota Mining and Manufacturing Company ("3M") (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K")) 10.7 Supply Agreement dated May 17, 1995 between the Company and Minnesota Mining and Manufacturing Company ("3M") (incorporated by reference to Exhibit 10.12 to the 1995 Form 10-K). 10.8 License Agreement dated May 9, 1997 between the Company and Cigone, Enterprises, SmokeBusters of Texas, Inc. and Odor Pros, Inc. (incorporated by reference to Exhibit 10.9 to the 1997 Form 10-K) 10.9* Employment Agreement between the Company and Daniel E. Cohen dated February 12, 1999. 10.10* Employment Agreement between the Company and Marti Morfitt dated February 12, 1999. 10.11* Employment Agreement between the Company and Kirk P. Hodgdon dated February 12, 1999. 10.12* Employment Agreement between the Company and David J. Byrd dated February 12, 1999. 22 10.13* Employment Agreement between the Company and John J. Keppeler dated February 12, 1999. 10.14* Employment Agreement between the Company and Teri P. Osgood dated February 12, 1999. 10.15* Employment Agreement between the Company and Carol J. Watzke dated February 12, 1999. 10.16* Employment Agreement between the Company and Douglas G. Austin dated February 12, 1999. 10.17* Employment Agreement between the Company and M. W. Anderson dated February 12, 1999. 13.1 Selected information from Company's 1998 Annual Report to Stockholders. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 24.1 Powers of Attorney (included on the signature page hereof). 27.1 Financial Data Schedule. - ---------------------------------- *Indicates Compensatory Agreement 23 EX-3.2 2 AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF CNS, INC. DATED MARCH 3, 1999 CONTENTS OF AMENDED AND RESTATED BY-LAWS OF CNS, INC. ARTICLE 1 - OFFICES............................................................1 1.1) Registered Offices....................................................1 1.2) Offices .............................................................1 ARTICLE 2 - CORPORATE SEAL.....................................................1 ARTICLE 3 - SHAREHOLDERS.......................................................1 3.1) Regular Meeting.......................................................1 3.2) Special Meetings......................................................1 3.3) Quorum .............................................................2 3.4) Voting .............................................................2 3.5) Notice of Meeting.....................................................2 3.6) Proxies .............................................................2 3.7) Closing Transfer Books................................................3 3.8) Record Date...........................................................3 3.9) Presiding Officer.....................................................3 3.10) Conduct of Meetings of Shareholders...................................3 3.11) Order of Business.....................................................4 3.12) Inspectors of Election................................................4 3.13) Informal Action by Shareholders.......................................4 ARTICLE 4 - DIRECTORS..........................................................5 4.1) General Powers........................................................5 4.2) Number .............................................................5 4.3) Qualifications and Term of Office.....................................5 4.4) Quorum .............................................................5 4.5) Regular Meetings......................................................5 4.6) Telephonic Meetings...................................................5 4.7) Special Meetings......................................................5 4.8) Compensation..........................................................6 4.9) Salaries .............................................................6 4.10) Committees............................................................6 4.11) Committee of Disinterested Persons....................................6 4.12) Vacancies.............................................................6 4.13) Order of Business.....................................................7 4.14) Written Consent or Opposition in Advance of Meeting...................7 4.15) Informal Action by Directors..........................................7 4.16) Removal of Directors..................................................7 ARTICLE 5 - OFFICERS...........................................................7 5.1) Number .............................................................7 5.2) Election, Term of Office and Qualifications...........................8 5.3) Chairman of the Board.................................................8 5.4) President and Chief Executive Officer.................................8 5.5) Chief Operating Officer...............................................8 5.6) Vice President........................................................8 5.7) Secretary.............................................................8 5.8) Treasurer and Chief Financial Officer.................................8 5.9) Assistant Officers....................................................9 5.10) Officers Shall Not Lend Corporate Credit..............................9 ARTICLE 6 - INDEMNIFICATION....................................................9 ARTICLE 7 - SHARES AND THEIR TRANSFER..........................................9 7.1) Certificates of Stock.................................................9 7.2) Facsimile Signature..................................................10 7.3) Issuance of Shares...................................................10 7.4) Transfer of Shares...................................................10 7.5) Lost Certificates....................................................10 7.6) Treasury Stock.......................................................10 7.7) Indebtedness of Shareholders.........................................10 7.8) Transfer Agent and Registrar.........................................10 ARTICLE 8 - BOOKS AND RECORDS.................................................11 8.1) Share Register; Dates of Issuance....................................11 8.2) Other Documents Required.............................................11 8.3) Financial Records....................................................11 8.4) Right to Inspect.....................................................11 8.5) Cost of Copies.......................................................12 8.6) Computerized Records.................................................12 8.7) Financial Statements.................................................12 ARTICLE 9 - DISTRIBUTIONS.....................................................12 9.1) Distributions........................................................12 9.2) Record Date..........................................................12 9.3) Restrictions.........................................................13 ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................13 10.1) Fiscal Year..........................................................13 10.2) Audit of Books and Accounts..........................................13 10.3) Contracts............................................................13 10.4) Checks ............................................................13 10.5) Deposits ............................................................13 10.6) Voting Securities Held by Corporation................................13 ARTICLE 11 - WAIVER OF NOTICE.................................................14 ARTICLE 12 - AMENDMENTS.......................................................14 AMENDED AND RESTATED BY-LAWS OF CNS, INC. ARTICLE 1 OFFICES 1.1) Registered Offices - The address of the registered office of the corporation shall be established and maintained at the office of the Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware and the Corporation Trust Company shall be the registered agent of the corporation. The Board of Directors shall have authority to change the registered office of the corporation from time to time, and any such change shall be registered by the secretary with the Secretary of State of Delaware. 1.2) Offices - The corporation may have such other offices, including its principal business office, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the corporation may require from time to time. ARTICLE 2 CORPORATE SEAL The corporate seal shall have thereon the name of the corporation, and the words "Corporate Seal" and when so directed by the Board of Directors a duplicate of the seal may be kept and used by the secretary or treasurer or by an assistant secretary or assistant treasurer. ARTICLE 3 SHAREHOLDERS 3.1) Regular Meeting - The regular meeting of the shareholders of the corporation shall be an annual meeting held at the principal business office of the corporation, or at such place as is designated by the Board of Directors or by written consent of all the shareholders entitled to vote thereat, within one hundred twenty (120) days of the close of the fiscal year of the corporation, at which time the shareholders, voting as provided in the Articles of Incorporation, shall elect a Board of Directors for the ensuing year, and shall transact such other business as shall properly come before them. In the event the regular meeting is not held for a period of thirteen (13) months or more, a shareholder or director may apply to the Court of Chancery to summarily order a meeting to be held. 3.2) Special Meetings - Special meetings of the shareholders shall be called by the Secretary at any time upon request of the President, a Vice-President acting in the capacity of the President, the Treasurer or two (2) or more members of the Board of Directors, or upon a written request of shareholders holding ten percent (10%) or more of the capital stock entitled to vote. Notice shall be given in accordance with the provisions of Article 3.5 hereof. 1 3.3) Quorum - The holders of fifty (50%) percent of the outstanding shares entitled to vote, represented either in person or by proxy, shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting, at which a quorum of the shareholders is present, may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. In case a quorum is not present at any meeting, those present shall have the power to adjourn the meeting from time to time, without notice or other announcement at the meeting, until the requisite number of voting shares shall be represented. Any business may be transacted at such reconvened meeting which might have been transacted at the meeting which was adjourned. 3.4) Voting - At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one (1) vote for each share having voting power standing in his name on the books of the corporation. Shares owned by two (2) or more shareholders may be voted by any one of them unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. A holder of voting shares may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all the shares in that way. Upon the demand of any shareholder, the vote for director, or the vote upon any question before the meeting shall be by ballot. All elections shall be had and all questions decided by a majority vote of the number of shares entitled to vote and represented at any meeting at which there is a quorum, except in such cases as shall otherwise be required or permitted by statute, the Certificate of Incorporation, these By-Laws or by agreement approved by a majority vote of the number of shares entitled to vote. 3.5) Notice of Meeting - There shall be mailed to each shareholder shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of the regular meeting or any special meeting, which notice shall be mailed at least ten (10) days and not more than sixty (60) days prior thereto. Every notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to purposes stated in the call. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, or whether given in writing, orally, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. 3.6) Proxies - At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. No appointment of a proxy is irrevocable unless the appointment is coupled with an interest in the shares of the corporation. 2 3.7) Closing Transfer Books - The Board of Directors may close the stock transfer books for a period of time not exceeding forty (40) days preceding the date of any meeting of shareholders, payment of dividend, allotment of rights, change, conversion or exchange of capital stock or the date of obtaining consent of shareholders for any purpose. 3.8) Record Date - In lieu of closing the stock record books the Board of Directors may fix in advance a date, not exceeding forty (40) days preceding the date of any of the aforesaid events, as a record date for the determination of shareholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or allotment or rights, or to exercise the rights in respect to any change, conversion or exchange of capital stock or to give such consent, and in such case only such shareholders on the record date so fixed shall be entitled to notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date so fixed. If the stock transfer books are not closed and no record date is fixed for such determination of the shareholders of record, the date on which notice of the meeting is mailed, or the date of adoption of a resolution of the Board of Directors declaring a dividend, allotment of rights, change, conversion or exchange of capital stock or to give such consent, as the case may be, shall be the record date for such determination of shareholders. A determination of shareholders entitled to vote shall apply to any adjournment of such meeting except when the date of determination or the closing of the stock transfer book exceeds forty (40) days preceding such adjourned meeting, in which event a new meeting must be called. 3.9) Presiding Officer - The appropriate officers of the corporation shall preside over all meetings of the shareholders; provided, however, that in the absence of an appropriate corporate officer at any meeting of the shareholders, the meeting shall choose any person present to act as presiding officer of the meeting. 3.10) Conduct of Meetings of Shareholders - Subject to the following, meetings of shareholders generally shall follow accepted rules of parliamentary procedure: 1. The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. If the chairman, in his absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of shareholders or part thereof the chairman shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. 2. If disorder should arise which prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is immediately adjourned. 3. The chairman may ask or require that anyone not a bona fide shareholder or proxy leave the meeting. 4. A resolution or motion shall be considered for vote only if proposed by a shareholder or duly authorized proxy, and seconded by an individual who is a shareholder or a duly authorized proxy, other than the individual who proposed the resolution or motion. 3 3.11) Order of Business - The suggested order of business at the regular meeting of shareholders, and so far as possible at all other meetings of the shareholders, shall be: 1. Calling of roll. 2. Proof of due notice of meeting, or unanimous waiver. 3. Reading and disposal of any unapproved minutes. 4. Annual reports of all officers and committees. 5. Election of directors. 6. Unfinished business. 7. New business. 8. Adjournment. 3.12) Inspectors of Election - The Board of Directors in advance of any meeting of shareholders may appoint inspectors to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the officer or person acting as chairman of any such meeting may, and on the request of any shareholder or his proxy, shall make such appointment. In case any person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting, or at the meeting by the officer or person acting as chairman. The inspectors of election shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots, assents or consents, hear and determine all challenges and questions in any way arising and announce the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. No inspector whether appointed by the Board of Directors or by the officer or person acting as chairman need be a shareholder. 3.13) Informal Action by Shareholders - Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action. 4 ARTICLE 4 DIRECTORS 4.1) General Powers - The property, affairs, and business of the corporation shall be managed by the Board of Directors. 4.2) Number - The Board of Directors shall consist of such number of directors, not less than five (5) nor more than eight (8), the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office. 4.3) Qualifications and Term of Office - Directors need not be shareholders or residents of the State of Delaware. Directors shall be elected by the shareholders at the regular meeting for a term of one (1) year or until their successors are elected and qualified. Each of the directors of the corporation shall hold office until the regular meeting next following or closely coinciding with the expiration of his term of office and until his successor shall have been elected and shall qualify or until he shall resign, or shall have been removed as provided by statute. 4.4) Quorum - A majority of the whole Board of Directors shall constitute a quorum for the transaction of business; provided, however, that if any vacancies exist by reason of death, resignation or otherwise, a majority of the remaining directors shall constitute a quorum for the conduct of business. If less than a quorum is present at any meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than a majority. 4.5) Regular Meetings - As soon as practical after each regular meeting of shareholders, the Board of Directors shall meet for the purposes of organization, choosing the officers of the corporation and for the transaction of other business at the place where the shareholders' meeting is held or at the place where regular meetings of the Board of Directors are held. No notice of such meeting need be given. Such first meeting may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings or in a consent and waiver of notice signed by all the directors. 4.6) Telephonic Meetings - Any member or members of the Board of Directors, or any committee designated by such Board, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this paragraph shall constitute presence in person at such meeting. 4.7) Special Meetings - Special meetings of the Board of Directors may be held at such time and place as may from time to time be designated in the notice or waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the president, or by any director. Unless notice shall be waived by all directors entitled to notice, notice of the special meeting shall be given by the secretary, who shall give at least twenty-four (24) hours notice thereof to each director by mail, telegraph, telephone, or in person; provided, however, that meetings may be held without waiver of notice from or giving notice to any director while he is in the Armed Forces of the United States. Each 5 director, by his attendance and his participation in the action taken at any directors' meeting, shall be deemed to have waived notice of such meeting. 4.8) Compensation - Directors and any members of any committee of the corporation contemplated by these By-Laws or otherwise provided for by resolution of the Board of Directors, shall receive such compensation therefore as may be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving proper compensation therefor. 4.9) Salaries - Salaries and other compensation of all officers and employees of the corporation shall be fixed by the Board of Directors. Nothing herein contained shall be construed to preclude any officer from serving the corporation as a director, consultant or in any other capacity and receiving proper compensation therefor. In the event that any authority, such as the Internal Revenue Service, determines, and such determination is ultimately accepted, that any compensation paid to a director, officer or employee of the corporation is excessive and disallows the corporate deduction therefor, the recipient of the amounts so determined to be excessive shall repay the corporation said amount. 4.10) Committees - A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the corporation to the extent provided in the resolution. Committees are subject at all times to the direction and control of the Board of Directors except as provided in Article 4.11. A committee shall consist of one or more natural persons, who are directors, appointed by affirmative vote of a majority of the directors present. A majority of the members of the committee present at a meeting is a quorum for the transaction of business unless a larger or smaller proportion is provided in a resolution approved by the affirmative vote of a majority of the directors present. 4.11) Committee of Disinterested Persons - The Board of Directors may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the corporation. A director or other person is "disinterested" if he is not an owner of more than one percent of the outstanding shares of, or a present or former officer, employee or agent of the corporation or of a related corporation and has not been made or threatened to be made a party to the proceeding in question. The committee, once established, is not subject to the direction or control of, or termination by, the Board of Directors. A vacancy on the committee may be filled by a majority vote of the remaining members. The good faith determinations of the committee are binding upon the corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations. 4.12) Vacancies - Any vacancy in the Board of Directors shall be filled by an affirmative vote of a majority of the remaining directors of the Board, though less than a quorum, and each person so elected shall be a director until his successor is elected by the shareholders, who may make such election at their next annual meeting or any meeting duly called for that purpose. 4.13) Order of Business - The meetings shall be conducted in accordance with Roberts Rules of Order, Revised, and the suggested order of business at any meeting of the directors shall be: 6 1. Roll call. 2. Proof of due notice of meeting, or unanimous consent, or unanimous presence and declaration by president. 3. Reading and disposal of any unapproved minutes. 4. Reports of officers and committees. 5. Election of officers. 6. Unfinished business. 7. New business. 8. Adjournment. 4.14) Written Consent or Opposition in Advance of Meeting - Any member of the Board of Directors or a committee thereof, may give advance written consent or opposition to a proposal or resolution stating an action to be taken by the Board or committee. Such consent or opposition shall be a vote in favor of or against the proposal or resolution if the proposal or resolution acted upon at the meeting is substantially the same or has substantially the same effect as the proposal or resolution to which the member of the Board or committee has consented or objected. 4.15) Informal Action by Directors - Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter set forth. 4.16) Removal of Directors - The holders of a majority of the shares entitled to vote at an election of directors may remove at any time, for cause or without cause, any director of the corporation. ARTICLE 5 OFFICERS 5.1) Number - The officers of the corporation shall include a president or chief executive officer, a treasurer or chief financial officer and a secretary and may include such other officers as may from time to time be chosen by the Board of Directors. Any two offices except those of president and vice-president may be held by one person. 5.2) Election, Term of Office and Qualifications - At any regular meeting of the Board of Directors, the Board shall elect from their number a president or chief executive officer and shall, from within or without their number, elect a treasurer or chief financial officer and a secretary, and may, in addition, from within or without their number, elect one or more vice-presidents and such other officers and assistant officers as may be deemed advisable. Such officers shall hold office until the next regular 7 meeting or until their successors are elected and qualified; provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the whole Board of Directors. 5.3) Chairman of the Board - The chairman of the board of directors shall preside at all meetings of shareholders and directors, and he shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. 5.4) President and Chief Executive Officer - The president shall have general and active management of the business under the supervision and direction of the Board of Directors, and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall be the chief executive officer of the corporation and shall perform all duties usually incident to the office of president and chief executive officer and such other duties as may be from time to time prescribed by the Board of Directors; except that if the Board of Directors elects a separate chief executive officer, then the president shall perform such duties usually incident to the office of president and the chief executive officer shall perform such duties usually incident to the office of the chief executive officer and each of them shall perform such duties as may be from time to time prescribed to each of them by the Board of Directors. 5.5) Chief Operating Officer - The chief operating officer of the corporation shall be responsible for directing and supervising the corporation's overall business activities. He shall be the officer primarily responsible for planning and carrying out the business policies of the corporation and shall report to the Board of Directors thereon at each meeting of the Board of Directors. He shall have such other responsibilities and shall exercise such additional authority as may from time to time be assigned to him by the Board. 5.6) Vice President - Each vice-president shall have such powers and shall perform such duties as may be specified in these By-Laws or prescribed by the Board of Directors. In the event of absence or disability of the president, a vice-president shall succeed to his powers and duties in the order in which they are elected or as otherwise prescribed by the Board of Directors. A vice-president who is not a director shall not succeed to the office of president. 5.7) Secretary - The secretary shall be secretary of and shall attend all meetings of the shareholders and Board of Directors. He shall act as clerk thereof and shall record all the proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall keep the seal of the corporation and shall affix the same to any instrument requiring it and shall attest the seal by his signature. He shall, with the president or any vice-president, acknowledge all certificates for shares of the corporation and shall perform such other duties as may be prescribed from time to time by the Board of Directors. 5.8) Treasurer and Chief Financial Officer - The treasurer shall keep accurate accounts of all moneys of the corporation received or disbursed. He shall deposit all moneys, drafts, and checks in the name and to the credit of the corporation in such banks and depositories as the Board of Directors shall designate from time to time. He shall endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor. He shall disburse the funds of the corporation as authorized by the Board of Directors. He shall render to the president and the Board of Directors, whenever required, an account of all of his transactions as treasurer and of 8 the financial condition of the corporation and shall perform such other duties as may be prescribed by the Board of Directors from time to time. 5.9) Assistant Officers - In the event of absence or disability of any vice-president, secretary, or treasurer, such assistants to such officers shall succeed to the powers and duties of the absent officer in the order in which they are elected or as otherwise prescribed by the Board of Directors until such principal officer shall resume his duties or a replacement is elected by the Board of Directors. Such assistant officers shall exercise such other powers and duties as may be delegated to them from time to time by the Board of Directors, but they shall be subordinate to the principal officer they are designated to assist. 5.10) Officers Shall Not Lend Corporate Credit - Except for the proper use of the corporation, no officer of this corporation shall sign or endorse in the name or on behalf of this corporation, or in his official capacity, any obligations for the accommodation of any other party or parties, nor shall any check, note, bond, stock certificate or other security or thing of value belonging to this company be used by any officer or director as collateral for any obligation other than valid obligations of this corporation. ARTICLE 6 INDEMNIFICATION Any person who at any time shall serve or shall have served as a director, officer, employee or agent of the Corporation, and the heirs, executors and administrators of such person shall be indemnified by the Corporation in accordance with, and the fullest extent permitted by, the provisions of the Delaware General Corporation Law, as it may be amended from time to time. ARTICLE 7 SHARES AND THEIR TRANSFER 7.1) Certificates of Stock - Every owner of stock of the corporation shall be entitled to a certificate, to be in such form as the Board of Directors prescribe, certifying the number of shares of stock of the corporation owned by him. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the corporation by the president, and by the secretary, or by any other two (2) proper officers of the corporation authorized by the Board of Directors. A record shall be kept of the name of the person, firm or corporation owning the stock represented by each such certificate, and the respective issue date thereof, and in the case of cancellation, the respective dates of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be canceled and no other certificate or certificates shall be issued in exchange for any existing certificates until such existing certificate shall have been so canceled except in cases provided for in Article 7.5. 7.2) Facsimile Signature - Where any certificate is manually signed by a transfer agent, a transfer clerk or by a registrar appointed by the Board of Directors to perform such duties, a facsimile or engraved signature of the president and secretary or other proper officer of the corporation authorized by the Board of Directors may be inscribed on the certificate in lieu of the actual signature of such 9 officer. The fact that a certificate bears the facsimile signature of an officer who has ceased to hold office shall not affect the validity of such certificate if otherwise validly issued. 7.3) Issuance of Shares - Subject to the provisions and limitations of Article 4 of the Certificate of Incorporation, the Board of Directors is authorized to cause to be issued shares of the corporation, to the full amount of such authorized shares, and at such times as may be determined by the Board of Directors and as may be permitted by law. 7.4) Transfer of Shares - Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or by the shareholder's legal representative, or duly authorized attorney-in-fact, and upon surrender for cancellation of the certificate or certificates for such shares. The shareholder in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of shares shall be made as collateral security, and not absolutely, such facts, if known to the secretary of the corporation, or to the transfer agent, shall be so expressed in the entry of transfer. 7.5) Lost Certificates - Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board, in an amount determined by the Board of Directors not exceeding double the value of the stock represented by such certificate to indemnify the corporation, against any claim that may be made against it on account of the alleged loss or destruction of such certificate; whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost. 7.6) Treasury Stock - Treasury stock shall be held by the corporation subject to disposal by the Board of Directors, in accordance with the Certificate of Incorporation and these By-Laws, and shall not have voting rights nor participate in dividends. 7.7) Indebtedness of Shareholders - The corporation shall have a first lien on all the shares of its capital stock and upon all dividends declared upon the same for any indebtedness of the respective holders thereof to the corporation. 7.8) Transfer Agent and Registrar - The Board of Directors may appoint one or more transfer agents or transfer clerks, and may require all certificates for shares to bear the signature or signatures of any of them. ARTICLE 8 BOOKS AND RECORDS 8.1) Share Register; Dates of Issuance - The corporation shall keep at its principal business office, or at another place or places within the United States determined by the Board of Directors, a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder. The corporation shall also keep, with the share register, a record of the dates on which certificates or transaction statements representing shares were issued. 10 8.2) Other Documents Required - A corporation shall keep at its principal business office, or, if its principal business office is outside of this state, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a person described in Article 8.4, originals or copies of: 1. Records of all proceedings of shareholders for the last three years; 2. Records of all proceedings of the board for the last three years; 3. Its articles and all amendments currently in effect; 4. Its by-laws and all amendments currently in effect; 5. Financial statements required by Article 8.7 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; 6. Reports made to shareholders generally within the last three years; 7. A statement of the names and usual business addresses of its directors and principal officers; 8. Voting trust agreements; and 9. Shareholder control agreements. 8.3) Financial Records - A corporation shall keep appropriate and complete financial records. 8.4) Right to Inspect - A shareholder, beneficial owner, or a holder of a voting trust certificate has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, during the usual hours for business, the share register and all documents referred to in Article 8.2. A shareholder, beneficial owner, or a holder of a voting trust certificate has a right, upon written demand, to examine and copy in person or by legal representative, other corporate records during the usual hours for business, only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination. A "proper purpose" is one reasonably related to the person's interest as a shareholder, beneficial owner, or holder of a voting trust certificate of the corporation. 8.5) Cost of Copies - Copies of all documents referred to in Article 8.2 shall be furnished at the expense of the corporation. A copy of the most recently generated share register shall be furnished at the expense of the corporation if the requesting party shows a proper purpose. In all other cases, the corporation may charge the requesting party a reasonable fee to cover the expenses of providing the copy. 8.6) Computerized Records - The records maintained by the corporation, including its share register, financial records, and minute books, may utilize any information storage technique, including, for example, punched holes, printed or magnetized spots, or microimages, even though that makes them 11 illegible visually, if the records can be converted, by machine and within a reasonable time, into a form that is legible visually and whose contents are assembled by related subject matter to permit convenient use by people in the normal course of business. The corporation shall convert any of the records referred to in Articles 8.1 and 8.2 upon the request of a person entitled to inspect them, and the expense of the conversion shall be borne by the person who bears the expense of copying pursuant to Article 8.5. A copy of the conversion is admissible in evidence, and shall be accepted for all other purposes, to the same extent as the existing or original records would be if they were legible visually. 8.7) Financial Statements - The corporation shall upon written request by a shareholder stating a proper purpose therefor, furnish annual financial statements, including at least a balance sheet as of the end of each fiscal year and a statement of income for the fiscal year, which shall be prepared on the basis of accounting methods reasonable in the circumstances and may be consolidated statements of the corporation and one or more of its subsidiaries. In the case of statements audited by a public accountant, each copy shall be accompanied by a report setting forth the opinion of the accountant on the statements; in other cases, each copy shall be accompanied by a statement of the president or other person in charge of the corporation's financial records stating the reasonable belief of the person that the financial statements were prepared in accordance with accounting methods reasonable in the circumstances, describing the basis of presentation, and describing any respects in which the financial statements were not prepared on a basis consistent with those prepared for the previous year. ARTICLE 9 DISTRIBUTIONS 9.1) Distributions - The Board of Directors may authorize distributions by the corporation from funds legally available therefor at such times and in such amounts as the Board shall deem reasonable. 9.2) Record Date - Subject to any provisions of the Certificate of Incorporation, the Board of Directors may fix a date preceding the date fixed for the payment of any distribution or allotment of other rights as the record date for the determination of the shareholders entitled to receive payment of such distribution or allotment notwithstanding any transfer of shares on the books of the Corporation after such record date. 9.3) Restrictions - A distribution may be made to the holders of a class or series of shares only if: 1. All amounts payable to the holders of shares having a preference for the payment of that kind of distribution are paid; and 2. The payment of the distribution does not reduce the remaining net assets of the corporation below the aggregate preferential amount payable in the event of liquidation to the holders of shares having preferential rights, unless the distribution is made to those shareholders in the order and to the extent of their respective priorities. 12 3. The money or property available for distribution is insufficient to satisfy all preferences, the distributions shall be made pro rate according to the order of priority of preferences by classes and by series within those classes. ARTICLE 10 FINANCIAL AND PROPERTY MANAGEMENT 10.1) Fiscal Year - The fiscal year of the corporation shall be set by the Board of Directors. 10.2) Audit of Books and Accounts - The books and accounts of the corporation shall be audited at such times as may be ordered by the Board of Directors. 10.3) Contracts - The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 10.4) Checks - All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation shall be signed by the treasurer or such other officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 10.5) Deposits - All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select. 10.6) Voting Securities Held by Corporation - The president or other agent designated by the Board of Directors, shall have full power and authority on behalf of the corporation to attend, act and vote at any meeting of security holders of other corporations in which this corporation may hold securities. At such meeting the president, or such other agent, shall possess and exercise any and all rights and powers incident to the ownership of such securities which the corporation might possess and exercise. ARTICLE 11 WAIVER OF NOTICE Whenever any notice whatsoever is required to be given by these By-Laws or the Certificate of Incorporation of the corporation or any of the corporate laws of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to said notice, either before, at, or after the time stated therein, shall be deemed equivalent thereto. 13 ARTICLE 12 AMENDMENTS Subject to the limitations set forth in the Delaware General Corporation Law, these By-Laws may be amended by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been included in the notice of such meeting given to the directors. The undersigned Secretary hereby certifies that the foregoing Amended and Restated By-Laws were adopted as the complete By-Laws of the corporation by the Board of Directors on this 3rd day of March, 1999. /s/ Patrick Delaney ----------------------------- Patrick Delaney, Secretary 14 EX-10.9 3 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.9 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Dan Cohen ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its Chairman & CEO under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as Chairman & CEO, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Executive Employment Agreement Page 2 Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as Chairman & CEO; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ Dan Cohen -------------------------------------------- Dan Cohen EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Dan Cohen DATE: February 12, 1999 POSITION: Chairman & CEO DEPARTMENT: Corporate Administration BASE SALARY: $235,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month MANAGEMENT INCENTIVE PLAN LEVEL: 25 at Threshold 50 at Plan 100 at Maximum EX-10.10 4 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.10 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Marti Morfitt ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its President & COO under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as President & COO, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Executive Employment Agreement Page 2 Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as President & COO; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Daniel Cohen ----------------------------------------- Its Chairman & CEO ------------------------------------- EMPLOYEE /s/ Marti Morfitt -------------------------------------------- Marti Morfitt 15 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Marti Morfitt DATE: February 12, 1999 POSITION: President & COO DEPARTMENT: Corporate Administration BASE SALARY: $245,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month MANAGEMENT INCENTIVE PLAN LEVEL: 25 at Threshold 50 at Plan 100 at Maximum EX-10.11 5 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.11 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Kirk Hodgdon ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, Business Development under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, Business Development, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman Executive Employment Agreement Page 2 of the Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, Business Development; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ Kirk Hodgdon -------------------------------------------- Kirk Hodgdon EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Kirk Hodgdon DATE: February 12, 1999 POSITION: VP, Business Development DEPARTMENT: BASE SALARY: $145,950 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.12 6 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.12 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and David Byrd ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP Finance, CFO, and Treasurer under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP Finance, CFO, and Treasurer, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Executive Employment Agreement Page 2 Chairman of the Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP Finance, CFO, and Treasurer; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ David Byrd -------------------------------------------- David Byrd EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: David Byrd DATE: February 12, 1999 POSITION: VP, Finance, CFO and Treasurer DEPARTMENT: Finance BASE SALARY: $144,900 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.13 7 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.13 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and John Keppeler ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, Sales under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, Sales, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Board of Executive Employment Agreement Page 2 Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, Sales; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ------------------------------------------ Its President & COO -------------------------------------- EMPLOYEE /s/ John Keppeler --------------------------------------------- John Keppeler EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: John Keppeler DATE: February 12, 1999 POSITION: VP, Sales DEPARTMENT: Sales BASE SALARY: $158,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.14 8 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.14 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Teri Osgood ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, New Business Commercialization under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, New Business Commercialization, Employee will continue to faithfully and diligently perform such executive management Executive Employment Agreement Page 2 responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will Executive Employment Agreement Page 3 continue to be paid by CNS for the duration of the 30-day notice period. In connection with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, New Business Commercialization; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ Teri Osgood -------------------------------------------- Teri Osgood EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Teri Osgood DATE: February 12, 1999 POSITION: VP, New Business Commercialization DEPARTMENT: New Business Commercialization BASE SALARY: $155,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) $500.00/month MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.15 9 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.15 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Carol Watzke ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, Consumer Strategy under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, Consumer Strategy, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman Executive Employment Agreement Page 2 of the Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, Consumer Strategy; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ Carol Watzke --------------------------------------------- Carol Watzke EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Carol Watzke DATE: February 12, 1999 POSITION: VP, Consumer Strategy DEPARTMENT: Consumer Strategy BASE SALARY: $150,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.16 10 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.16 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Doug Austin ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, Operations under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, Operations, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Executive Employment Agreement Page 2 Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection Executive Employment Agreement Page 3 with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, Operations; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO -------------------------------------- EMPLOYEE /s/ Doug Austin -------------------------------------------- Doug Austin EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Doug Austin DATE: February 12, 1999 POSITION: VP, Operations DEPARTMENT: Operations BASE SALARY: $138,000 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-10.17 11 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.17 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement is made as of February 12, 1999 (the "Effective Date") between CNS, INC. a Delaware corporation ("CNS") and Andy Anderson ("Employee"). WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the performance of Employee's duties to the detriment of CNS and its shareholders; and WHEREAS, Employee is willing to continue his employment with CNS upon the understanding that CNS will provide income security if Employee's employment is terminated under certain terms and conditions; WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage his continued attention and dedication to his assigned duties without distraction and to ensure his continued availability to CNS in the event of a Change in Control; and WHEREAS, it is further in CNS's best interests to receive certain assurances from Employee regarding CNS's confidentiality, competition and other proprietary business concerns; THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows: 1. Employment. CNS agrees to continue to employ Employee as its VP, Product Development & Regulatory Affairs under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits. 2. Term. The term of Employee's employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein. 3. Duties. In his position as VP, Product Development & Regulatory Affairs, Employee will continue to faithfully and diligently perform such executive management Executive Employment Agreement Page 2 responsibilities as may be assigned to him from time to time by the Chief Executive Officer, President or Chairman of the Board of Directors of CNS (the "Board"); devote his full time, energy and skill to CNS's business, as is reasonably necessary to execute fully his duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with his duties hereunder; and promote CNS's best interests. The principal place of employment and the location of Employee's principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of his duties during the term of this Agreement. Employee shall notify the President of any other paid position which he is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the President of CNS's prior approval. 4. Compensation. For all services rendered by Employee, CNS shall pay Employee the compensation described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The President of CNS shall, from time to time during Employee's employment, review his annual salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors. In the event of termination of this Agreement by CNS without Good Cause, as defined in paragraph 7 herein, the Board may, in good faith and in its sole discretion, determine and cause to be paid a partial bonus based on Employee's performance through the date of termination, and such determination shall be final and binding. 5. Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. 6. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days' advance written notice to the President. If Employee resigns under this paragraph, the President retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that base salary and the employer portion of his health insurance premiums will Executive Employment Agreement Page 3 continue to be paid by CNS for the duration of the 30-day notice period. In connection with his termination, Employee will receive any accrued unused Paid Time Off to which he is entitled. 7. Termination by CNS. CNS shall have the right to terminate Employee's employment in any of the following ways: a. CNS may, by written notice to Employee, terminate his employment without Good Cause, in which event Employee will be paid his base salary up to the date of termination. Employee is also entitled to receive Salary Continuation for one year from his termination date. "Salary Continuation" shall mean payment by CNS of the Employee's base salary as of his termination date, payable to Employee on the same schedule and in the same amount as the payment of base salary prior to termination of his employment, until such time as the full Salary Continuation obligation shall be discharged, as provided in this paragraph 7. During the period when Salary Continuation is payable to Employee, CNS will also continue to provide to Employee all group medical, dental and life plan benefits provided to its other senior executives. Employee shall also receive any accrued unused Paid Time Off to which he is entitled. Receipt of Salary Continuation is subject to Employee's compliance with his obligations under paragraphs 9, 10, 11 and 12 of this Agreement and his execution of a standard release agreement which includes, in addition to release of claims against CNS and related releasees, an obligation not to speak negatively about or harm CNS, confidentiality with respect to the termination process, and cooperation with the transition of responsibilities. Payment of the employer portion of Employee's group medical, dental and life plan premiums under this paragraph and under paragraphs 6 and 8 herein shall cease as of the date on which Employee is covered under other such group plans if such coverage occurs prior to termination of any salary continuation periods set forth in said paragraphs. b. CNS, by written notice to Employee, may terminate his employment for Good Cause, as defined below. In the event of termination under this subparagraph 7.b., Employee shall be paid his base salary up to the date of termination. "Good Cause" for the purpose of this Agreement shall mean one or more of the following: (i) willful and premeditated failure or refusal of Employee to render services to CNS in accordance with his obligations under paragraph 3; (ii) the commission by Employee of an act of fraud or embezzlement against CNS; (iii) the commission by Employee of any other willful or reckless act which injures CNS in a substantial or material way (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement); (iv) the breach by Employee of any provision of this Agreement; or (v) the commission of a substantial act of moral turpitude by Employee which is deemed by CNS's Board to have a material adverse effect on CNS; or (vi) unsatisfactory performance after Executive Employment Agreement Page 4 specific notice of performance deficiencies, description of expectations and opportunity to cure. c. CNS, by written notice to Employee, may terminate Employee's employment under this Agreement if he becomes physically or mentally disabled during the term so that he has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to him hereunder ("Disability"). Upon such determination, CNS shall pay to Employee his base salary up to the date of such termination to the extent not covered by any disability plan. d. This Agreement shall terminate upon the Employee's death during its term, except that CNS shall pay to the legal representative of Employee's estate all base salary due him up to the date of his death. 8. Termination Following a Change in Control. DEFINITION. a. For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: i. ACQUISITION OF 25% OF STOCK IN CNS any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CNS is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS's then outstanding securities; ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT APPROVED BY BOARD during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director [other than a director designated by a person who has entered into agreement with CNS to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CNS or nomination for election by CNS's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Executive Employment Agreement Page 5 Board of Directors of CNS; iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN LESS THAN 50% OF SURVIVING COMPANY'S STOCK the stockholders of CNS approve a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no "person" acquires more than 25% of the combined voting power of CNS's then outstanding securities; iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF CNS STOCK MARKET VALUE the stockholders of CNS approve a plan of complete liquidation or a sale or disposition by CNS of all or substantially all of CNS's assets. "The sale or disposition by CNS of all or substantially all of CNS's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CNS. For purposes of the preceding sentence, the "fair market value of CNS" shall be the aggregate market value of CNS's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS's other outstanding equity securities. The aggregate market value of CNS's common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CNS of all or substantially all of CNS's assets by the average closing price for CNS's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS's common stock or by such other method as the Board of Directors of CNS shall determine is Executive Employment Agreement Page 6 appropriate; and Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control. b. Applicability. In the event of a Change in Control, the terms of this subparagraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24 month period this Agreement in its entirety shall be terminated and be of no further effect. Employee shall be entitled to receive the benefits set forth in subparagraph 8.f if, within 24 months of such Change in Control, his employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i, below). Employee shall, in return for the benefits provided under subparagraph 8.f., sign a standard release agreement with CNS, in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. i. Termination for Good Reason shall be effective immediately upon written notice from the Employee to the President. Good Reason shall exist if CNS has materially breached any of the terms of this Agreement; Employee is assigned duties which are materially inconsistent with his position, duties, responsibilities and status as VP, Product Development & Regulatory Affairs; his compensation, including any incentive compensation or bonus plan, is reduced; or relocation of CNS would require him to relocate his principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area. ii. Termination without Good Cause shall be effective upon 30 days' advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in subparagraph 7.b. c. Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 20 hereunder. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. Executive Employment Agreement Page 7 d. Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, "Date of Termination" shall mean: i. if Employee's employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee's duties during such 30 day period); and ii. if Employee's employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs. e. Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. Executive Employment Agreement Page 8 f. Compensation Upon Termination. Following a Change in Control, as defined in subparagraph 8.a. above, to the extent provided in subparagraph 8.b. above, Employee shall be entitled to the following benefits in lieu of any benefits which would otherwise be available to him upon termination under paragraphs 6 or 7 hereunder: i. CNS shall pay Employee through the Date of Termination Employee's base salary at the rate in effect at the time the Notice of Termination is given and any other form or type of other compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS. ii. In lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the "Severance Payment") equal to 24 months of Employee's Compensation as defined below based on the average monthly Compensation paid to Employee during the 24 month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee's average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation ("Affiliate") affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Employee's gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee's contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. iii. For 18 months following the Employee's Date of Termination, CNS shall arrange to provide, at its sole expense, Employee with group medical, dental and life plan benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise Executive Employment Agreement Page 9 receivable by Employee pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by Employee during such period from any third party, and any such benefits actually received by Employee shall be reported to CNS. iv. CNS shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph). v. The Severance Payment shall be reduced and offset by the amount of any other payment received or to be received by Employee in connection with his termination of employment pursuant to any policies of CNS. vi. If a determination is made by legislation, regulations, rulings directed to CNS or Employee, or court decision that the aggregate amount of any payment made to Employee hereunder, or pursuant to any plan, program or policy of CNS in connection with, on account of, or as a result of, a Change of Control constitutes an "excess parachute payment" as defined in Section 280G of the Code subject to the excise tax provisions of Section 4999 of the Code, or any successor sections thereof, Employee shall be entitled to receive from CNS, in addition to any other amounts payable hereunder, an amount which shall be equal to such excise tax, plus, on a net after-tax basis, an amount equal to the aggregate amount of any interest, penalties, fines or additions to any tax, including income tax, which are imposed in connection with the imposition of such excise tax. Such amount shall be payable to Employee as soon as may be practicable after such final determination is made. Employee and CNS shall mutually and reasonably determine whether or not such determination has occurred or whether any appeal to such determination should be made. vii. Employee shall be entitled to receive all benefits payable to Employee under the CNS, Inc. Profit Sharing Plan and Trust or any successor of such Plan and Trust and any other plan or agreement relating to retirement benefits, and, in addition, if Employee is not fully vested in his account balance under such Plan, a single lump sum payment in cash from CNS representing the nonvested portion of his account, which shall be in addition to, and not reduced by, any other amounts payable to Employee under this paragraph 8. viii. Employee shall not be required to mitigate the amount of any payment provided for in this paragraph 8 by seeking other employment or Executive Employment Agreement Page 10 otherwise, nor shall the amount of any payment or benefit provided for in this paragraph 8 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in this paragraph 8. ix. In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee's legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS. x. As a condition of receiving the Severance Payment and other benefits provided in this subparagraph 8.f and in subparagraph 8.g, Employee shall be required to sign a standard release agreement with CNS in which he agrees to release any and all claims and causes of action which he might have against CNS and in which he affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of this Agreement. g. Stock Options. Employee shall, immediately upon a Change in Control, vest in all stock options which have been granted to him and he shall be entitled to exercise all rights and to receive all benefits accruing to him under any and all CNS stock purchase and stock option plans or programs, including the CNS, Inc. 1994 Amended Stock Plan, or any successor to any such plan or program, which shall be in addition to and not reduced by any other amounts payable to Employee under this paragraph 8. 9. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, Executive Employment Agreement Page 11 inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed "Confidential Information" herein. Employee's obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS's Board, or (d) Employee is obligated by law to disclose. 10. Disclosure and Transfer of Product Developments, etc. a. Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed "Developments" herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments. b. Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment. c. Notwithstanding subparagraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee's own time, and (1) which do not relate (a) directly to the business of CNS or (b) to CNS's actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by Employee for CNS. Executive Employment Agreement Page 12 This will confirm that Employee's obligations to CNS under paragraphs 9, 10 and 11 will continue after the termination of Employee's employment. 11. Non-Competition. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for Employee's own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of Employee's employment. For purposes of this Agreement, the "Business of CNS" or "Business" means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee's employment. Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 11 shall apply throughout the United States, Canada, Japan and Europe. 12. Non-Solicitation. During the term of Employee's employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee's termination date. Prospective CNS customers, brokers, vendors and distributors include those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business Executive Employment Agreement Page 13 relationship within six months following Employee's termination date. Employee also agrees that during his employment in the one year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee's employment and as of his termination date. 13. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance or Salary Continuation Payments, benefits or bonus which he may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of his violation of any of his obligations under this Agreement. In the event of cessation of payments and benefits, Employee's release of his claims against CNS shall remain valid and fully enforceable in consideration of the benefits which Employee received prior to set breach. 14. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended. 15. Binding Effect. Executive Employment Agreement Page 14 a. CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets as defined in subparagraph 8.a of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term "CNS" as used in this Agreement shall instead refer to CNS' successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's designated beneficiaries, or, if there is no such designated beneficiary, to Employee's estate. 16. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation. 17. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, "CNS", as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors. Executive Employment Agreement Page 15 18. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota. 19. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law. 20. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. CNS, INC. By /s/ Marti Morfitt ----------------------------------------- Its President & COO ------------------------------------- EMPLOYEE /s/ Andy Anderson -------------------------------------------- Andy Anderson EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT A NAME: Andy Anderson DATE: February 12, 1999 POSITION: VP, Product Development & Regulatory Affairs DEPARTMENT: Product Development & Regulatory Affairs BASE SALARY: $104,709 CAR ALLOWANCE: (INCLUDE ONLY IF APPLICABLE) MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold 30 at Plan 60 at Maximum EX-13.1 12 1998 ANNUAL REPORT EXHIBIT 13.1 FINANCIAL HIGHLIGHTS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Results of Operations(1)(2): Net sales: Domestic net sales ................... $ 51,855 $ 60,602 $ 60,098 $ 47,196 $ 2,798 International net sales .............. 1,768 6,355 25,768 1,435 0 ---------------------------------------------------- Total net sales .................... 53,623 66,957 85,866 48,631 2,798 ---------------------------------------------------- Gross profit ........................... 35,138 45,664 52,520 31,077 1,008 Operating income (loss) ................ 701 9,644 21,743 12,398 (2,758) Income (loss) from continuing operations before income taxes .................. 3,492 12,620 24,022 12,970 (2,558) Income (loss) from continuing operations 3,492 8,770 15,522 13,311 (2,558) Net income (loss) ...................... 2,982 8,770 15,522 14,076 (2,867) Diluted net income (loss) per share: From continuing operations ........... $ .16 $ .44 $ .78 $ .72 $ (.16) From discontinued operations ......... .00 .00 .00 .04 (.02) ---------------------------------------------------- Diluted net income (loss) per share $ .16 $ .44 $ .78 $ .76 $ (.18) ==================================================== Weighted average number of common and assumed conversion shares outstanding 18,249 19,802 19,807 18,376 15,755 DECEMBER 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Financial Position(1): Working capital ........................ $ 72,025 $ 76,919 $ 78,403 $ 25,855 $ 10,790 Total assets ........................... 84,963 88,495 89,409 32,341 11,613 Stockholders' equity ................... 75,866 80,645 79,775 26,885 11,207
(1) Until June 1995, the Company manufactured and marketed diagnostic devices for sleep disorders. This line of business was sold in June 1995 and is reported as discontinued operations. (2) Results of operations prior to 1996 included no income tax expense due to net operating loss and credit carryforwards. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the Company's audited financial statements and notes thereto appearing elsewhere in this Annual Report. In the opinion of the Company's management, the quarterly unaudited information set forth below has been prepared on the same basis as the audited financial information, and includes all adjustments (consisting only of normal, recurring adjustments) necessary to present this information fairly when read in conjunction with the Company's financial statements and notes thereto. OVERVIEW The Company was founded in 1982. From 1987 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. Since 1995, the Company has focused on the Breathe Right(R) nasal strip and divested itself of the assets related to its sleep disorders business. The Company's revenues are derived primarily from the manufacture and sale of the Breathe Right nasal strip. Revenue from sales is recognized when earned, at the time products are shipped. The Company obtained the exclusive license to manufacture and sell the Breathe Right nasal strip in 1992 and received FDA clearance in October 1993 to market the Breathe Right nasal strip as a product that improves nasal breathing. In September 1994, the Company launched its consumer marketing program which was enhanced by broad media coverage of the use of Breathe Right nasal strips by professional football players. At the same time, a number of radio and television personalities provided unsolicited endorsements of the product on national radio and television. In August 1995, the Company signed an exclusive international distribution agreement with the 3M Company ("3M") to market Breathe Right nasal strips outside the U.S. and Canada. That agreement is currently being renegotiated. At the end of 1995, Breathe Right nasal strips were available in most domestic drug stores, mass merchants and warehouse clubs and a majority of grocery stores. In November 1995, the Company received FDA clearance to market the Breathe Right nasal strip for the reduction or elimination of snoring and began marketing programs emphasizing the related snoring benefits of the product. In February 1996, the Company received FDA clearance to market the Breathe Right nasal strip for the temporary relief of nasal congestion and thereafter launched a media program to increase consumer awareness of the benefits of the product for this application. In June 1996, the Company received FDA clearance to market the Breathe Right nasal strip for the temporary relief of breathing difficulties due to a deviated nasal septum. In July 1996, U.S. Utility Patents were issued covering the basic invention of the Breathe Right nasal strip and additional elements incorporated in the product. During 1997, the Company became aware of a foreign reference to a nasal dilator, not commercially available, that the Company believed would result in narrower protection in the future from the patents licensed for Breathe Right nasal strips. During 1998, the Company strengthened its management team to add consumer packaged goods and new products experience and organized into focused business teams. The Company completed positioning research work to expand the Breathe Right brand and developed a road map for new product development. These steps have positioned the Company to invest aggressively during 1999 in marketing, selling and product development expenses to build the Breathe Right brand and to launch additional products. 8 OPERATING RESULTS The tables below set forth certain selected financial information of the Company and the percentage of net sales represented by certain items included in the Company's statements of income for the periods indicated.
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR - ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Domestic net sales ......... $13,354 $11,789 $12,581 $14,130 $51,855 International net sales .... 1,127 168 168 305 1,768 ------------------------------------------------------------------------------------------------- Net sales ................ 14,481 11,957 12,749 14,435 53,623 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold ......... 4,470 4,454 4,242 5,320 18,485 30.9 37.2 33.3 36.9 34.5 ------------------------------------------------------------------------------------------------- Gross profit ............. 10,011 7,503 8,507 9,115 35,138 69.1 62.8 66.7 63.1 65.5 ------------------------------------------------------------------------------------------------- Operating expenses: Marketing and selling .... 9,694 5,581 7,032 6,471 28,777 66.8 46.7 55.2 44.8 53.7 General and administrative 1,047 1,167 810 596 3,621 7.4 9.8 6.3 4.1 6.7 Product development ...... 395 589 540 515 2,039 2.7 4.9 4.2 3.6 3.8 ------------------------------------------------------------------------------------------------- Total operating expenses 11,136 7,337 8,382 7,582 34,437 76.9 61.4 65.7 52.5 64.2 ------------------------------------------------------------------------------------------------- Operating income (loss) . (1,125) 166 125 1,533 701 (7.8) 1.4 1.0 10.6 1.3 Interest income ............ 690 730 712 660 2,791 4.8 6.1 5.6 4.6 5.2 ------------------------------------------------------------------------------------------------- Income (loss) before income taxes ............ $ (435) $ 896 $ 837 $ 2,193 $ 3,492 (3.0)% 7.5% 6.6% 15.2% 6.5% ================================================================================================= THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR - ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Domestic net sales ......... $16,909 $12,623 $12,352 $18,718 $60,602 International net sales .... 2,486 970 291 2,608 6,355 ------------------------------------------------------------------------------------------------- Net sales ................ 19,395 13,593 12,643 21,326 66,957 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold ......... 6,245 4,456 3,897 6,695 21,293 32.2 32.8 30.8 31.4 31.8 ------------------------------------------------------------------------------------------------- Gross profit ............. 13,150 9,137 8,746 14,631 45,664 67.8 67.2 69.2 68.6 68.2 ------------------------------------------------------------------------------------------------- Operating expenses: Marketing and selling .... 11,124 4,900 4,582 11,033 31,639 57.4 36.0 36.2 51.8 47.3 General and administrative 762 812 933 768 3,275 3.9 6.0 7.4 3.6 4.9 Product development ...... 202 289 246 369 1,106 1.0 2.1 2.0 1.7 1.6 ------------------------------------------------------------------------------------------------- Total operating expenses 12,088 6,001 5,761 12,170 36,020 62.3 44.1 45.6 57.1 53.8 ------------------------------------------------------------------------------------------------- Operating income ........ 1,062 3,136 2,985 2,461 9,644 5.5 23.1 23.6 11.5 14.4 Interest income ............ 710 777 773 716 2,976 3.6 5.7 6.1 3.4 4.4 ------------------------------------------------------------------------------------------------- Income before income taxes $ 1,772 $ 3,913 $ 3,758 $ 3,177 $12,620 9.1% 28.8% 29.7% 14.9% 18.8% ================================================================================================= THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR - ---------------------------------------------------------------------- ENDED ------------------------------------- ENDED MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Domestic net sales ......... $17,986 $12,611 $11,582 $17,919 $60,098 International net sales .... 2,835 8,508 7,793 6,632 25,768 ------------------------------------------------------------------------------------------------- Net sales ................ 20,821 21,119 19,375 24,551 85,866 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold ......... 7,652 9,147 8,000 8,548 33,347 36.7 43.3 41.3 34.8 38.8 ------------------------------------------------------------------------------------------------- Gross profit ............. 13,169 11,972 11,375 16,003 52,520 63.3 56.7 58.7 65.2 61.2 ------------------------------------------------------------------------------------------------- Operating expenses: Marketing and selling .... 7,430 6,917 4,862 7,589 26,798 35.7 32.8 25.1 30.9 31.2 General and administrative 738 645 760 727 2,870 3.5 3.0 3.9 3.0 3.3 Product development ...... 157 340 336 275 1,109 .8 1.6 1.7 1.1 1.3 ------------------------------------------------------------------------------------------------- Total operating expenses 8,325 7,902 5,958 8,591 30,777 40.0 37.4 30.7 35.0 35.8 ------------------------------------------------------------------------------------------------- Operating income ........ 4,844 4,070 5,417 7,412 21,743 23.3 19.3 28.0 30.2 25.3 Interest income ............ 155 685 696 743 2,279 .7 3.2 3.6 3.0 2.7 ------------------------------------------------------------------------------------------------- Income before income taxes $ 4,999 $ 4,755 $ 6,113 $ 8,155 $24,022 24.0% 22.5% 31.6% 33.2% 28.0% =================================================================================================
9 1998 COMPARED TO 1997 NET SALES Net sales were $53.6 million for 1998 compared to $67.0 million for 1997. For the year 1998, domestic sales decreased to $51.9 million from $60.6 million for 1997. The decrease was primarily due to the failure of marketing efforts to generate the anticipated volume of new Breathe Right nasal strip users in the first quarter of 1998, a planned reduction in advertising expenditures during the fourth quarter of 1998 and the entry of a competitor at the end of 1998. The Company has experienced in the past, and expects that it will continue to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to advertising levels and seasonality of sales as described below, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. International sales decreased to $1.8 million for 1998 from $6.4 million for 1997. The lower level of international sales in 1998 reflects continued high inventory levels at 3M. The Company believes a higher level of advertising and promotion is needed in international markets and is working with 3M to amend the distribution agreement to enable the Company to take a more active role in advertising and promoting the Breathe Right nasal strip in the future. GROSS PROFIT Gross profit was $35.1 million for 1998 compared to $45.7 million for 1997. Gross profit as a percentage of net sales was 65.5% for 1998 compared to 68.2% for 1997. The lower gross profit as a percentage of net sales in 1998 was due primarily to a write off of inventory in anticipation of the introduction of new packaging, the inclusion of "20% More Free" Breathe Right nasal strips in packages for part of the year and the introduction of new products with lower gross profit margins. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $28.8 million for 1998 compared to $31.6 million for 1997. This decrease resulted primarily from a planned reduction in national television advertising during the fourth quarter of 1998 and lower than expected coupon redemption. Marketing and selling expenses as a percentage of net sales increased to 53.7% in 1998 from 47.3% in 1997, reflecting the lower level of sales in 1998. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $3.6 million for 1998 compared to $3.3 million for 1997. This increase resulted primarily from personnel expenses, including costs associated with the change of the Company's President, offset by a decrease in expenses from patent litigation that was settled during 1998. General and administrative expenses as a percentage of net sales increased to 6.7% in 1998 from 4.9% in 1997 primarily as a result of the lower level of sales. PRODUCT DEVELOPMENT EXPENSES Product development expenses were $2.0 million for 1998 compared to $1.1 million for 1997. This increase resulted primarily from costs related to evaluation and testing of potential new products. Product development expenses as a percentage of net sales increased to 3.8% in 1998 from 1.6% in 1997. INTEREST INCOME Interest income was $2.8 million for 1998 compared to $3.0 million for 1997. This decrease resulted primarily from a higher level of investment in tax exempt municipal bonds in 1998. INCOME TAX EXPENSE Income tax expense for 1998 was $510,000 or 14.6% of income before income taxes compared to $3.9 million or 30.5% for 1997. The lower effective income tax rate was due primarily to the higher level of tax exempt interest income as a percentage of income before income taxes. 1997 COMPARED TO 1996 NET SALES Net sales were $67.0 million for 1997 compared to $85.9 million for 1996. Breathe Right nasal strip sales decreased in 1997 as a result of a decrease in international sales. For the year 1997, domestic sales increased to $60.6 million from $60.1 million for 1996. While our domestic sales dollars were relatively flat in 1997 compared to 1996, both retail sell-through and our strip sales, measured in units, increased by approximately ten percent. This is primarily due to a higher percentage of sales in 30 and 24 count boxes compared to 10 count boxes. International sales decreased to $6.4 million for 1997 from $25.8 million for 1996. International sales in 1996 represented primarily initial inventory purchases by 3M, the Company's international distributor, and initial stocking of inventory at international retail outlets in certain countries. The lower level of international sales in 1997 reflected continued high inventory levels at 3M. GROSS PROFIT Gross profit was $45.7 million for 1997 compared to $52.5 million for 1996. Gross profit as a percentage of net sales was 68.2% for 1997 compared to 61.2% for 1996. The higher gross profit as a percentage of net sales in 1997 was due to the lower level of international sales. The Company obtains lower gross profit margins on international sales because the Company sells product to 3M at a price lower than its sales price in domestic markets. In connection with these international sales, 3M is responsible for substantially all of the operating expenses and a portion of the packaging costs. Domestic gross profit as a percentage of domestic net sales for 1997 was approximately 1.5 percentage points higher than 1996, due to a combination of lower manufacturing costs obtained from subcontractors, an increase in the selling price of certain products and changes in the mix of products sold. 10 MARKETING AND SELLING EXPENSES Marketing and selling expenses were $31.6 million for 1997 compared to $26.8 million for 1996. This increase resulted primarily from heavier levels of advertising primarily associated with domestic national television advertising. Marketing and selling expenses as a percentage of net sales increased to 47.3% in 1997 from 31.2% in 1996 as a result of the increase in expenses and lower level of international sales. GENERAL AND ADMINISTRATIVE Expenses General and administrative expenses were $3.3 million for 1997 compared to $2.9 million for 1996. This increase resulted primarily from expenses associated with patent litigation. General and administrative expenses as a percentage of net sales increased to 4.9% in 1997 from 3.3% in 1996 primarily as a result of the lower level of international sales. PRODUCT DEVELOPMENT EXPENSES Product development expenses were $1.1 million for 1997 and 1996. Product development expenses as a percentage of net sales increased to 1.6% in 1997 from 1.3% in 1996 primarily as a result of the lower level of international sales. INTEREST INCOME Interest income was $3.0 million for 1997 compared to $2.3 million for 1996. This increase resulted primarily from investment of net proceeds from the public offering of common stock completed in the second quarter of 1996. INCOME TAX EXPENSE Income tax expense for 1997 was $3.9 million or 30.5% of income before income taxes compared to $8.5 million or 35.4% for 1996. The lower effective income tax rate was due primarily to the higher level of tax exempt interest income as a percentage of income before income taxes. SEASONALITY The Company believes that approximately 50% of Breathe Right nasal strip users currently use the product for the temporary relief of nasal congestion or congestion related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons because of increased use during the cold season. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash, cash equivalents and marketable securities of $60.4 million and working capital of $72.0 million. OPERATING ACTIVITIES The Company generated cash from operations of approximately $9.3 million in 1998, $8.0 million in 1997 and $16.4 million in 1996. The increased cash flow in 1998 was primarily due to a change in operating assets and liabilities offset by a decrease in net income. The higher level of cash provided by operations in 1996 was primarily due to the higher level of net income. INVESTING ACTIVITIES The Company's purchases of marketable securities equaled sales and maturities of marketable securities in 1998. Purchases of marketable securities exceeded sales and maturities by $9.1 million in 1997. Marketable securities purchased consisted of cash equivalents, corporate bonds, U.S. Government obligations and municipal bonds. The Company purchased $1.1 million of property and equipment in 1998, primarily associated with the upgrade of management information systems, compared to $1.2 million in 1997. Capitalized product rights were $229,000 in 1998 compared to $1.6 million in 1997. FINANCING ACTIVITIES In 1998, the Company's Board of Directors authorized the Company to purchase up to 2,250,000 shares of its common stock and the Company purchased 1,907,600 shares for $8.3 million during the year. In 1997, the Company's Board of Directors authorized and the Company purchased one million shares of its common stock for $8.3 million. These treasury shares are to be used to meet the Company's obligations under its employee stock ownership plan and stock option plans, and for possible future acquisitions. The Company received $239,000 in 1998 and $362,000 in 1997 from the exercise of stock options. In April 1996, the Company completed a public offering of 1,725,000 shares of common stock. Of these shares, 1,525,000 shares were sold by the Company and 200,000 shares by selling shareholders. Net proceeds to the Company were $35.5 million. The Company also received $686,000 in 1996 from the exercise of stock options. The Company believes that its existing funds will be sufficient to support its planned operations for the foreseeable future, including capital expenditures noted above and possible future acquisitions of products that would complement existing operations. YEAR 2000 The Company is evaluating the potential impact of what is commonly referred to as the Year 2000 issue, concerning the inability of certain information systems to properly recognize and process dates containing the year 2000 and beyond. The Company has established a Year 2000 team, and this team has worked with management to commence the following steps: (i) implementing a Year 2000 assessment and testing plan for all internal information systems and other systems that contain microcontrollers that may be affected by the Year 2000 date change; (ii) communicating with third parties that supply product to the Company to ensure they are addressing the Year 2000 issue; and (iii) contingency and disaster recovery planning to ensure Year 2000 problem resolution. The Company has identified and tested the systems it believes are critical, and the test results indicate that these systems are Year 2000 compliant. The Company expects to complete testing and establish compliance with respect to all of its systems and products by June 30, 1999, subject to possible 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS equipment upgrades during 1999 and ongoing communications with third parties. Regardless of the Year 2000 compliance of the Company's systems and products, there can be no assurance that the Company will not be adversely affected by the failure of others to become Year 2000 compliant. The Company estimates that its direct costs for Year 2000 compliance will consist primarily of costs related to the staff time devoted to Year 2000 compliance. The Company does not expect capital expenditures will be necessary related to Year 2000 compliance. Costs and capital expenditures in these areas have not been material for historical periods. As noted below under "Forward-Looking Statements," statements in this section that are not historical or current facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding the timetable for Year 2000 compliance, the Company's costs and capital expenditures, the success of the Company's efforts and efforts of others to achieve compliance, and the effects of the Year 2000 issue on the Company's future financial condition and results of operations. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important factors, among others, could affect the accuracy of these statements: (i) the inherent uncertainty of the costs and timing of achieving compliance on the wide variety of systems used by the Company; (ii) the reliance on the efforts of vendors, customers, government agencies and other third parties to achieve adequate compliance and avoid disruption of the Company's business in early 2000; and (iii) the uncertainty of the ultimate costs and consequences of any unanticipated disruption in the Company's business resulting from the failure of one of the Company's applications or of a third party's systems. The foregoing list is not exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RECENT ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company plans to adopt the new standard in 2000. The Company is in the process of evaluating SFAS No. 133 and its potential impact. In 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and does not require additional disclosures. The Company intends to adopt SOP 98-1 in 1999. Costs incurred prior to the initial application of the SOP will not be adjusted to conform with SOP 98-1. The adoption is not expected to have a material impact on the Company's financial position or results of operations. FORWARD LOOKING STATEMENTS Certain statements in this Annual Report do not relate strictly to historical or current facts but provide current expectations or forecasts of future events. As such, they are considered "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. Such forward-looking statements can be identified by the use of terminology such as "may," "will," "expect," "plan," "intend," "anticipate," "estimate," or "continue" or similar words or expressions. It is not possible to foresee or identify all factors affecting the Company's forward looking statements and investors therefore should not consider any list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to the following factors: (i) the Company's revenue and profitability is primarily reliant on sales of a single product, Breathe Right nasal strips; (ii) the Company's success will depend on its ability to effectively market Breathe Right nasal strips and on the fact that it was the first entrant into the nasal dilation market; (iii) the Company's competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of the patents on the Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation; (iv) the Company operates in a highly competitive market where recent and potential market entrants pose greater competitive challenges than those faced by the Company in the past; (v) the Company has faced and will continue to face challenges in successfully introducing new products; (vi) the Company is currently dependent upon 3M for the international distribution of its products under a contractual relationship which has produced less than anticipated results and which the Company expects to modify or replace; and (vii) the risk factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 12 STATEMENTS OF INCOME CNS, INC.
YEARS ENDED DECEMBER 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Net sales .......................................... $53,622,803 $66,957,134 $85,866,525 Cost of goods sold ................................. 18,484,608 21,292,995 33,346,878 ------------------------------------------ Gross profit ..................................... 35,138,195 45,664,139 52,519,647 ------------------------------------------ Operating expenses: Marketing and selling ............................ 28,777,148 31,638,518 26,798,820 General and administrative ....................... 3,620,752 3,275,636 2,869,163 Product development .............................. 2,039,411 1,105,790 1,109,062 ------------------------------------------ Total operating expenses ........................ 34,437,311 36,019,944 30,777,045 ------------------------------------------ Operating income ................................ 700,884 9,644,195 21,742,602 Interest income .................................... 2,790,780 2,976,121 2,279,882 ------------------------------------------ Income before income taxes ...................... 3,491,664 12,620,316 24,022,484 Income tax expense ................................. 510,000 3,850,000 8,500,000 ------------------------------------------ Net income ...................................... $ 2,981,664 $ 8,770,316 $15,522,484 ========================================== Basic net income per share ......................... $ .16 $ .46 $ .83 ========================================== Weighted average number of common shares outstanding 18,079,000 19,119,000 18,704,000 ========================================== Diluted net income per share ....................... $ .16 $ .44 $ .78 ========================================== Weighted average number of common and assumed conversion shares outstanding ............ 18,249,000 19,802,000 19,807,000 ==========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 13 BALANCE SHEETS CNS, INC.
DECEMBER 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ............................................... $ 584,718 $ 229,647 Marketable securities ................................................... 59,796,952 59,458,236 Accounts receivable, net of allowance for doubtful accounts of $210,000 in 1998 and 1997 ........................................... 7,790,952 11,392,001 Inventories ............................................................. 8,823,193 8,624,663 Prepaid expenses and other current assets ............................... 2,794,558 3,295,001 Deferred income taxes ................................................... 1,332,000 1,770,000 ------------------------------- Total current assets ................................................. 81,122,373 84,769,548 Property and equipment, net ............................................... 2,406,488 1,863,007 Product rights, net ....................................................... 1,434,566 1,502,520 Certificate of deposit, restricted ........................................ 0 359,898 ------------------------------- $ 84,963,427 $ 88,494,973 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 4,993,462 $ 3,130,660 Accrued expenses ........................................................ 3,419,187 3,561,279 Accrued income taxes .................................................... 684,937 1,158,533 ------------------------------- Total current liabilities ............................................. 9,097,586 7,850,472 ------------------------------- Stockholders' equity: Preferred stock-- authorized 8,483,589 shares; none issued or outstanding 0 0 Common stock-- $.01 par value; authorized 50,000,000 shares; issued and outstanding 19,294,570 shares in 1998 and 1997 .............. 192,946 192,946 Additional paid-in capital .............................................. 61,932,529 63,495,718 Treasury shares-- at cost; 2,692,144 in 1998 and 961,511 shares in 1997 . (14,670,128) (8,219,993) Retained earnings ....................................................... 28,157,494 25,175,830 Accumulated other comprehensive income .................................. 253,000 0 ------------------------------- Total stockholders' equity ........................................... 75,865,841 80,644,501 Commitments (notes 8 and 9) ------------------------------- $ 84,963,427 $ 88,494,973 ===============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 14 STATEMENTS OF STOCKHOLDERS' EQUITY AND CNS, INC. COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-------------------- ADDITIONAL ------------------------- COMMON STOCK ADDITIONAL TREASURY SHARES NUMBER PAR PAID-IN NUMBER OF SHARES VALUE CAPITAL OF SHARES COST - --------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 ....... 17,387,852 $173,878 $ 25,828,434 0 $ 0 Proceeds from public stock offering less issuance costs of $2,469,000 ................. 1,525,000 15,250 35,449,926 0 0 Stock issued in connection with Employee Stock Purchase Plan .. 893 9 11,048 0 0 Stock options exercised ......... 231,700 2,317 683,531 0 0 Tax benefit from stock options exercised ............. 0 0 1,205,000 0 0 Comprehensive income: Net income for the year ....... 0 0 0 0 0 Total comprehensive income . ------------------------------------------------------------------- Balance at December 31, 1996 ....... 19,145,445 191,454 63,177,939 0 0 Stock issued in connection with Employee Stock Purchase Plan .. 927 10 7,180 (1,489) 8,464 Stock options exercised ......... 77,300 773 241,308 (37,000) 50,062 Tax benefit from stock options exercised ............. 0 0 70,000 0 0 Warrants exercised .............. 70,898 709 (709) 0 0 Treasury shares purchased ....... 0 0 0 1,000,000 (8,278,519) Comprehensive income: Net income for the year ....... 0 0 0 0 0 Total comprehensive income . ------------------------------------------------------------------- Balance at December 31, 1997 ....... 19,294,570 192,946 63,495,718 961,511 (8,219,993) Stock issued in connection with Employee Stock Purchase Plan .. 0 0 (25,349) (5,467) 43,141 Stock options exercised ......... 0 0 (1,537,840) (171,500) 1,776,871 Treasury shares purchased ....... 0 0 0 1,907,600 (8,270,147) Comprehensive income: Net income for the year ....... 0 0 0 0 0 Unrealized gains on marketable securities net of income tax effect of $154,000 ......... 0 0 0 0 0 Total comprehensive income . ------------------------------------------------------------------- Balance at December 31, 1998 ....... 19,294,570 $192,946 $ 61,932,529 2,692,144 $(14,670,128) ===================================================================
[WIDE TABLE CONTINUED FROM ABOVE]
ACCUMULATED OTHER TOTAL RETAINED COMPREHENSIVE STOCKHOLDERS' EARNINGS INCOME EQUITY - ---------------------------------------------------------------------------- Balance at December 31, 1995 ....... $ 883,030 $ 0 $ 26,885,342 Proceeds from public stock offering less issuance costs of $2,469,000 ................. 0 0 35,465,176 Stock issued in connection with Employee Stock Purchase Plan .. 0 0 11,057 Stock options exercised ......... 0 0 685,848 Tax benefit from stock options exercised ............. 0 0 1,205,000 Comprehensive income: Net income for the year ....... 15,522,484 0 15,522,484 ------------ Total comprehensive income . 15,522,484 -------------------------------------- Balance at December 31, 1996 ....... 16,405,514 0 79,774,907 Stock issued in connection with Employee Stock Purchase Plan .. 0 0 15,654 Stock options exercised ......... 0 0 292,143 Tax benefit from stock options exercised ............. 0 0 70,000 Warrants exercised .............. 0 0 0 Treasury shares purchased ....... 0 0 (8,278,519) Comprehensive income: Net income for the year ....... 8,770,316 0 8,770,316 ------------ Total comprehensive income . 8,770,316 -------------------------------------- Balance at December 31, 1997 ....... 25,175,830 0 80,644,501 Stock issued in connection with Employee Stock Purchase Plan .. 0 0 17,792 Stock options exercised ......... 0 0 239,031 Treasury shares purchased ....... 0 0 (8,270,147) Comprehensive income: Net income for the year ....... 2,981,664 0 2,981,664 Unrealized gains on marketable securities net of income tax effect of $154,000 ......... 0 253,000 253,000 ------------ Total comprehensive income . 3,234,664 -------------------------------------- Balance at December 31, 1998 ....... $28,157,494 $253,000 $ 75,865,841 ======================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 15 STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net income .......................................................... $ 2,981,664 $ 8,770,316 $ 15,522,484 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................................... 854,702 460,044 259,822 Deferred income taxes ............................................. 284,000 (809,000) (58,000) Changes in operating assets and liabilities: Accounts receivable .............................................. 3,601,049 3,273,730 (6,834,938) Inventories ...................................................... (198,530) (309,837) 2,786,083 Prepaid expenses and other current assets ........................ 500,443 (1,647,946) (649,381) Accounts payable and accrued expenses ............................ 1,247,114 (1,783,688) 5,383,967 --------------------------------------------- Net cash provided by operating activities ....................... 9,270,442 7,953,619 16,410,037 --------------------------------------------- Investing activities: Purchases of marketable securities .................................. (43,428,987) (99,045,360) (177,630,971) Sales and maturities of marketable securities ....................... 43,497,271 89,926,317 135,200,938 Payments for purchases of property and equipment .................... (1,101,403) (1,239,918) (464,675) Payments for product rights ......................................... (228,826) (1,553,605) (141,309) Redemption (purchase) of certificate of deposit, restricted ......... 359,898 (19,834) (20,064) --------------------------------------------- Net cash used in investing activities ........................... (902,047) (11,932,400) (43,056,081) --------------------------------------------- Financing activities: Net proceeds from public stock offering ............................. 0 0 35,465,176 Proceeds from the issuance of common stock under Employee Stock Purchase Plan ................................. 17,792 15,654 11,057 Proceeds from the exercise of stock options ......................... 239,031 362,143 685,848 Purchase of treasury shares ......................................... (8,270,147) (8,278,519) 0 --------------------------------------------- Net cash (used in) provided by financing activities ............. (8,013,324) (7,900,722) 36,162,081 --------------------------------------------- Net increase (decrease) in cash and cash equivalents ............ 355,071 (11,879,503) 9,516,037 Cash and cash equivalents: Beginning of year ................................................... 229,647 12,109,150 2,593,113 --------------------------------------------- End of year ......................................................... $ 584,718 $ 229,647 $ 12,109,150 ============================================= Supplemental disclosure of cash flow information: Cash paid during the year for interest .............................. $ 0 $ 0 $ 0 Cash paid during the year for income taxes .......................... 700,000 4,750,000 6,541,467 =============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS CNS, Inc. ("the Company"), designs, manufactures and markets consumer products, primarily the Breathe Right(R) nasal strip. The Breathe Right nasal strip is a nonprescription, single use, disposable device that can temporarily relieve nasal congestion and reduce or eliminate snoring by improving nasal breathing. The Breathe Right nasal strip is sold over-the-counter in retail outlets, including drug, grocery, mass merchant and club stores. The Company has an international distribution agreement with 3M Company to market Breathe Right nasal strips outside the U.S. and Canada, which is currently in the process of being renegotiated. REVENUE RECOGNITION Revenue from sales is recognized at the time products are shipped. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS All financial instruments are carried at amounts that approximate fair value. CASH EQUIVALENTS Cash equivalents consist primarily of money market funds. MARKETABLE SECURITIES The Company classifies its marketable debt securities as available-for-sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Any unrealized gains and losses are reflected as a separate component of stockholders' equity. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary, results in a charge to operations resulting in the establishment of a new cost basis for the security. INVENTORIES Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment is depreciated using the straight-line method over five years. Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the term of the lease. PRODUCT RIGHTS Product rights, consisting of patents, trademarks and other product rights, are stated at cost and are amortized over three to seven years using the straight-line method. STOCK BASED COMPENSATION The Company follows the disclosure requirements for stock based compensation plans and, accordingly, no compensation expense has been recognized. FOREIGN SALES Foreign sales are made in U.S. dollars only. There are no currency conversions. ADVERTISING The Company expenses the production costs of advertising the first time the advertising runs. INCOME TAXES Deferred tax assets and liabilities and the resultant provision for income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. NET INCOME PER SHARE Basic net income per share has been computed based upon the weighted average number of common shares outstanding during the year. Diluted net income per share has been computed based upon the weighted average number of common and assumed conversion shares outstanding during the year. COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of the Company's net income and unrealized gains on marketable securities and is presented in the statements of stockholders' equity and comprehensive income. SFAS No. 130 only requires additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company plans to adopt the new standard in 2000. The Company is in the process of evaluating SFAS No. 133 and its potential impact. In 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and does not require additional disclosures. The Company intends to adopt SOP 98-1 in 1999. Costs incurred prior to the initial application of the SOP will not be adjusted to conform with SOP 98-1. The adoption is not expected to have a material impact on the Company's financial position or results of operations. 17 NOTE 2 MARKETABLE SECURITIES Marketable securities, including estimated fair value based on quoted market prices or valuation models, are summarized as follows (in thousands): DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------- COST FAIR VALUE COST FAIR VALUE ------------------------------------------------------------------------------ Cash equivalents ................. $ 1,145 $ 1,145 $ 805 $ 805 Corporate bonds .................. 1,754 1,772 3,772 3,772 U.S. Government obligations ...... 1,309 1,316 3,994 3,994 Municipal bonds .................. 55,182 55,564 50,887 50,887 - ------------------------------------------------------------------------------- Total marketable securities ...... $59,390 $59,797 $59,458 $59,458 =============================================================================== Maturities of marketable securities at December 31, 1998 are as follows (in thousands): COST FAIR VALUE - ------------------------------------------------------------------------------- Due within one year ....................... $21,692 $21,802 Due after one year through three years .... 37,698 37,995 - ------------------------------------------------------------------------------- Total marketable securities ............... $59,390 $59,797 =============================================================================== There were no realized gains or losses during 1998, 1997 or 1996. NOTE 3 ADVERTISING At December 31, 1998 and 1997, $445,000 and $1,337,000, respectively, of advertising costs were reported as assets. Advertising expense was $15,783,000 in 1998, $21,160,000 in 1997, and $16,215,000 in 1996. NOTE 4 DETAILS OF SELECTED BALANCE SHEET ACCOUNTS Details of selected balance sheet accounts are as follows (in thousands): 1998 1997 1996 - ------------------------------------------------------------------------------- Allowance for doubtful accounts: Balance beginning of year ................. $210 $210 $201 Plus provision for doubtful accounts ...... 43 5 123 Less charge offs .......................... 43 5 114 - ------------------------------------------------------------------------------- Balance end of year ...................... $210 $210 $210 =============================================================================== DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------- Inventories: Finished goods ...................................... $6,364 $6,475 Work in process ..................................... 183 468 Raw materials and component parts ................... 2,276 1,682 - ------------------------------------------------------------------------------- Total inventories .................................. $8,823 $8,625 - ------------------------------------------------------------------------------- Property and equipment: Production equipment ................................ $ 410 $ 395 Office equipment and information systems ............ 3,096 2,010 - ------------------------------------------------------------------------------- 3,506 2,405 Less accumulated depreciation ....................... 1,100 542 - ------------------------------------------------------------------------------- Property and equipment, net ........................ $2,406 $1,863 - ------------------------------------------------------------------------------- Product rights: Product rights ...................................... $2,148 $1,920 Less accumulated amortization ....................... 713 417 - ------------------------------------------------------------------------------- Product rights, net ................................ $1,435 $1,503 - ------------------------------------------------------------------------------- Accrued expenses: Promotions and allowances ........................... $1,632 $1,926 Royalties and commissions ........................... 665 1,214 Salaries, incentives and paid time off .............. 1,016 273 Other ............................................... 106 148 - ------------------------------------------------------------------------------- Total accrued expenses ............................. $3,419 $3,561 =============================================================================== NOTE 5 STOCKHOLDERS' EQUITY STOCK OPTIONS The Company's stock option plans allow for the grant of options to officers, directors, and employees to purchase up to 2,950,000 shares of common stock at exercise prices not less than 100% of fair market value on the dates of grant. The term of the options may not exceed ten years and vest in increments over 1 to 5 years from the grant date. The plans allow for the grant of shares of restricted common stock. No shares of restricted common stock have been granted under these plans as of December 31, 1998. Stock option activity under these plans is summarized as follows: WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES AVAILABLE PER SHARE OUTSTANDING FOR GRANT - ---------------------------------------------------------------------------- Balance at December 31, 1995 ... $ 3.85 1,508,300 242,052 Granted ...................... 17.61 175,000 (175,000) Exercised .................... 2.96 (231,700) 0 - ---------------------------------------------------------------------------- Balance at December 31, 1996 ... 5.65 1,451,600 67,052 Granted ...................... 7.13 110,000 (110,000) Exercised .................... 2.56 (114,300) 0 Canceled ..................... 16.79 (90,000) 90,000 Unused 1987 expired .......... -- 0 (31,702) Amend 1994 Plan .............. -- 0 750,000 - ---------------------------------------------------------------------------- Balance at December 31, 1997 ... 5.29 1,357,300 765,350 Granted ...................... 4.92 634,700 (634,700) Exercised .................... 1.39 (171,500) 0 Canceled ..................... 10.71 (240,000) 240,000 - ---------------------------------------------------------------------------- Balance at December 31, 1998 ... $ 4.74 1,580,500 370,650 =============================================================================== Information on outstanding and currently exercisable options by price range at December 31, 1998, is summarized as follows: WEIGHTED- WEIGHTED- WEIGHTED- PRICE TOTAL AVERAGE AVERAGE EXERCISABLE AVERAGE RANGE PER NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE SHARE SHARES LIFE (YEARS) PRICE SHARES PRICE - -------------------------------------------------------------------------------- $1.56 - 2.31 74,600 2.6 $ 1.93 74,600 $ 1.93 3.10 - 3.88 416,000 6.3 3.24 336,000 3.16 4.13 - 5.00 319,200 9.3 4.71 51,000 4.59 5.44 - 7.25 762,700 6.6 5.78 582,200 5.72 11.38 8,000 6.3 11.38 8,000 11.38 --------- --------- 1,580,500 1,051,800 ========= ========= At December 31, 1998, the weighted-average remaining contractual life of outstanding options was 6.9 years. At December 31, 1998, 1997 and 1996, currently exercisable options aggregated 1,051,800, 958,100 and 775,700 shares of common stock, respectively and the weighted-average exercise price of those options was $4.62, $3.87 and $3.10, respectively. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 is estimated as $3.20, $2.38 and $11.00, respectively on the date of grant using the Black-Scholes option pricing model with the following assumptions: volatility of 65%; risk-free interest rate of 6.00% in 1998, 6.25% in 1997 and 5.4% in 1996; and an expected life of 6 years. 18 The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock compensation plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and diluted earnings per share would have been reduced by approximately $1,300,000, or $.07 per share in 1998, $530,000, or $.03 per share in 1997 and $900,000, or $.05 per share in 1996. Pro forma net income reflects only options granted since 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan allows eligible employees to purchase shares of the Company's common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the stock on the first or last day of each six-month period during which an employee participated in the plan. The Company has reserved 200,000 shares under the plan of which 144,269 shares have been purchased by employees as of December 31, 1998. WARRANTS During 1997 and 1995, warrants to purchase a total of 100,000 shares at $2.75 were exercised. The warrants had been issued in connection with an agreement to license a product to be marketed as the Breathe Right device. In connection with an agreement to license a potential product, the licenser was issued a warrant during 1997 to purchase 25,000 shares of the Company's common stock exercisable at a price of $8.00 per share which expires November 2002. PREFERRED STOCK At December 31, 1998, the Company is authorized to issue 1,000,000 shares of Series A Junior Participating Preferred Stock upon a triggering event under the Company's stockholders' rights plan and is authorized to issue up to an additional 7,483,589 shares of undesignated preferred stock. NOTE 6 INCOME TAXES Income tax expense (benefit) for the three years ended December 31, 1998 is as follows (in thousands): CURRENT DEFERRED TOTAL - ------------------------------------------------------------------------------- 1998: Federal ...................................... $ 128 $ 184 $ 312 State ........................................ 98 100 198 - ------------------------------------------------------------------------------- Income tax expense .......................... $ 226 $ 284 $ 510 - ------------------------------------------------------------------------------- 1997: Federal ...................................... $4,154 $ (728) $3,426 State ........................................ 505 (81) 424 - ------------------------------------------------------------------------------- Income tax expense (benefit) ................ $4,659 $ (809) $3,850 - ------------------------------------------------------------------------------- 1996: Federal ...................................... $8,164 $ (52) $8,112 State ........................................ 394 (6) 388 - ------------------------------------------------------------------------------- Income tax expense (benefit) ................ $8,558 $ (58) $8,500 =============================================================================== Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following (in thousands): 1998 1997 1996 - -------------------------------------------------------------------------------- Computed tax expense ...................... $ 1,222 $ 4,417 $ 8,408 State taxes, net of federal benefit ....... 64 331 452 Tax exempt interest ....................... (789) (765) (185) Benefit of foreign sales corporation ...... 0 (127) (417) Other ..................................... 13 (6) 242 - -------------------------------------------------------------------------------- Actual tax expense ...................... $ 510 $ 3,850 $ 8,500 ================================================================================ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for 1998 and 1997 are presented below (in thousands): DECEMBER 31, 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Inventory items ................................... $ 659 $ 363 Accounts receivable allowance ..................... 78 78 Product rights .................................... 113 55 Accrued expenses .................................. 710 1,328 - -------------------------------------------------------------------------------- 1,560 1,824 - -------------------------------------------------------------------------------- Deferred tax liabilities: Unrealized gains on marketable securities ......... (154) 0 Property and equipment ............................ (74) (54) - -------------------------------------------------------------------------------- (228) (54) - -------------------------------------------------------------------------------- Net deferred tax assets .......................... $ 1,332 $ 1,770 ================================================================================ NOTE 7 SALES The Company had one significant customer who accounted for approximately 20% of total sales in 1998 and two significant customers, including 3M Company, who accounted for approximately 28% of total sales in 1997 and 42% of total sales in 1996. Accounts receivable from these customers as of December 31, 1998 and 1997 were $1,013,000 and $5,082,000, respectively. Sales by geographic area are as follows (in thousands): 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic .................................... $51,855 $60,602 $60,098 Europe ...................................... 523 4,319 12,617 Japan ....................................... 0 0 9,963 Canada ...................................... 518 434 622 Other foreign ............................... 727 1,602 2,566 - -------------------------------------------------------------------------------- Total sales .............................. $53,623 $66,957 $85,866 ================================================================================ 19 NOTES TO FINANCIAL STATEMENTS NOTE 8 LICENSE AGREEMENT The Company has an agreement to exclusively license the Breathe Right nasal strip. Royalties due under this agreement are 3% of net sales. To maintain the Company's license, it must make minimum royalty payments of $450,000 each year until patents for the product expire. Royalty expense was $1,509,000 in 1998, $1,995,000 in 1997 and $2,647,000 in 1996. NOTE 9 OPERATING LEASES The Company leases equipment and office space under noncancelable operating leases that expire over the next two years. Future minimum lease payments due in accordance with these leases as of December 31, 1998 are as follows (in thousands): YEAR ENDING DECEMBER 31, AMOUNT - ------------------------------------------------------------------------------- 1999 ................................................................... $498 2000 ................................................................... 412 - ------------------------------------------------------------------------------- Future minimum lease payments ........................................ $910 ================================================================================ Total rental expense for operating leases was $564,000 in 1998, $471,000 in 1997, and $473,000 in 1996. NOTE 10 EARNINGS PER SHARE A reconciliation of basic and diluted weighted average common shares outstanding are as follows (in thousands): 1998 1997 1996 - ------------------------------------------------------------------------------- Weighted average common shares outstanding ...... 18,079 19,119 18,704 Assumed conversion of stock options ............. 170 682 1,028 Assumed conversion of warrants .................. 0 1 75 - ------------------------------------------------------------------------------- Average common and assumed conversion shares .... 18,249 19,802 19,807 ================================================================================ Options and warrants to purchase 972,900 shares of common stock with a range of exercise prices from $5.00 to $11.38 per share were outstanding during 1998 but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. The options expire from 2000 to 2008. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS CNS, INC.: We have audited the accompanying balance sheets of CNS, Inc. as of December 31, 1998 and 1997 and the related statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CNS, Inc. as of December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP MINNEAPOLIS, MINNESOTA JANUARY 20, 1999 COMMON STOCK INFORMATION PRICE RANGE The Common Stock of the Company is traded under the symbol "CNXS" on The Nasdaq Stock Market(R). The following table sets forth the high and low last sale prices of the Company's stock for the periods indicated. 1998 HIGH LOW - --------------------------------------------------------------- First Quarter ...................... $ 7 3/4 $ 5 7/16 Second Quarter ..................... 5 9/16 3 29/32 Third Quarter ...................... 4 13/16 3 3/8 Fourth Quarter ..................... 5 1/16 3 13/32 1997 HIGH LOW - --------------------------------------------------------------- First Quarter ...................... $16 3/4 $ 8 Second Quarter ..................... 12 3/8 8 1/8 Third Quarter ...................... 9 1/2 6 5/8 Fourth Quarter ..................... 8 3/4 5 11/16 SHAREHOLDERS As of March 3, 1999, there were approximately 800 owners of record of the Common Stock and an estimated 11,000 beneficial holders whose shares were registered in the names of nominees. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying any cash dividends in the foreseeable future. 20 EX-21.1 13 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Name of Subsidiary Jurisdiction of Organization - ------------------ ---------------------------- CNS FSC, Inc. Barbados EX-23.1 14 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors CNS, Inc.: We consent to incorporation by reference in the registration statements Nos. 333-60017, 33-29454, 33-42971, and 33-59719 on Form S-8 of CNS, Inc. of our report dated January 20, 1999, relating to the balance sheets of CNS, Inc. as of December 31, 1998, and 1997, and the related statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, which report is incorporated by reference in the December 31, 1998, annual report on Form 10-K of CNS, Inc. /s/KPMG Peat Marwick LLP Minneapolis, Minnesota March 26, 1999 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 584,718 59,796,952 7,790,952 0 8,823,193 81,122,373 2,406,488 0 84,963,427 9,097,586 0 0 0 192,946 75,672,895 84,963,427 53,622,803 53,622,803 18,484,608 34,437,311 0 0 0 3,491,664 510,000 2,981,664 0 0 0 2,981,664 0.16 0.16
-----END PRIVACY-ENHANCED MESSAGE-----