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<SEC-DOCUMENT>0000897101-00-000300.txt : 20000411
<SEC-HEADER>0000897101-00-000300.hdr.sgml : 20000411
ACCESSION NUMBER: 0000897101-00-000300
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000329
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-K
SEC ACT:
SEC FILE NUMBER: 000-16612
FILM NUMBER: 583875
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
<HTML>
<head>
<TITLE>Prepared by American Financial Printing, Inc. www.afpi.com</TITLE>
</head>
<body>
<center>
<b><FONT Size="2">UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</b></FONT>
<p><font size="4"><b>FORM 10-K</b></font></p>
</center>
<p><font size="1">(MARK ONE)</font></p>
<center>
<table border="0" cellpadding="0" cellspacing="10" width="60%">
<tr>
<td width="10%" valign="top"><P ALIGN="RIGHT">
<b><FONT Size="2">[X]</FONT></b></P>
</td>
<td width="90%" valign="top"><P ALIGN="LEFT">
<b><FONT Size="2">ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934</b></P></FONT>
</td>
</tr>
</TABLE></CENTER>
<p><CENTER><FONT Size="2">For the fiscal year ended December 31, 1999</FONT></CENTER></p>
<p><CENTER><B><FONT Size="2">OR</FONT></B></CENTER></p>
<CENTER><table border="0" cellpadding="0" cellspacing="10" width="60%">
<tr>
<td width="10%" valign="top"><P ALIGN="RIGHT"><B><FONT Size="2">[ ]</FONT></B></P></td>
<td width="90%" valign="top"><P ALIGN="LEFT"><FONT Size="2"><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934</B></FONT></P></td>
</tr>
</TABLE></CENTER>
<P><CENTER><FONT Size="2">For the Transition period from _________ to __________</FONT></CENTER></P>
<P><CENTER><B><FONT Size="2">COMMISSION FILE NUMBER: 0-16612</FONT></B></CENTER></P>
<P><CENTER><FONT Size="6"><B>CNS, INC.</B></FONT><BR>
<FONT Size="1">(Exact name of registrant as specified in its charter)</FONT></P>
</CENTER>
<CENTER><TABLE border="0" cellpadding="0" cellspacing="0" width="90%">
<TR>
<TD width="40%"><CENTER><U><B><FONT Size="2">Delaware</FONT></B></U><BR><FONT Size="1">(State or other jurisdiction<BR>of incorporation or organization)</FONT></CENTER></TD>
<TD width="20%"> </TD>
<TD width="40%"><CENTER><U><B><FONT Size="2">41-1580270</FONT></B></U><BR><FONT Size="1">(I.R.S. Employer<BR>Identification No.)</FONT></CENTER></TD>
</TR>
</TABLE>
</CENTER>
<CENTER><B><FONT Size="2">P.O. Box 39802<BR>
Minneapolis, MN 55439</B></FONT><BR>
<FONT Size="1">(Address of principal executive offices and zip code)</FONT></CENTER>
<P><FONT Size="2">Registrant's telephone number, including area code: (612) 820-6696</FONT></P>
<P><FONT Size="2">Securities registered pursuant to section 12(b) of the Act: None</FONT></P>
<P><FONT Size="2">Securities registered pursuant to section 12(g) of the Act:</FONT></P>
<TABLE border="0" cellpadding="0" cellspacing="0" width="50%">
<TR>
<TD width="30%"> </TD>
<TD width="70%"><U><FONT Size="2">Title of each class</U><BR>
Common Stock, par value of $.01 per share<BR>
Preferred Stock purchase rights</TD></FONT>
</TR>
</TABLE>
<P ALIGN="justify"><FONT Size="2">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 <U> X </U> No<U> </U></FONT></P>
<P ALIGN="justify"><FONT Size="2">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. [ ]</FONT></P>
<P ALIGN="justify"><FONT Size="2">As of March 15, 2000, assuming as market value the price of $5.125 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 $55,000,000.</P></FONT>
<P ALIGN="justify"><FONT Size="2">As of March 15, 2000, the Company had outstanding 14,436,561 shares of Common Stock of $.01 par value per share.</FONT></P>
<P ALIGN="justify"><FONT Size="2">Documents Incorporated by Reference: Portions of the Company's Proxy Statement for its Annual Meeting of Stockholders
to be held on May 3, 2000, are incorporated by reference into Part III of this Form 10-K.</P></FONT>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><U><B><FONT Size="2">TABLE OF CONTENTS</FONT></B></U></CENTER>
<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">
<TR>
<TD COLSPAN="2" VALIGN="TOP"> </TD>
<TD WIDTH="5%" VALIGN="TOP"><FONT Size="2"><U><B>Page</B></U></FONT></TD>
</TR>
<TR>
<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTI">PART I</A></B></U></FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD WIDTH="10%" VALIGN="TOP"><FONT Size="2"><A HREF="#Item1">Item 1.</A></FONT></TD>
<TD WIDTH="85%" VALIGN="TOP"><FONT Size="2"><A HREF="#Item1">Business</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2"> 3</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item2">Item 2.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item2">Properties</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">16</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item3">Item 3.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item3">Legal Proceedings</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">17</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item4">Item 4.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item4">Submission of Matters to a Vote of Security Holders</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">17</FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTII">PART II</A></B></U></FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item5">Item 5.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item5">Market for Registrant's Common Equity and Related Stockholder Matters</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">18</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item6">Item 6.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item6">Selected Financial Data</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">19</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7">Item 7.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7">Management's Discussion and Analysis of Financial Condition</A><BR>
<A HREF="#Item7">and Results of Operations</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">20</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7A">Item 7A.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7A">Quantitative and Qualitative Disclosures about Market Risk</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item8">Item 8.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item8">Financial Statements and Supplementary Data</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item9">Item 9.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item9">Changes in and Disagreements with Accountants on Accounting and</A><BR>
<A HREF="#Item9">Financial Disclosure</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTIII">PART III</A></B></U></FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item10">Item 10.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item10">Directors and Executive Officers of the Registrant</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item11">Item 11.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item11">Executive Compensation</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item12">Item 12.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item12">Security Ownership of Certain Beneficial Owners and Management</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item13">Item 13.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item13">Certain Relationships and Related Transactions</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTIV">PART IV</A></B></U></FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item14">Item 14.</A></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item14">Exhibits, Financial Statement Schedules, and</A><BR>
<A HREF="#Item14">Reports on Form 8-K</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">28</FONT></TD>
</TR>
<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"><A HREF="#SIGNATURES">SIGNATURES</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">29</FONT></TD>
</TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"><A HREF="#EXHIBIT_INDEX">EXHIBIT INDEX</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">31</FONT></TD>
</TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT SIZE="2"><A HREF="#FINANCIAL_STATEMENTS">FINANCIAL STATEMENTS</A></FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2">F-1</FONT></TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">2</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><U><B><FONT Size="2">Forward-Looking Statements</FONT></B></U></P>
<P ALIGN="justify"><FONT Size="2"> 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 reliant on
sales of Breathe Right® nasal strips; (ii) the Company's success and future growth will depend significantly
on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets
for additional products; (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" and Item 3, "Litigation"); (iv) the Company operates in competitive markets where recent and potential
entrants into the nasal dilator 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 developing and introducing new products and anticipates that there will be substantial costs,
expenses and risks associated with the introduction of new products during 2000, including those associated
with the introduction of the Company's FiberChoice<SUP>TM</SUP> chewable fiber tablets (see Item 1, "Business"); (vii) the
Company is currently establishing its own channels of distribution for its nasal strip products in international
markets (see Item 1, "International Distribution"), and there can be no assurance that the Company's efforts to
develop its international distribution will be successful; and (viii) the Company is dependent upon contract
manufacturers for the production of substantially all of its products.</P></FONT>
<P><CENTER><B><FONT Size="2"><A NAME="PARTI">PART I</A></FONT></B></CENTER></P>
<P><U><B><FONT Size="2"><A NAME="Item1">Item 1. BUSINESS</A></FONT></B></U></P>
<P><B><FONT Size="2">General</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> 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 resistence. It
can be effective in providing temporary relief for nasal congestion, reducing snoring and reducing breathing
difficulties due to a deviated nasal septum. The Company has recently announced its expansion of the Breathe
Right product line to include nasal strips for colds with Vicks® mentholated vapors that are sized for the entire
family, and nasal strips for children that will be available in multiple colors and designs. Both are expected to
be on retail shelves during the fall 2000 cough/cold season.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> In the third quarter of 1999, the Company introduced a product for race horses called the FLAIR<SUP>TM</SUP>
equine nasal strip. Invented by two veterinarians, the FLAIR equine nasal strip is a patented, drug-free product
that enables horses to breathe more easily during strenuous exercise. The Company plans to introduce its new
FiberChoice<SUP>TM</SUP> chewable fiber tablets in 2000. The FiberChoice product is a flavored, chewable fiber tablet that
offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> In addition to expanding the Breathe Right brand and introducing other new products, the Company is
exploring possibilities for acquiring new consumer health care products or companies that have established
consumer brands. The Company is also considering opportunities for licensing new products and technologies.</P></FONT>
<CENTER><FONT Size="2">3</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><B><FONT Size="2">Management</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> During 1998, the Company added to its management team several executive officers with a diverse body
of consumer packaged goods experience. See Item 1, "Executive Officers of the Company." The Company also
reorganized its management structure into strategic business teams in order to expand the platform for building
the Breathe Right brand and develop and launch new products: Breathe Right Brand Team; FiberChoice Team;
FLAIR Team; International Team; and Business Development Team. The Company believes that its team focus
enables the Company to more effectively implement its business strategies and position itself to become a large,
multi-product consumer products company with a significant international presence.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Team.</I></B> The Company's Breathe Right Brand Team is responsible for the strategic
development and management of the Breathe Right nasal strip business and other non-nasal strip products that
seek to leverage the Breathe Right brand name. 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 Company has developed two new products, nasal strips for colds with Vicks® mentholated vapors
for the entire family and nasal strips for children. Both products are expected to be introduced during the fall
of 2000 to coincide with the cough/cold season.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Team.</I></B> The Company has recently completed an evaluation and testing of its FiberChoice
chewable fiber tablets and plans to introduce the product during the second quarter of 2000. The FiberChoice
Product Team is responsible for the strategic development and management of the FiberChoice chewable fiber
supplement business and will lead the Company's launch of the product.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Team.</I></B> The Company introduced the FLAIR equine nasal strip on a limited basis during the
fourth quarter of 1999 and plans an official launch of the product in the spring of 2000. The Company's FLAIR
Product Team is responsible for the strategic development and management of the FLAIR equine nasal strip
business.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>International Team.</I></B> The Company intends to develop international markets for all of its products and is negotiating with distributors and
representatives for distribution of Breathe Right nasal strips in a number of
countries in order to further expand the Company's presence in international markets. See Item 1, "International
Distribution." The International Team is responsible for developing and managing the Company's overseas
business and its relationships with distributors and representatives in international markets.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>Business Development Team.</I></B> The Business Development Team is committed to the expansion of the
Company's product base through the acquisition or licensing of promising consumer health care products that
have significant market potential. The Business Development Team is responsible for identifying and
evaluating potential new products, inventions and other business prospects that will enable the Company to
achieve its long-term growth and profit objectives, including opportunities for the acquisition of companies that
have established product lines.</P></FONT>
<P><B><FONT Size="2">Products</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Nasal Strips.</I></B> The Breathe Right nasal strip is a nonprescription, single-use disposable
device that improves breathing by opening the nasal passages. The Company has 510(k) clearance 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 Item 1, "Government Regulation." The Breathe
Right nasal strip comes both in tan and clear.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> 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 two sizes (small/medium and medium/large)
to accommodate the range of nose sizes. The Breathe Right nasal strip is packaged for the consumer market in various quantities ranging between 12 to 38 strips per box.</P></FONT>
<CENTER><FONT Size="2">4</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2">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 $3.99 and $11.99 per box. The Company expanded the Breathe Right nasal strip line
with the reintroduction of the Breathe Right clear nasal strip in the second half of 1999. Research has suggested
that the clear nasal strip product could increase the Company's customer base for nasal strip products by
addressing vanity issues that may be associated with the use of the tan Breathe Right nasal strip product.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> The Company is currently planning to introduce two new nasal strip products in the fall of 2000. The
first product is a Vicks mentholated strip that uses traditional Breathe Right strip technology but contains a
soothing mentholated aroma for additional relief. The mentholated vapors are released when the strip surface
is rubbed. The second is a nasal strip product that is specifically sized and styled for children. The Kid's Strips
will be sized specifically to fit children and include a brightly colored version and a mentholated version.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Products.</I></B> During the third quarter of 1998, the Company began the national
introduction of a saline nasal spray that leverages the Breathe Right brand name. 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 pollution and the overuse of nasal decongestants.
The Company intends to introduce additional non-nasal strip products in the future that carry the Breathe Right
brand name and to extend the product line.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablets.</I></B> The Company has recently completed evaluation and testing
of its FiberChoice chewable fiber tablets. FiberChoice is a flavored, chewable tablet that offers consumers an
effective, convenient good-tasting way to supplement their daily intake of dietary fiber. The Company plans
to introduce its FiberChoice product during the second quarter of 2000. The FiberChoice tablets will be
available in both regular and sugar-free varieties. The product will be packaged in both 90-count bottles and
10-count rolls.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strips.</I></B> The FLAIR equine nasal strip is a product for horses that capitalizes on
the Company's current nasal strip technology. Invented by two veterinarians, the FLAIR equine nasal strip is
a patented, drug-free product that enables horses to breathe more easily during strenuous exercise. Results from
a limited clinical trial indicate that the equine nasal strip product also reduces a bleeding condition in horses
called exercise-induced pulmonary hemorrhaging ("EIPH") that often occurs during and after races, high
performance events and strenuous workouts. The FLAIR equine nasal strip holds open the nasal passages of
the horses, which can breathe only through their noses, and reduces the effort required to breathe.</P></FONT>
<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip was introduced for the first time during the Breeder's Cup in November
of 1999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR is being sold in tack shops, through equine
catalogs and in equine supply stores. The Company expects to officially launch FLAIR in the spring of 2000.</P></FONT>
<CENTER><FONT Size="2">5</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"><B>Markets</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Product Line.</I></B> The Breathe Right brand of products includes the Breathe Right
nasal strips and the Breathe Right saline nasal spray.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> Air impedance in the nose accounts for approximately one-half of the total airway resistance involved
in the respiratory system (i.e., one-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 chronic
conditions such as snoring or allergies or with structural problems such as deviated septa 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. These conditions are aggravated when people have nasal congestion, thus
increasing the opportunity for consumer trial during the cough/cold season. People suffering from these
conditions are currently the primary users of the Company's Breathe Right products and are the main targets
of its advertising.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> In 1999, the Company began to emphasize the Breathe Right nasal strip position as a product that
provides instant, 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts capitalize on the benefits of Breathe Right products to consumers in
various, and often overlapping, consumer market segments:</FONT></P>
<TABLE BORDER="0"CELLPADDING="0" CELLSPACING="0">
<TR>
<TD WIDTH="3%"> </TD>
<TD WIDTH="3%" VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>
<TD WIDTH="94%" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Nasal Congestion Relief.</I></U> Virtually all Americans suffer some nasal congestion annually as a
result of the common cold, while nasal congestion as a result of allergies affects approximately
35 million Americans. The Company believes that the Breathe Right nasal strip is often used
as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral
decongestants). This broad cough/cold market represents a significant potential for the Breathe
Right nasal strip. Prior to 1999, the product had not been marketed directly to the cough/cold
consumer in any significant respect. In 1999, the Company commenced marketing efforts
aimed at repositioning the Breathe Right nasal strip as a product that provides relief for the
common cold. The Company believes that its recent efforts to reposition this product will
increase a significant segment of its business. In the fall of 2000, the Company plans to
introduce two new products that could also increase the Breathe Right business for colds.
These products include nasal strips for colds with soothing Vicks mentholated vapors and nasal
strips for children.</FONT></P></TD>
</TR>
<TR><TD VALIGN="TOP"> </TD><TD VALIGN="TOP"> </TD></TR>
<TR>
<TD> </TD>
<TD VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>
<TD VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Snoring Relief.</I></U> Breathe Right nasal strips were effective in eliminating snoring or reducing
snoring loudness in approximately 75% of the participants in a clinical study. Snoring relief
was one of the Company's key advertising messages prior to 1999. This market remains very
important to the Company since approximately 37 million people snore regularly, while another
50 million people snore occasionally. The Company believes that snorers can be targeted
effectively and directly through relationship marketing efforts as well as through broad-based
advertising.</FONT></P></TD>
</TR>
<TR><TD VALIGN="TOP"> </TD><TD VALIGN="TOP"> </TD></TR>
<TR>
<TD> </TD>
<TD VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>
<TD VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Improved Breathing for Consumers with Deviated Septa.</I></U> 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. The
Company plans to approach this market more directly through targeted marketing efforts.</FONT></P></TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">6</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0"CELLPADDING="0" CELLSPACING="0">
<TR>
<TD WIDTH="3%"> </TD>
<TD WIDTH="3%" VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>
<TD WIDTH="94%" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Athletic Market.</I></U> 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. The Company continues to use athletes to endorse the Breathe Right
nasal strip to increase the visibility of the product, which thereby leads to greater awareness of
the product.</FONT></P></TD>
</TR>
</TABLE>
<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablets.</I></B> Approximately 10 million U.S. households annually purchase
bulk fiber products, primarily to promote regularity and improve digestive health. The bulk fiber category
represents approximately $300 million in U.S. retail sales. The Company believes there is a significant
opportunity to expand this category due to both the aging of the baby-boomer generation and the marketing of
a better consumer solution to existing dietary fiber products–FiberChoice chewable fiber tablets. As people age,
they frequently develop digestive problems. People over 55 years old are three times more likely to purchase
a bulk fiber supplement than those younger than 55. The first year the baby-boom generation will turn 55 is in
2001. This generation is generally more active and demanding than their parents. These consumers will be
searching for solutions that do not hamper their active lifestyles. The Company believes that its FiberChoice
chewable fiber tablet represents such a solution in that it provides an effective, convenient and good-tasting alternative for supplementing dietary fiber intake. The tablets can be taken anytime and anywhere, with or
without water.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strips.</I></B> The FLAIR equine nasal strip is similar in concept to the human Breathe
Right nasal strip adjusted to the unique anatomy and size of a horse. A horse breathes only through its nose,
not through its mouth. During strenuous exercise, large amounts of air are inhaled creating a vacuum inside the
lungs which can cause soft tissue on the side of the nose to collapse. The equine nasal strip supports those soft
tissues so they do not collapse, which allows a horse to breathe more easily with less vacuum developing in the
lungs. Results from a limited clinical trial indicate that horses wearing the FLAIR equine nasal strip use less
energy to breath and that the product reduces a bleeding condition in horses called exercise-induced pulmonary
hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts.
Additional studies are underway to more completely delineate the benefits of the FLAIR equine nasal strip
product.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip could be used any time a horse is engaged in strenuous exercise. The
Company estimates that in the U.S. there are approximately 1.3 million individual horse starts in racing
competitions and over 1 million individual horse starts in non-racing competitions. Horses can benefit from
the use of the FLAIR equine nasal strip in training as well as competition.</FONT></P>
<CENTER><FONT Size="2">7</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><B><FONT Size="2">Business Strategy</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> The Company's business strategy includes increasing sales of its Breathe Right nasal strip and other
Breathe Right brand products through advertising, expanding its Breathe Right product line with value added
line extensions like Breathe Right nasal strips for colds with Vicks mentholated vapors and children's nasal
strips, and successfully introducing new products, including the FLAIR equine nasal strip and the FiberChoice
chewable fiber tablet.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Increasing New Consumer Product Trial and Increasing Product Usage.</I></B> The Company uses a
combination of advertising, sampling, 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 emphasize the position of the Breathe Right nasal strip as a product that provides instant, 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 instant,
drug-free relief from nasal congestion due to colds and allergies.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Marketing New Breathe Right Brand Products.</I></B> The Company believes that the Breathe Right brand
name is one of its most valuable assets. In 1998, the Company introduced the Breathe Right saline nasal spray.
The Company has also expanded the Breathe Right product line to include nasal strips for colds with Vicks
mentholated vapors and nasal strips for children, both of which are expected to be introduced during the fall of
2000 in order to coincide with the cough/cold season.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Acquiring and Marketing New Products.</I></B> The Company plans to take advantage of its marketing and
distribution strengths by acquiring or licensing the rights to new products that it believes have merit and bring
them to market. The FLAIR equine nasal strip was introduced in the fourth quarter of 1999 and the FiberChoice
chewable fiber tablet is being prepared for a 2000 launch. In addition, the Company is evaluating opportunities
for licensing new products and acquiring companies or product lines that have an established base of consumer
acceptance.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>Expanding Company Presence in International Markets.</I></B> The Company believes that there is a
significant market potential for its products outside the United States. The 3M Company ("3M") has been the
Company's sole distributor of its nasal strip products outside the United States and Canada since August of
1995. The Company's relationship with 3M produced less than anticipated results. On September 30, 1999,
the Company negotiated the termination of its distribution agreement with 3M to allow the Company to assume
the role of selling, marketing and distributing its nasal strip products in international markets during 2000. See
Item 1, "International Distribution." The Company is devoting significant resources to the development of its
international business and is in the process of entering into agreements with distributors and representatives for
the distribution of the Company's nasal strip products in foreign countries. The Company believes that the
network that it is attempting to establish for the international distribution of Breathe Right nasal strips will also
enable the Company to build its international marketing and distribution capacity for other products. See Item
1, "International Distribution."</FONT></P>
<P><B><FONT Size="2">Marketing Strategy</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts for Breathe Right products are primarily directed to the consumer
market. The Company's advertising focuses on the Breathe Right brand benefit of providing instant, drug-free
relief from nasal congestion. The Company has primarily used television, magazine and radio advertising to
market its products. The Company also uses product promotion programs, such as sampling, coupons and
public relations activities to encourage product trial and repeat purchases. Introduction of the new Breathe Right
nasal strips for colds with Vicks mentholated vapors will include joint promotional programs with Vicks products. Marketing communications are generally designed to promote trial of Breathe Right brand products
by increasing consumer awareness of the benefits of each product.</FONT></P>
<FONT Size="2"><CENTER>8</CENTER></FONT>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> 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 in the same year.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts for FiberChoice chewable fiber tablets will concentrate on advertising
through television and magazines to consumers who are 55 or more years old. In addition, the Company plans
to distribute samples of the product and coupons to current users of bulk fiber products. Marketing
communications are designed to promote awareness and trial of this new product among current category users.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's marketing communications for FLAIR equine nasal strips focus on the benefits of using
the product in training as well as competition. Marketing efforts will include advertising in influential equine
magazines and public relations activities surrounding high profile races and events in order to create awareness
in the racing and non-racing segments of the market. The Company will also use sampling and direct mail to
generate trial among top horse trainers and competitors.</FONT></P>
<P><B><FONT Size="2">New Products Strategy</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> The Company is committed to the expansion of its product base through the acquisition and
development of unique consumer health care products and technologies that have good market potential. The
Business Development Team is responsible for identifying for acquisition or license new products and potential
acquisition of companies that have established products in the Company's focus areas of better breathing,
digestive health and aging well. The Company has licensed the Vicks trademark from The Proctor & Gamble
Company for use with the new product, Breathe Right nasal strips for colds with Vicks mentholated vapors.
The Company routinely evaluates the merit of product concepts and acquisition opportunities 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> Most, if not all, of the Company's current products are regulated to varying degrees by the FDA and
other regulatory bodies. See Item 1, "Government Regulation." Products that the Company may acquire or
develop in the future could also be subject to a variety of regulatory requirements. Some products will require
extensive clinical studies and 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.</FONT></P>
<P><B><FONT Size="2">Domestic Distribution</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> The Breathe Right nasal strip and the Breathe Right saline nasal spray are sold primarily as consumer
products in mass merchant chain stores, drug stores, grocery stores, warehouse clubs and military base stores
in the United States. The Company expects that the FiberChoice chewable fiber tablet will be sold in most of
the same retail outlets. The Company sells its products through a direct sales force that concentrates on serving
certain key retail accounts as well as through a network of independent sales representatives referred to in the
industry as non-food general merchandise brokers. The Company uses direct sales people and broker groups
who call on the mass merchant, chain drug, and grocery accounts and the wholesalers who serve primarily the
independent drug stores and many of the grocery stores in the United States.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Breathe Right nasal strip is typically positioned in the cough, cold and allergy section of stores
because it provides benefits similar to those obtained with other decongestant products. The Breathe Right
saline nasal spray is 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. Dietary fiber products
typically occupy a small section of a particular store and the Company anticipates that its FiberChoice chewable
fiber tablets will be positioned near well-established brands.</FONT></P>
<CENTER><FONT Size="2">9</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> The Company's retail customers include national chains of mass merchants, drug stores and grocery
stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens, RiteAid, CVS, and Albertson's and warehouse
clubs such as Sam's Club and Price Costco, as well as regional and independent stores in the same store
categories. In 1999, one retailer accounted for approximately 24% 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip will, at least initially, be sold primarily to trainers and owners in the horse
racing industry through tack shops, equine catalogs and equine supply stores. The product was introduced on
a limited basis during the fourth quarter of 1999. The Company intends to officially launch the FLAIR equine
nasal strip in the spring of 2000.</FONT></P>
<P><B><FONT Size="2">International Distribution</FONT></B></P>
<P ALIGN="justify"><FONT Size="2"> In August of 1995, the Company executed an international distribution agreement with 3M pursuant
to which 3M was given the exclusive right to distribute the Breathe Right nasal strip outside of the United States
and Canada. Under the terms of the agreement, 3M was obligated to buy product from the Company and was
responsible for obtaining all necessary regulatory approvals outside of the United States and for all marketing
and selling expenses. The agreement contained certain minimum performance objectives and breakup
provisions. The contractual relationship with 3M produced less than anticipated results in international markets.
International sales for the Company were approximately $1 million for 1999, down from its high of
approximately $26 million for 1996. The decrease in international sales during that period were attributable
in substantial part to the high inventory levels of nasal strips maintained by 3M and disappointing marketing
efforts in the international sector.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company is optimistic about the prospects for generating increased sales of nasal strips outside the
United States and believes that international markets require an increased level of focus, advertising and
promotion to reach their potential. On September 30, 1999, the Company and 3M agreed to terminate the
existing distribution agreement in a manner that enables the Company to take a direct and immediate role in the
sale, marketing and distribution of its nasal strip products in international markets. The amended distribution
agreement provides for an orderly transition of the international business from 3M to the Company. Under the
amended distribution agreement, 3M has the nonexclusive right to distribute Breathe Right nasal strips outside
the United States and Canada until June 30, 2000. The right of 3M to distribute the Company's nasal strip
products terminates on June 30, 2000 and, for a period of two years thereafter, 3M has agreed not to sell any
nasal dilator devices. The Company paid 3M a one-time termination fee of approximately $6.3 million. The
Company is not obligated to repurchase any unsold inventory of nasal strips after 3M exits the market.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company is currently involved in establishing a broad-ranging international distribution system
for the Breathe Right nasal strip business that will consist of both sales representatives and reselling distributors.
The markets that the Company plans to address first will be western Europe as well as Japan and Australia.
Sales will be supervised by the Company from its Minnesota headquarters and by CNS International, Inc., a
wholly-owned domestic subsidiary which has hired one business manager in Europe. The business manager
will supervise and coordinate the activities of the distributors and sales representatives. It is expected that the distributors will be appointed largely on an exclusive basis, with territories consisting of one or more countries.
The Company will retain control over packaging and advertising in all territories. Most shipments are expected
to be made in bulk, either to reselling distributors who will package for the local market, or to Company-controlled warehouse facilities, where final packaging may be arranged by the Company directly before
shipment to retailers.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<CENTER><FONT Size="2">10</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><B>Manufacturing and Operations</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company currently subcontracts with multiple manufacturers to produce the Breathe Right nasal
strip, Breathe Right saline nasal spray, the FiberChoice chewable fiber tablet and the FLAIR equine nasal strip.
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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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. Similar materials are,
however, currently available from other suppliers. 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.</FONT></P>
<P><B><FONT Size="2">Competition</FONT></B></P>
<P><FONT Size="2"> <B><I>Breathe Right Nasal Strips</I></B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company believes that the market for decongestant products is highly competitive. 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 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. Other companies have
also recently entered the nasal dilation market with private label products. 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. As a result, the
Breathe Right nasal strip has maintained more than 85% of the nasal dilator market despite the entry of Schering
Plough and other competitors into the market place.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.
The Company intends to aggressively enforce the patents it has licensed covering the Breathe Right nasal strip
and has engaged in significant litigation to protect its patent rights. See Item 3, "Legal Proceedings."</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 many international markets where
the Company does not yet have patent protection on the Breathe Right nasal strip.</FONT></P>
<CENTER><FONT Size="2">11</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablet</I></B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> Although the market for dietary fiber supplements is highly competitive and dominated by large
companies with resources greater than the Company's and established brands, such as Metamucil, Citrucel and
FiberCon, the Company believes that its FiberChoice chewable fiber tablet is a unique product that will present
a significant opportunity for the Company. The Company believes that its product will offer consumers an
effective, convenient and good tasting alternative to existing products.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strip</I></B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> As an alternative to controversial drug therapies, the FLAIR equine nasal strip is a unique product which
currently has no direct competition. The only competitive product currently available is the drug Lasix. Lasix
is intended to alleviate a bleeding condition in the lungs of horses called exercise-induced pulmonary
hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts.</FONT></P>
<P><FONT Size="2"><B>Government Regulation</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 product safety and effectiveness.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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. In March of 1998, nasal dilators were classified by the FDA as Class
I devices and exempt from pre-market notification.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's FiberChoice product is considered to be a dietary supplement and is regulated under
the Federal Food, Drug, and Cosmetic 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 requirement that a
company 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.</FONT></P>
<CENTER><FONT Size="2">12</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> There is no national regulatory body for horse racing. Consequently, approval from state horse racing
commissions must be obtained on a state-by-state basis before the Company's FLAIR equine nasal strip can be
used during horse racing events. The Company has been working with state racing commissions to gain
approval for the use of the FLAIR equine nasal strip in competition. To date, the FLAIR equine nasal strip can
be used in horse races in approximately 25 states, including the leading racing states of Kentucky, California
and Florida, and 3 provinces in Canada.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> Sales of the Company's products outside the United States are subject to regulatory requirements that
vary widely from country to country. Under its international distribution agreement with the Company which
will terminate on June 30, 2000, 3M was responsible for obtaining all necessary approvals outside the United
States for Breathe Right nasal strips. As part of the renegotiations of the 3M distribution agreement (see Item
1, "International Distribution"), the Company will transfer the product registrations from the 3M subsidiary in
each country to a new distributor or third party. The Company has selected a third party to act as an
"Authorized Representative" in the European Union. The Company believes that it has the necessary
documentation to support affixing the "CE" mark, an international symbol of quality and compliance with
applicable European medical device directives, to the Company's products in Europe.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 other Company's products. 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 and
other products are subject to future change. The Company cannot predict what impact, if any, such changes
might have on its business.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P><FONT Size="2"><B>Patents, Trademarks and Proprietary Rights</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company has registered trademarks, and has a number of patents under licenses which are used in
connection with its business. Some of these patents and licenses cover significant product formulations,
processing and designs for the Company's products. The Company believes its trademarks are important as
protection for the Company's image in the marketplace and advertising. The Company's success is and will
continue to be dependent upon the existence of and ability to protect its patents, trademarks and licenses and
the Company intends to take such steps as are necessary to protect its intellectual property rights.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> There can be no assurance that the Company's technology and proprietary rights 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 products
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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company entered into license agreements pursuant to which the Company acquired from the
licensors the exclusive rights to manufacture and sell the Breathe Right nasal strip, the FiberChoice chewable
fiber tablet and the FLAIR equine nasal strip. Specifically, the Company has the exclusive right pursuant to
those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensor's</FONT></P>
<CENTER><FONT Size="2">13</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2">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 licensors based on sales of the products including certain
minimum royalty amounts in order to maintain its exclusivity.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The licensor of the Breathe Right nasal strip 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 in the United States, including one with claims
that cover the single-body construction of the Breathe Right nasal strip. The licensor of the Breathe Right nasal
strip also has one patent application which is currently pending. In addition, that licensor has obtained patent
protection on the Breathe Right nasal strip in several foreign countries and has various applications pending
which seek further patent protection in these and a number of additional countries. The Company has two patent
applications both pending in the U.S. and has filed a corresponding patent application seeking protection in
several foreign countries to protect certain rights to nasal dilation technology that it acquired.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The licensor of the FiberChoice chewable fiber tablet has filed at least two patent applications with the
U.S. Patent and Trademark Office seeking patent protection for different aspects of this product which remain
pending. The licensor of the Breathe Right aromatic nasal strip has filed at least three patent applications with
the U.S. Patent and Trademark Office resulting in one issued patent so far. At least two patent applications for
the FLAIR equine nasal strip have also been filed by the licensor thereof in the U.S. Patent and Trademark
Office which have resulted in an issued U.S. patent. Each of these licensors has filed corresponding patent
applications for acquiring patent protection in several foreign countries on the licensed products.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> Although 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, there can be no
assurance that the patents on the Breathe Right nasal strip, or any additional patents on this or other products
issued, if any, will effectively foreclose the development of competitive products or that the Company 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 and its other products. In order to
enforce any patents issued covering the Breathe Right nasal strip or any of its other products, 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company has in the past and is currently engaged in litigation to enforce its patent rights relating
to the Breathe Right nasal strip. The Company has recently brought a suit in federal district court to enforce
one of the licensed nasal strip patents. In the course of this suit, the defendant requested reexamination in the
U.S. Patent and Trademark Office of the patent involved which request was granted thus leaving the licensor
to await further action on the part of the Office. (See Item 3, "Legal Proceedings").</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 has also
licensed the right to a U.S. trademark registration for the FLAIR equine nasal strip product as well as the
pending trademark application for the FiberChoice chewable fiber tablet.</FONT></P>
<P><FONT Size="2"><B>Employees</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> At March 15, 2000, the Company had 73 full-time and 3 part-time employees, of whom 18 were
engaged in operations, 23 in general administration, 31 in marketing and sales and 4 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.</FONT></P>
<CENTER><FONT Size="2">14</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><B><FONT Size="2">EXECUTIVE OFFICERS OF THE COMPANY</FONT></B></P></CENTER>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<CENTER>
<TABLE BORDER="0" CELLSPACING="2" CELLPADDING="0">
<TR>
<TD VALIGN="TOP" WIDTH="30%"><CENTER><FONT Size="2"><U>Name and Age</U></FONT></CENTER></TD>
<TD VALIGN="TOP" WIDTH="20%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="50%"><CENTER><FONT Size="2"><U>Office</U></FONT></CENTER></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Daniel E. Cohen (47)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Chairman of the Board, Chief Executive Officer and Director</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Marti Morfitt (42)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">President, Chief Operating Officer and Director</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">M. W. Anderson, Ph.D (49)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Product Development and Regulatory Affairs</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Douglas G. Austin (45)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Operations</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">David J. Byrd (46)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Finance, Chief Financial Officer and Treasurer</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Kirk P. Hodgdon (40)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Business Development</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">John J. Keppeler (38)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Worldwide Sales</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Teri P. Osgood (36)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of U.S. Marketing</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Carol J. Watzke (52)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Vice President of Consumer Strategy</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P ALIGN="justify"><FONT Size="2"> <I>Daniel E. Cohen</I> 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
of 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Marti Morfitt</I> has served as the Company's President and Chief Operating Officer and a director since
March 1998. From September of 1982 through February of 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 of 1997 to February of 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>M. W. Anderson, Ph.D</I> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Douglas G. Austin</I> has served as the Company's Vice President of Operations since December of 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 of 1998;
Director of Logistics and Purchasing for Wilsons - The Leather Experts, a specialty retailer of leather garments
and accessories, from March of 1993 to February of 1996; and Director of System Stores and General
Purchasing of Northwest Airlines, Inc. from June of 1976 to October of 1992.</FONT></P>
<CENTER><FONT Size="2">15</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> <I>David J. Byrd</I> has served as the Company's Vice President of Finance and Chief Financial Officer since
February of 1996 and its Treasurer since March of 1999. Prior to joining the Company, Mr. Byrd was Chief
Financial 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Kirk P. Hodgdon</I> has served as the Company's Vice President of Business Development since April of
1999, and has served as the Company's Vice President of Breathe Right Brand from 1998 to 1999 and as 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>John J. Keppeler</I> has served as the Company's Vice President of Worldwide Sales since August of 1999,
and has served as the Company's Vice President of Sales from 1998 to 1999. From November of 1986 to June
of 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Teri P. Osgood</I> has served as the Company's Vice President of U.S. Marketing since December of 1999,
of the Breathe Right Brand from April to December of 1999, and has served as the Company's Vice President
of New Business Commercialization from 1998 to April of 1999. From August of 1990 to July of 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 of 1997 to July of 1998
as Business Team Leader for Old El Paso, and from October of 1995 to May of 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Carol J. Watzke</I> has served as the Company's Vice President of Consumer Strategy since July of 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 of 1997 to July of 1998 and as Market Research Director,
Green Giant Brands, from 1994 to 1997.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item2">Item 2. PROPERTIES</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company leases approximately 80,000 square feet of office, manufacturing and warehouse space
in Bloomington, Minnesota. The lease expires in December of 2000. Upon the expiration of that lease, the
Company will be moving into a different facility that consists of approximately 73,000 square feet of office,
manufacturing and warehouse space located in Eden Prairie, Minnesota. The new lease expires in December
of 2011 and contains a renewal option.</FONT></P>
<CENTER><FONT Size="2">16</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><U><B><A NAME="Item3">Item 3. LEGAL PROCEEDINGS</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> On July 20, 1999, the Company commenced a civil action in the United States District Court for the
District of Minnesota, Case No. 99-CV-111 JMR/JGL, against JMS Labs Limited (USA), LLC, a/k/a/ JMS Labs
Limited, asserting claims of patent infringement and Lanham Act violations. The Company contends that nasals
strips manufactured, sold and/or offered for sale by JMS infringe United States Patent No. 5,533,499 (the "499
Patent"), and that JMS has made false and/or misleading statements concerning the characteristics and qualities
of its own products and the Company's products. JMS filed an answer and counterclaim, denying the
Company's claims and asserting a counterclaim for declaratory judgment that the 499 Patent is invalid,
unenforceable and not infringed, and that the complained of statements are not false and misleading. The
Company intends to vigorously defend against JMS's counterclaim. No discovery has been conducted in this
action. JMS has also moved before the United States Patent and Trademark Office for re-examination of the
499 Patent.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item4">Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></B></U></FONT></P>
<P><FONT Size="2"> None.</FONT></P>
<CENTER><FONT Size="2">17</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><CENTER><FONT Size="2"><B><A NAME="PARTII">PART II</A></B></FONT></CENTER></P>
<P><FONT Size="2"><U><B><A NAME="Item5">Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</A></B></U></FONT></P>
<P><FONT Size="2"><B>Market Information</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's Common Stock has been traded on The Nasdaq Stock Market under the symbol
"CNXS" since April 8, 1994. The following table sets forth the high and low last sale prices of the Company's
Common Stock for the period indicated.</FONT></P>
<FONT SIZE="2"><PRE>
<B>Fiscal Year Ended December 31, 1999</B> <B>High</B> <B>Low</B>
---- ----
First Quarter........................................................4.06 3.00
Second Quarter.......................................................3.47 2.81
Third Quarter........................................................4.19 3.47
Fourth Quarter.......................................................7.19 3.63
<B>Fiscal Year Ended December 31, 1998</B> <B>High</B> <B>Low</B>
---- ----
First Quarter........................................................7.75 5.44
Second Quarter.......................................................5.56 3.91
Third Quarter........................................................4.81 3.38
Fourth Quarter.......................................................5.06 3.41
</PRE></FONT>
<P ALIGN="justify"><FONT Size="2"> On March 15, 2000, the last sale price of the Common Stock was $5.125 per share.</FONT></P>
<P><FONT Size="2"><B>Shareholders</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> As of March 15, 2000, there were approximately 800 owners of record of Common Stock and an
estimated 9,000 beneficial holders whose shares were registered in the names of nominees.</FONT></P>
<P><FONT Size="2"><B>Dividends</B></FONT><P>
<P ALIGN="justify"><FONT Size="2"> 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 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.</FONT></P>
<P><FONT Size="2"><B>Recent Sales of Unregistered Securities</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> On March 12, 1999, the Company issued two ten-year warrants to two individuals in connection with
the Company's acquisition of certain intellectual property rights relating to the FLAIR equine nasal strip
under a license agreement on that same date (the "Holders") between the Company and a business in which
the Holders are principals. The warrants vest over a three-year period and entitle each of the Holders to
purchase up to 25,000 shares of Common Stock of the Company at a purchase price of $3.4375 per share,
the fair market value of the Common Stock of the Company on the date the warrants were issued. The
Company also granted the Holders certain "piggyback" or "incidental" registration rights in connection with
the shares of Common Stock acquired by the Holders upon exercise of the warrants. The Company believes
that the issuance of the warrants was exempt under Section 4(2) of the Securities Act of 1933. The Company
did not issue any unregistered securities during the quarter ended December 31, 1999.</FONT></P>
<CENTER><FONT Size="2">18</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><U><B><A NAME="Item6">Item 6. SELECTED FINANCIAL DATA</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The following selected financial data should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto together with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all of which are included elsewhere in this Report. The Consolidated
Statements of Operations and Balance Sheet data presented below as of and for the Years Ended December 31,
1997 through December 31, 1999 inclusive have been derived from the Company's Consolidated Financial
Statements included elsewhere in this Report, which have been audited by KPMG LLP, independent certified
public accountants.</FONT></P>
<CENTER><P><FONT Size="2"><B>FINANCIAL HIGHLIGHTS</B><BR>
(In thousands, except per share amounts)</FONT></P></CENTER>
<FONT SIZE="2"><PRE>
Years ended December 31,
1999 1998 1997 1996 1995
---------------------------------------------------------
Net sales $ 46,050 $ 53,623 $ 66,957 $ 85,866 $ 48,631
Operating income (loss) (18,696) 701 9,644 21,743 12,398
Income (loss) from continuing operations (13,757) 2,982 8,770 15,522 13,311
Net income (loss) (13,757) 2,982 8,770 15,522 14,076
Diluted net income (loss) per share
from continuing operations (0.89) 0.16 0.44 0.78 0.72
Diluted net income (loss) per share (0.89) 0.16 0.44 0.78 0.72
Working capital $ 50,183 $ 72,025 $ 76,919 $ 78,403 $ 25,855
Total assets 65,337 84,963 88,495 89,409 32,341
Stockholders' equity 53,584 75,866 80,645 79,775 26,885
</PRE></FONT>
<CENTER><FONT Size="2">19</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><U><B><A NAME="Item7">Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's audited consolidated
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 consolidated financial statements and notes
thereto.</FONT></P>
<P><FONT Size="2"><B>Overview</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 primarily on the Breathe Right®
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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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. On September 30, 1999, the Company and 3M
amended the distribution agreement in a manner that allows the Company to regain
control of its international business on a phased schedule. In exchange for the
one-time contract termination fee noted below, 3M is authorized to continue to
distribute primarily on a non-exclusive basis until June 30, 2000. The
international distribution agreement with 3M will terminate on June 30, 2000.
The Company is currently adding distributors who will reintroduce nasal strips
to Europe, Japan and Australia.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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. 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<CENTER><FONT Size="2">20</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> 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. During
1999, the Company invested aggressively in marketing, selling and product
development expenses to build the Breathe Right brand and position additional
products for launch in 2000.</FONT></P>
<P><FONT Size="2"><B>Operating Results</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<FONT SIZE="2"><PRE>
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,
1999 1999 1999 1999 1999 1999 1999 1999 1999 1999
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
(In thousands)
Domestic net sales $ 11,811 $ 7,994 $ 10,151 $ 15,106 $ 45,062
International net sales 123 191 312 362 988
--------- -------- -------- --------- --------
Net sales 11,934 8,185 10,463 15,468 46,050 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 4,688 3,629 3,992 6,049 18,358 39.3 44.3 38.2 39.1 39.9
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Gross profit 7,246 4,556 6,471 9,419 27,692 60.7 55.7 61.8 60.9 60.1
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling 11,430 4,361 4,644 12,918 33,353 95.8 53.3 44.4 83.5 72.4
General and administrative 803 824 941 815 3,383 6.7 10.1 9.0 5.3 7.3
Product development 979 843 782 702 3,306 8.2 10.3 7.5 4.5 7.2
Contract termination fee 0 0 6,345 0 6,345 0.0 0.0 60.6 0.0 13.8
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Total operating expenses 13,212 6,028 12,712 14,435 46,387 110.7 73.6 121.5 93.3 100.7
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Operating loss (5,966) (1,472) (6,241) (5,016) (18,695) (50.0) (18.0) (59.6) (32.4) (40.6)
Investment income 899 698 643 598 2,838 7.5 8.5 6.1 3.9 6.2
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Loss before income taxes $ (5,067)$ (774)$ (5,598)$ (4,418)$ (15,857) (42.5)% (9.5)% (53.5)% (28.6)% (34.4)%
========= ======== ======== ========= ======== ======== ======== ======== ======== ========
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 $ 51,854
International net sales 1,127 168 168 305 1,768
--------- -------- -------- --------- --------
Net sales 14,481 11,957 12,749 14,435 53,622 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 4,470 4,454 4,242 5,320 18,486 30.9 37.3 33.3 36.9 34.5
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Gross profit 10,011 7,503 8,507 9,115 35,136 69.1 62.7 66.7 63.1 65.5
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling 9,694 5,581 7,032 6,470 28,777 66.9 46.7 55.2 44.8 53.7
General and administrative 1,047 1,167 810 596 3,620 7.2 9.8 6.4 4.1 6.8
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 7,581 34,436 76.9 61.4 65.7 52.5 64.2
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Operating income (loss) (1,125) 166 125 1,534 700 (7.8) 1.4 1.0 10.6 1.3
Investment income 690 730 712 660 2,792 4.8 6.1 5.6 4.6 5.2
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes $ (435)$ 896 $ 837 $ 2,194 $ 3,492 (3.0)% 7.5 % 6.6 % 15.2 % 6.5 %
========= ======== ======== ========= ======== ======== ======== ======== ======== ========
</PRE></FONT>
<CENTER><FONT Size="2">21</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<FONT SIZE="2"><PRE>
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 51.7 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 1.9 1.7 1.7
--------- -------- -------- --------- -------- -------- -------- -------- -------- --------
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
Investment income 710 777 773 716 2,976 3.7 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 %
========= ======== ======== ========= ======== ======== ======== ======== ======== ========
</PRE></FONT>
<P><FONT Size="2"><B>1999 Compared to 1998</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Net Sales.</I> Net sales were $46.1 million for 1999 compared to $53.6
million for 1998. While sales were down for the year, fourth quarter sales
increased to $15.5 million for 1999 from $14.4 million for 1998 due to increased
advertising expenditures. For the year 1999, domestic sales declined to $45.1
million from $51.9 for 1998. Slower sales for 1999 reflect both a lower level of
advertising during the previous cough/cold season and the presence of
competition. Retailer returns of product in conjunction with our introduction of
new packaging also reduced sales.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> International sales decreased to $988,000 for 1999 from $1.8 million
for 1998. The lower level of international sales for 1999 is attributable in
large part to disappointing marketing results and continued high inventory
levels at the Company's international distributor 3M. The distribution agreement
with 3M has been terminated effective June 30, 2000. The Company is currently
adding distributors who will reintroduce nasal strips to Europe, Japan and
Australia. In addition the Company will take a more active role in international
advertising and promotion.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Gross Profit.</I> Gross profit was $27.7 million for 1999 compared to $35.1
million for 1998. Gross profit as a percentage of net sales was 60.1% for 1999
compared to 65.5% for 1998. The lower gross profit as a percentage of net sales
was primarily due to costs of the transition to new product packaging, lower
sales and product mix.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Marketing and Selling Expenses.</I> Marketing and selling expenses were
$33.4 million for 1999 compared to $28.8 million for 1998. This increase
resulted primarily from a resumption in national television advertising during
1999 after no significant advertising in the fourth quarter of</FONT></P>
<CENTER><FONT Size="2">22</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT SIZE="2">1998. Marketing
and selling expenses as a percentage of net sales increased to 72.4% in 1999
from 53.7% in 1998 reflecting the planned investment in advertising needed to
return the Breathe Right brand to growth in the fourth quarter of 1999.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>General and Administrative Expenses.</I> General and administrative
expenses were $3.4 million for 1999 comparable to $3.6 million for 1998. General
and administrative expenses as a percentage of net sales increased to 7.3% in
1999 from 6.7% in 1998 primarily as a result of the lower level of sales in
1999.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Product Development Expenses.</I> Product development expenses were $3.3
million for 1999 compared to $2.0 million for 1998. This increase resulted
primarily from costs related to evaluation and testing of potential new
products, including FLAIR equine nasal strips and FiberChoice chewable fiber
tablets. Product development expenses as a percentage of net sales increased to
7.2% in 1999 from 3.8% in 1998.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Contract Termination Fee.</I> Contract termination fee of $6.3 million
represents a one-time payment to 3M, the Company's international distributor, to
terminate the international distribution agreement. The amount paid was
negotiated, and is less than the amount called for in the original contract. The
agreement allows the Company to regain control of the international business on
a phased schedule that will be completed by June 30, 2000.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Investment Income.</I> Investment income was $2.8 million for 1999 and 1998.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Income Tax Benefit (Expense).</I> Income tax provision for 1999 was a
benefit of $2.1 million compared to an expense of $510,000 for 1998. Due to tax
loss carryforwards the income tax benefit for 1999 represents the remaining tax
benefit available from carrying back current year losses, offset by a reserve
against net deferred income tax assets. A high level of tax-exempt interest
income impacted the effective income tax rate in 1998.</FONT></P>
<P><FONT Size="2"><B>1998 Compared to 1997</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Net Sales.</I> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Gross Profit.</I> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Marketing and Selling Expenses.</I> Marketing and selling expenses were
$28.8 million for 1998 compared to $31.6 million for 1997. This decrease
resulted primarily from a planned</FONT></P>
<CENTER><FONT Size="2">23</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT SIZE="2">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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>General and Administrative Expenses.</I> 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 in 1998.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Product Development Expenses.</I> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Investment Income.</I> Investment 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Income Tax Expense.</I> 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.</FONT></P>
<P><FONT Size="2"><B>Seasonality</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 to snoring. Sales of nasal congestion remedies
are higher during the fall and winter seasons because of increased use during
the cold season.</FONT></P>
<P><FONT Size="2"><B>Liquidity and Capital Resources</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> At December 31, 1999, the Company had cash, cash equivalents and
marketable securities of $38.9 million and working capital of $50.2 million.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Operating Activities.</I> The Company used cash in operations of
approximately $12.1 million in 1999. The decreased cash flow in 1999 was
primarily due to the net loss for the year. The Company generated cash from
operations of $9.3 million in 1998 and $8.0 million in 1997. The increased cash
flow in 1998 was primarily due to a change in operating assets and liabilities
offset by a decrease in net income.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Investing Activities.</I> Sales and maturities of marketable securities
exceeded purchases by $21.1 million in 1999. Net proceeds were used to fund the
cash used in operations and purchase treasury shares. The Company's purchases of
marketable securities equaled sales and maturities of marketable securities in
1998. Marketable securities purchased consisted of cash equivalents, corporate
bonds, U.S. Government obligations and municipal bonds.</FONT></P>
<CENTER><FONT Size="2">24</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P ALIGN="justify"><FONT Size="2"> The Company purchased $331,000 of property and equipment in 1999 and
$1.1 million in 1998, primarily associated with the upgrade of management
information systems.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> <I>Financing Activities.</I> The Company purchased 2.3 million shares of its
common stock for $8.6 million in 1999 and purchased 1.9 million shares for $8.3
million in 1998. 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 $446,000 in 1999 and
$239,000 in 1998 from the exercise of stock options.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company believes that its existing funds will be sufficient to
support its planned operations for the foreseeable future, including capital
expenditures and possible future acquisitions of products that would complement
existing operations.</FONT></P>
<P><FONT Size="2"><B>Year 2000</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company evaluated 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 identified and tested its systems, and the test results
indicated that these systems were Year 2000 compliant. The Company has
experienced no Year 2000 system issues in 2000.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Company's direct costs for Year 2000 compliance were not
significant and consisted primarily of costs related to the staff time devoted
to Year 2000 compliance.</FONT></P>
<P><FONT Size="2"><B>Recent Accounting Pronouncements</B></FONT></P>
<P ALIGN="justify"><FONT Size="2"> In 1998, the Financial Accounting Standards Board 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 2001. The Company is in the process of evaluating SFAS
No. 133 and its potential impact.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 adopted SOP 98-1 in 1999.
Costs incurred prior to the initial application of the SOP were not adjusted to
conform with SOP 98-1. The adoption did not have a material impact on the
Company's financial position or results of operations.</FONT></P>
<CENTER><FONT Size="2">25</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><U><B><A NAME="Item7A">Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> The table below provides information about the Company's cash and cash equivalents and marketable
securities as of December 31, 1999:</FONT></P>
<FONT SIZE="2"><PRE>
(In thousands)
Cost Fair Value
---- ----------
Due within one year $19,137 $19,091
Due after one year
through two years 16,207 15,990
Due after two years
through three years 2,973 2,916
------- -------
$38,317 $37,997
======= =======
</PRE></FONT>
<P><FONT Size="2"><U><B><A NAME="Item8">Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> The Consolidated Balance Sheets of the Company as of December 31, 1999 and 1998, and the related
Consolidated Statements of Operations, Stockholders' Equity and Comprehensive Income (Loss), and Cash
Flows for each of the years in the three-year period ended December 31, 1999, the Notes to the Consolidated
Financial Statements and the Report of KPMG LLP, independent certified public accountants, are listed under
Item 14 of this Report.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item9">Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE</A></B></U></FONT></P>
<P><FONT Size="2"> None.</FONT></P>
<CENTER><FONT Size="2">26</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B><A NAME="PARTIII">PART III</A></B></FONT></P></CENTER>
<P><FONT Size="2"><U><B><A NAME="Item10">Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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 Stockholders to be held on May 3, 2000 (the "2000 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.</FONT></P>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item11">Item 11. EXECUTIVE COMPENSATION</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> Information required under this item is contained in the section entitled "Executive Compensation"
in the Company's 2000 Proxy Statement and is incorporated herein by reference.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item12">Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</A></B></U></FONT></P>
<P ALIGN="justify"><FONT Size="2"> Information required under this item is contained in the section entitled "Security Ownership of
Principal Stockholders and Management" in the Company's 2000 Proxy Statement and is incorporated herein
by reference.</FONT></P>
<P><FONT Size="2"><U><B><A NAME="Item13">Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</A></B></U></FONT></P>
<P><FONT Size="2"> Not Applicable.</FONT></P>
<CENTER><FONT Size="2">27</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><CENTER><B><A NAME="PARTIV">PART IV</A></B></CENTER></P>
<P><FONT Size="2"><U><B><A NAME="Item14">Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K</A></B></U></FONT></P>
<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0">
<TR>
<TD WIDTH="5%" VALIGN="TOP"><FONT Size="2">(a)</FONT></TD>
<TD WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="4" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2">Documents filed as part of this Report:</FONT></P></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="5" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD WIDTH="14%" VALIGN="TOP"><CENTER><FONT Size="2"><B>Form 10-K<BR><U>Page Reference</U></B></CENTER></FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD WIDTH="3%" VALIGN="TOP"><FONT Size="2">1.</FONT></TD>
<TD WIDTH="3%" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Financial Statements.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD WIDTH="70%" VALIGN="TOP"><FONT Size="2">Independent Auditors' Report</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-1</FONT></CENTER></TD>
</TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Operations for the Years Ended<BR>
December 31, 1999, 1998 and 1997</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-2</FONT></CENTER></TD>
</TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Consolidated Balance Sheets as of December 31, 1999 and 1998</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-3</FONT></CENTER></TD>
</TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Stockholders' Equity and Comprehensive<BR>
Income (Loss) for the Years Ended December 31, 1999, 1998 and 1997</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-4</FONT></CENTER></TD>
</TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Cash Flows for the Years Ended<BR>
December 31, 1999, 1998 and 1997</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-5</FONT></CENTER></TD>
</TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Notes to Consolidated Financial Statements</FONT></TD>
<TD VALIGN="TOP"><CENTER><FONT Size="2">F-6</FONT></CENTER></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">2.</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Financial Statement Schedules.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">None.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">3.</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Exhibits.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">See "Exhibit Index" on the page following the Signature Page.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">(b)</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2">Reports on Form 8-K.</FONT></TD>
</TR>
<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>
<TR>
<TD COLSPAN="2" VALIGN="TOP"> </TD>
<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2">The Company did not file a report on Form 8-K during the fourth quarter ended December 31, 1999.</FONT>
</TR>
</TABLE>
<CENTER><FONT Size="2">28</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B><A NAME="SIGNATURES">SIGNATURES</A></B></FONT></P></CENTER>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="50%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" COLSPAN="2"><FONT Size="2">CNS, INC.<BR>("Registrant")</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> <BR> </FONT></TD>
<TD VALIGN="TOP" WIDTH="2%"><FONT Size="2"> <BR> </FONT></TD>
<TD VALIGN="TOP" WIDTH="48%"><FONT Size="2"> <BR> </FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">Dated: March 27, 2000</FONT></TD>
<TD VALIGN="TOP" COLSPAN="2"><FONT Size="2">By <U>/s/ Daniel E. Cohen
</U></FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Daniel E. Cohen<BR>Chairman of the Board, Chief Executive<BR>Officer and Director</FONT></TD>
</TR>
</TABLE>
<P ALIGN="justify"><FONT Size="2"> Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by
the following persons on March 27, 2000 on behalf of the Registrant in the capacities indicated.</FONT></P>
<CENTER><P><FONT Size="2"><B>(POWER OF ATTORNEY)</B></FONT></P></CENTER>
<P ALIGN="justify"><FONT Size="2"> 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.</FONT></P>
<BR>
<P><FONT Size="2"><U>/s/ Daniel E. Cohen </U><BR>
Daniel E. Cohen<BR>
Chairman of the Board, Chief Executive Officer<BR>
and Director<BR>
(Principal Executive Officer)</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ Marti Morfitt </U><BR>
Marti Morfitt<BR>
President, Chief Operating Officer and Director</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ David J. Byrd </U><BR>
David J. Byrd<BR>
Vice President of Finance, Chief<BR>
Financial Officer and Treasurer<BR>
(Principal Financial and Accounting Officer)</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ Patrick Delaney </U><BR>
Patrick Delaney<BR>
Director</P></FONT>
<BR>
<CENTER><FONT Size="2">29</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<P><FONT Size="2"><U>/s/ H. Robert Hawthorne </U><BR>
H. Robert Hawthorne<BR>
Director</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ R. Hunt Greene </U><BR>
R. Hunt Greene<BR>
Director</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ Andrew J. Greenshields </U><BR>
Andrew J. Greenshields<BR>
Director</P></FONT>
<BR>
<P><FONT Size="2"><U>/s/ Richard W. Perkins </U><BR>
Richard W. Perkins<BR>
Director</P></FONT>
<CENTER><FONT Size="2">30</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><A NAME="EXHIBIT_INDEX">CNS, INC.<BR>
<U>EXHIBIT INDEX</A></U></FONT></P></CENTER>
<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="15%"><FONT Size="2"><U><B>Exhibit No.</B></U></FONT></TD>
<TD VALIGN="TOP" WIDTH="85%"><FONT Size="2"><U><B>Description</B></U></FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">3.1</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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")).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">3.2</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Company's Amended and Restated By-Laws.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.1*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.2*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="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).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.3*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.4*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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")).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.5**</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.6</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Distribution Agreement dated August 2, 1995 between the Company and Minnesota
Mining and Manufacturing ("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").</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.7</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Amendment to August 2, 1995 Distribution Agreement between the Company and
Minnesota Mining and Manufacturing company ("3M") dated effective September 30,
1999.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.8</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.9**</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">License Agreement dated November 10, 1997 between the Company and Onesta Nutrition,
Inc.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.10**</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">License Agreement dated March 12, 1999 between the Company and WinEase LLC.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.11**</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen
Cronk.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.12*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Daniel E. Cohen dated February 12,
1999 (incorporated by referenced to Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (the "1998 Form 10-K")).</FONT></TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">31</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="15%"><FONT Size="2">10.13*</FONT></TD>
<TD VALIGN="TOP" WIDTH="85%"><FONT Size="2">Employment Agreement between the Company and Marti Morfitt dated February 12,
1999 (incorporated by referenced to Exhibit 10.10 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.14*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Kirk P. Hodgdon dated February 12,
1999 (incorporated by referenced to Exhibit 10.11 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.15*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and David J. Byrd dated February 12, 1999
(incorporated by referenced to Exhibit 10.12 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.16*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and John J. Keppeler dated February 12,
1999 (incorporated by referenced to Exhibit 10.13 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.17*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Teri P. Osgood dated February 12,
1999 (incorporated by referenced to Exhibit 10.14 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.18*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Carol J. Watzke dated February 12,
1999 (incorporated by referenced to Exhibit 10.15 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.19*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Douglas G. Austin dated February 12,
1999 (incorporated by referenced to Exhibit 10.16 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">10.20*</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and M. W. Anderson dated February 12,
1999 (incorporated by referenced to Exhibit 10.17 to the 1998 Form 10-K).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">21.1</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Subsidiaries of the Company.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">23.1</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Consent of KPMG LLP.</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">24.1</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Powers of Attorney (included on the signature page hereof).</FONT></TD>
</TR>
<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2">27.1</FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Financial Data Schedule.</FONT></TD>
</TR>
</TABLE>
<BR>
<HR ALIGN="LEFT" WIDTH="25%" SIZE="1" NOSHADE COLOR="000000">
<FONT Size="2">*Indicates Compensatory Agreement</FONT>
<P><FONT Size="2">**Certain portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a
request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are
represented by brackets with asterisks.</FONT></P>
<CENTER><FONT Size="2">32</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<A NAME="FINANCIAL_STATEMENTS"></A>
<CENTER><P><FONT Size="2"><B>Independent Auditors' Report</B></FONT></P></CENTER>
<BR>
<BR>
<BR>
<P><FONT Size="2">The Board of Directors and Stockholders<BR>
CNS, Inc.:</FONT></P>
<BR>
<P ALIGN="justify"><FONT Size="2">We have audited the accompanying consolidated balance sheets of CNS, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.</FONT></P>
<P ALIGN="justify"><FONT Size="2">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.</FONT></P>
<P ALIGN="justify"><FONT Size="2">In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNS, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.</FONT></P>
<BR>
<BR>
<P><FONT Size="4">/s/ KPMG LLP</FONT></P>
<BR>
<BR>
<P><FONT Size="2">Minneapolis, Minnesota<BR>
January 19, 2000</FONT></P>
<CENTER><FONT Size="2">F-1</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>
Consolidated Statements of Operations<BR>
Years ended December 1999, 1998, and 1997</FONT></P></CENTER>
<FONT SIZE="2"><PRE>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net sales $ 46,050,208 $ 53,622,803 $ 66,957,134
Cost of goods sold 18,358,435 18,484,608 21,292,995
- -------------------------------------------------------------------------------------------------------------
Gross profit 27,691,773 35,138,195 45,664,139
- -------------------------------------------------------------------------------------------------------------
Operating expenses:
Marketing and selling 33,353,549 28,777,148 31,638,518
General and administrative 3,382,897 3,620,752 3,275,636
Product development 3,306,162 2,039,411 1,105,790
Contract termination fee 6,345,000 0 0
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 46,387,608 34,437,311 36,019,944
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) (18,695,835) 700,884 9,644,195
Interest income 2,595,779 2,790,780 2,976,121
Gain on sales of marketable securities 242,567 0 0
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (15,857,489) 3,491,664 12,620,316
Income tax benefit (expense) 2,101,138 (510,000) (3,850,000)
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ (13,756,351) $ 2,981,664 $ 8,770,316
=============================================================================================================
Basic net income (loss) per share $ (.89) $ .16 $ .46
=============================================================================================================
Weighted average number of common shares outstanding 15,435,000 18,079,000 19,119,000
=============================================================================================================
Diluted net income (loss) per share $ (.89) $ .16 $ .44
=============================================================================================================
Weighted average number of common
and assumed conversion shares outstanding 15,435,000 18,249,000 19,802,000
=============================================================================================================
</PRE></FONT>
<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>
<CENTER><FONT Size="2">F-2</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>
Consolidated Balance Sheets<BR>
December 31, 1999 and 1998</FONT></P></CENTER>
<FONT SIZE="2"><PRE>
Assets 1999 1998
- -------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 859,852 $ 584,718
Marketable securities 37,997,409 59,796,952
Accounts receivable, net of allowance for doubtful accounts
of $280,000 in 1999 and $210,000 in 1998 11,369,815 7,790,952
Income taxes receivable 3,177,771 0
Inventories 4,905,449 8,823,193
Prepaid expenses and other current assets 3,625,373 2,794,558
Deferred income taxes 0 1,332,000
- -------------------------------------------------------------------------------------------------------
Total current assets 61,935,669 81,122,373
Property and equipment, net 2,010,059 2,406,488
Product rights, net 1,391,107 1,434,566
- -------------------------------------------------------------------------------------------------------
$ 65,336,835 $ 84,963,427
=======================================================================================================
Liabilities and Stockholders Equity
- -------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 5,422,031 $ 4,993,462
Accrued expenses 6,330,730 3,419,187
Accrued income taxes 0 684,937
- -------------------------------------------------------------------------------------------------------
Total current liabilities 11,752,761 9,097,586
- -------------------------------------------------------------------------------------------------------
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 1999 and 1998 192,946 192,946
Additional paid-in capital 61,530,522 61,932,529
Treasury shares - at cost; 4,838,098 shares in 1999
and 2,692,144 shares in 1998 (22,220,537) (14,670,128)
Retained earnings 14,401,143 28,157,494
Accumulated other comprehensive income (loss) (320,000) 253,000
- -------------------------------------------------------------------------------------------------------
Total stockholders equity 53,584,074 75,865,841
Commitments (notes 9 and 10)
- -------------------------------------------------------------------------------------------------------
$ 65,336,835 $ 84,963,427
=======================================================================================================
</PRE></FONT>
<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>
<CENTER><FONT Size="2">F-3</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)<BR>
Years ended December 31, 1999, 1998, and 1997</FONT></P></CENTER>
<FONT SIZE="2"><PRE>
Common stock Treasury shares Accumulated
-------------------------- Additional -------------------------- other Total
Number Par paid-in Number Retained comprehensive stockholders'
of shares value capital of shares Cost earnings income (loss) equity
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 19,145,445 $ 191,454 $63,177,939 0 $ 0 $16,405,514 $ 0 $ 79,774,907
Stock issued in connection with
Employee Stock Purchase Plan 927 10 7,180 (1,489) 8,464 0 0 15,654
Stock options exercised 77,300 773 241,308 (37,000) 50,062 0 0 292,143
Tax benefit from stock options
exercised 0 0 70,000 0 0 0 0 70,000
Warrants exercised 70,898 709 (709) 0 0 0 0 0
Treasury shares purchased 0 0 0 1,000,000 (8,278,519) 0 0 (8,278,519)
Comprehensive income:
Net income for the year 0 0 0 0 0 8,770,316 0 8,770,316
-----------
Total comprehensive income 8,770,316
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 19,294,570 192,946 63,495,718 961,511 (8,219,993) 25,175,830 0 80,644,501
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (25,349) (5,467) 43,141 0 0 17,792
Stock options exercised 0 0 (1,537,840) (171,500) 1,776,871 0 0 239,031
Treasury shares purchased 0 0 0 1,907,600 (8,270,147) 0 0 (8,270,147)
Comprehensive income:
Net income for the year 0 0 0 0 0 2,981,664 0 2,981,664
Unrealized gains on marketable securities
net of income tax effect of $154,000 0 0 0 0 0 0 253,000 253,000
-----------
Total comprehensive income 3,234,664
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 19,294,570 192,946 61,932,529 2,692,144 (14,670,128) 28,157,494 253,000 75,865,841
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (98,185) (18,381) 151,404 0 0 53,219
Stock options exercised 0 0 (413,822) (108,065) 860,103 0 0 446,281
Warrants issued 0 0 110,000 0 0 0 0 110,000
Treasury shares purchased 0 0 0 2,272,400 (8,561,916) 0 0 (8,561,916)
Comprehensive loss:
Net loss for the year 0 0 0 0 0 (13,756,351) 0 (13,756,351)
Unrealized losses on marketable securities
net of income tax effect of $154,000 0 0 0 0 0 0 (573,000) (573,000)
-----------
Total comprehensive loss (14,329,351)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 19,294,570 $ 192,946 $61,530,522 4,838,098 $(22,220,537) $ 14,401,143 $ (320,000) $53,584,074
========================================================================================================================================================================
</PRE></FONT>
<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>
<CENTER><FONT Size="2">F-4</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>
Consolidated Statements of Cash Flows<BR>
Years ended December 31, 1999, 1998, and 1997</FONT></P></CENTER>
<FONT SIZE="2"><PRE>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ (13,756,351) $ 2,981,664 $ 8,770,316
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,029,148 854,702 460,044
Warrants issued 110,000 0 0
Deferred income taxes 1,486,000 284,000 (809,000)
Changes in operating assets and liabilities:
Accounts receivable (3,578,863) 3,601,049 3,273,730
Inventories 3,917,744 (198,530) (309,837)
Prepaid expenses and other current assets (4,008,586) 500,443 (1,647,946)
Accounts payable and accrued expenses 2,655,175 1,247,114 (1,783,688)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (12,145,733) 9,270,442 7,953,619
- ----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of marketable securities (97,157,463) (43,428,987) (99,045,360)
Sales and maturities of marketable securities 118,230,006 43,497,271 89,926,317
Payments for purchases of property and equipment (330,538) (1,101,403) (1,239,918)
Payments for product rights (258,722) (228,826) (1,553,605)
Redemption (purchase) of certificate of deposit, restricted 0 359,898 (19,834)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 20,483,283 (902,047) (11,932,400)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from the issuance of common stock
under Employee Stock Purchase Plan 53,219 17,792 15,654
Proceeds from the exercise of stock options 446,281 239,031 362,143
Purchase of treasury shares (8,561,916) (8,270,147) (8,278,519)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,062,416) (8,013,324) (7,900,722)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 275,134 355,071 (11,879,503)
Cash and cash equivalents:
Beginning of year 584,718 229,647 12,109,150
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 859,852 $ 584,718 $ 229,647
==================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 0 $ 0 $ 0
Cash paid during the year for income taxes 344,000 700,000 4,750,000
==================================================================================================================================
</PRE></FONT>
<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>
<CENTER><FONT Size="2">F-5</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>
Notes to Consolidated Financial Statements<BR>
December 31, 1999, 1998 and 1997</FONT></P></CENTER>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(1)</B></FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Summary of Significant Accounting Policies</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Principles of Consolidation </B> The accompanying consolidated financial statements
include the accounts of CNS, Inc. and its subsidiaries ("the Company"). All material intercompany
accounts and transactions have been eliminated in consolidation.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Business </B> The Company designs, manufactures and markets consumer
products, primarily the Breathe Right® 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
mass merchant, drug, grocery and club stores. The Company has an
international distribution agreement with 3M Company ("3M") to
market Breathe Right nasal strips outside the U.S. and Canada,
which was amended in 1999 to allow the Company to regain control
of its international business on a phased schedule. The Company's
agreement with 3M will terminate on June 30, 2000.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Revenue Recognition </B> Revenue from sales is recognized at the time
products are shipped.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Accounting Estimates </B> 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.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>FairValue of Financial Instruments </B> All financial instruments are
carried at amounts that approximate fair value.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Cash Equivalents </B> Cash equivalents consist primarily of money market
funds.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Marketable Securities </B> 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.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Inventories </B> Inventories are valued at the lower of cost (determined on
a first-in, first-out basis) or market.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Property and Equipment </B> 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.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Product Rights </B> 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.</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-6</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Stock Based Compensation </B> The Company follows the disclosure
requirements for employee stock based compensation plans and,
accordingly, no compensation expense has been recognized.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Foreign Sales </B> Foreign sales are made in U.S. dollars only. There are no currency conversions.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Advertising </B> The Company expenses the production costs of advertising
the first time the advertising runs.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Income Taxes </B> 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.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Net Income Per Share </B> Basic net income (loss) per share and diluted net
(loss) per share have been computed based upon the weighted
average number of common shares outstanding during the year.
Assumed conversion shares were excluded from the net loss per
share computation as their effect is antidilutive. Common stock
options could potentially dilute basic earnings per share in
future periods if the Company generates net income. Diluted net
income per share has been computed based upon the weighted average
number of common and assumed conversion shares outstanding during
the year.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Comprehensive Income (Loss) </B> Comprehensive income (loss) consists of
the Company's net income (loss) and unrealized gains (losses) on
marketable securities and is presented in the consolidated
statements of stockholders' equity and comprehensive income
(loss). Comprehensive income (loss) is an additional disclosure in
the consolidated financial statements; it does not affect the
Company's financial position or results of operations.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>New Accounting Standards </B> In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 2001. The Company is in the process of evaluating SFAS No. 133 and its
potential impact.</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(2)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Marketable Securities</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Marketable securities, including estimated fair value based on quoted
market prices or valuation models, are summarized as follows (in
thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
December 31
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------------------------
Cash equivalents $ 659 $ 659 $ 1,145 $ 1,145
Certificates of deposit 5,500 5,493 0 0
Corporate bonds 24,088 23,879 1,754 1,772
U.S. Government obligations 8,070 7,966 1,309 1,316
Municipal bonds 0 0 55,182 55,564
- ----------------------------------------------------------------------------------------------------------------
Total marketable securities $ 38,317 $ 37,997 $ 59,390 $ 59,797
================================================================================================================
</PRE></FONT>
</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-7</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">Maturities of marketable securities at December 31, 1999 are as
follows (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
Cost Fair Value
- ----------------------------------------------------------------
Due within one year $ 19,137 $ 19,091
Due after one year through three years 19,180 18,906
- ----------------------------------------------------------------
Total marketable securities $ 38,317 $ 37,997
================================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">There were realized gains of $243,000 during 1999 and no realized
gains or losses in 1998 or 1997.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(3)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Advertising</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">At December 31, 1999 and 1998, $1,762,000 and $445,000, respectively,
of advertising costs were reported as assets. Advertising expense
was $17,669,000 in 1999, $15,783,000 in 1998, and $21,160,000 in
1997.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(4)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Details of Selected Balance Sheet Accounts</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Details of selected balance sheet accounts are as follows (in
thousands):</FONT></TD>
</TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
1999 1998 1997
- -------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Balance beginning of year $ 210 $ 210 $ 210
Plus provision for doubtful accounts 96 43 5
Less charge offs 26 43 5
- -------------------------------------------------------------------------------------
Balance end of year $ 280 $ 210 $ 210
=====================================================================================
December 31
---------------------
1999 1998
- -------------------------------------------------------------------------------------
Inventories:
Finished goods $ 2,935 $ 6,364
Work in process 21 183
Raw materials and component parts 1,949 2,276
- -------------------------------------------------------------------------------------
Total inventories $ 4,905 $ 8,823
=====================================================================================
Property and equipment:
Production equipment $ 408 $ 410
Office equipment and information systems 3,330 3,096
- -------------------------------------------------------------------------------------
3,738 3,506
Less accumulated depreciation 1,728 1,100
- -------------------------------------------------------------------------------------
Property and equipment, net $ 2,010 $ 2,406
=====================================================================================
Product rights:
Product rights $ 2,407 $ 2,148
Less accumulated amortization 1,016 713
- -------------------------------------------------------------------------------------
Product rights, net $ 1,391 $ 1,435
=====================================================================================
</PRE></FONT>
</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-8</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT SIZE="2"><PRE>
Accrued expenses:
Promotions and allowances $ 3,106 $ 1,632
Royalties and commissions 678 665
Salaries, incentives and paid time off 991 1,016
Packaging transition 1,426 0
Other 130 106
- -------------------------------------------------------------------------------------
Total accrued expenses $ 6,331 $ 3,419
=====================================================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(5)</B></FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Stockholders' Equity</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Stock Options </B> 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, 1999.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Stock option activity under these plans is summarized as follows:</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
Weighted-average Shares
Exercise Price Shares Available
Per Share Outstanding For Grant
- -------------------------------------------------------------------------------
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
Granted 3.05 353,000 (353,000)
Exercised 4.16 (115,010) 0
Canceled 4.00 (47,100) 47,100
- -------------------------------------------------------------------------------
Balance at December 31, 1999 $ 4.47 1,771,390 64,750
===============================================================================
</PRE></FONT>
</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-9</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">Information on outstanding and currently exercisable options by price
range as of December 31, 1999, is summarized as follows:</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
Weighted- Weighted- Weighted-
Total average average Exercisable average
Price Range Number of Remaining Exercise Number of Exercise
Per Share Shares Life (Years) Price Shares Price
- ---------------------------------------------------------------------------------------
$ 1.69 - 2.31 37,100 1.8 $ 1.97 37,100 $ 1.97
2.81 - 3.94 719,000 7.0 3.12 369,400 3.20
4.13 - 5.00 309,590 8.5 4.70 102,456 4.69
5.44 - 7.25 697,700 5.6 5.81 574,200 5.80
11.38 8,000 .3 11.38 8,000 11.38
------------- ---------------
1,771,390 1,091,156
============= ===============
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">At December 31, 1999, the weighted-average remaining contractual life
of outstanding options was 6.6 years. At December 31, 1999, 1998
and 1997, currently exercisable options aggregated 1,091,156,
1,051,800 and 958,100 shares of common stock, respectively and the
weighted-average exercise price of those options was $4.73, $4.62
and $3.87, respectively.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">The per share weighted-average fair value of stock options granted
during 1999, 1998 and 1997 is estimated as $1.98, $3.20 and $2.38,
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 1999, 6.00% in 1998 and 6.25%
in 1997; and an expected life of 6 years.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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
$950,000, or $.06 per share in 1999, $1,300,000, or $.07 per share
in 1998 and $530,000, or $.03 per share in 1997.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Employee Stock Purchase Plan </B> 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 employees as of December 31, 1999 have purchased
162,650 shares.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Warrants </B> 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.</FONT></TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-10</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">In connection with agreements to license certain intellectual
property rights to potential products, licensers were issued
warrants. During 1999, warrants were issued to purchase 50,000
shares of the Company's common stock exercisable at a price of
$3.44 per share exercisable evenly over the next three years and
for a period of 10 years. The issuance of the warrants resulted in
an expense of $110,000. Warrants were issued during 1997 to
purchase 25,000 shares at a price of $8.00 per share exercisable
when the potential products are marketed and for a period of five
years. None of these warrants are currently exercisable.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Preferred Stock </B> At December 31, 1999, 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.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(6)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Income Taxes</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Income tax expense (benefit) for the three years ended December 31,
1999, is as follows (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
Current Deferred Total
- -----------------------------------------------------------------------------
1999:
Federal $ (3,917) $ 1,816 $ (2,101)
State 0 0 0
- -----------------------------------------------------------------------------
Income tax expense (benefit) $ (3,917) $ 1,816 $ (2,101)
=============================================================================
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
=============================================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">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):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
1999 1998 1997
- -----------------------------------------------------------------------------------
Computed tax expense (benefit) $ (5,550) $ 1,222 $ 4,417
State taxes, net of federal benefit (431) 64 331
Tax exempt interest (178) (789) (765)
Benefit of foreign sales corporation 0 0 (127)
Change in deferred tax valuation allowance 3,932 0 0
Other 126 13 (6)
- -----------------------------------------------------------------------------------
Actual tax expense (benefit) $ (2,101) $ 510 $ 3,850
===================================================================================
</PRE></FONT>
</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-11</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
for 1999 and 1998 are presented below (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
December 31
------------------------
1999 1998
- --------------------------------------------------------------------------
Deferred tax assets:
Inventory items $ 677 $ 659
Accounts receivable allowance 104 78
Product rights 181 113
Accrued expenses 1,835 710
Net operating loss and credit carryforwards 1,124 0
Unrealized loss on marketable securities 122 0
- --------------------------------------------------------------------------
4,043 1,560
Less valuation allowance 3,932 0
- --------------------------------------------------------------------------
111 1,560
- --------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains on marketable securities 0 (154)
Property and equipment (111) (74)
- --------------------------------------------------------------------------
(111) (228)
- --------------------------------------------------------------------------
Net deferred tax assets $ 0 $ 1,332
==========================================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Based on the level
on historical taxable income and projections of future taxable
income over the periods in which the deferred tax assets are
deductible, management does not believe that it is more likely
than not the Company will realize the benefits of these deductible
differences. Accordingly, the Company has provided a valuation
allowance against the net deferred assets as of December 31, 1999.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">As of December 31, 1999, the Company has reported federal net
operating loss carryforwards of approximately $1,700,000. The
federal net operating loss carryforwards expire in 2009.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(7)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Sales</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">The Company had one significant customer who accounted for
approximately 24% of total sales in 1999 and 20% of total sales in
1998 and two significant customers, including 3M Company, who
accounted for approximately 28% of total sales in 1997. Accounts
receivable from this customer as of December 31, 1999 and 1998
were $4,330,000 and $1,013,000, respectively. Sales by geographic
area are as follows (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
1999 1998 1997
- -----------------------------------------------------------
Domestic $ 45,062 $ 51,855 $ 60,602
International 988 1,768 6,355
- -----------------------------------------------------------
Total sales $ 46,050 $ 53,623 $ 66,957
===========================================================
</PRE></FONT>
</TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-12</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">
<TR>
<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(8)</B></FONT></TD>
<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Contract Termination Fee</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">On September 30, 1999, the Company and 3M amended the international
distribution agreement in a manner that allows the Company to
regain control of its international business on a phased schedule.
In exchange for the 1999 payment of a one-time contract
termination fee of $6,345,000, the international distribution
agreement with 3M will terminate on June 30, 2000.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(9)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>License Agreements</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">The Company has agreements to exclusively license intellectual
property rights to certain products. Royalties due under these
agreements are based on various percentages of net sales. To
maintain the Company's licenses, it must make minimum royalty
payments of $1,250,000 each year until patents for the products
expire. Royalty expense was $1,477,000 in 1999, $1,509,000 in 1998
and $1,995,000 in 1997.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(10)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Operating Leases</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">The Company leases equipment and office space under noncancelable
operating leases that have initial or noncancelable lease terms in
excess of one year. Future minimum lease payments due in
accordance with these leases as of December 31, 1999 are as
follows (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
Year ending December 31, Amount
- ---------------------------------------------------------
2000 $ 481
2001 697
2002 711
2003 725
2004 727
Later years 4,599
- ---------------------------------------------------------
Future minimum lease payments $ 7,940
=========================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Total rental expense for operating leases was $555,000 in 1999,
$564,000 in 1998, and $471,000 in 1997.</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"><B>(11)</B></FONT></TD>
<TD VALIGN="TOP"><FONT Size="2"><B>Earnings Per Share</B></FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">A reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in thousands):</FONT></TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP">
<FONT SIZE="2"><PRE>
1999 1998 1997
- ----------------------------------------------------------------------------------
Weighted average common shares outstanding 15,435 18,079 19,119
Assumed conversion of stock options 0 170 682
Assumed conversion of warrants 0 0 1
- ----------------------------------------------------------------------------------
Average common and assumed Conversion shares 15,435 18,249 19,802
==================================================================================
</PRE></FONT>
</TD>
</TR>
<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>
<TR>
<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>
<TD VALIGN="TOP"><FONT Size="2">Options and warrants to purchase 1,846,390 shares of common stock with
a range of exercise prices from $1.69 to $11.38 per share were
outstanding during 1999 but were not included in the computation
of 1999 diluted earnings per share because the effect would be
anti-dilutive. The options expire from 2000 to 2009.</FONT></TD>
</TR>
</TABLE>
<CENTER><FONT Size="2">F-13</FONT></CENTER>
<HR SIZE=5 COLOR=GRAY NOSHADE>
</body>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<DESCRIPTION>AMENDED AND RESTATED BY-LAWS
<TEXT>
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
DATED MARCH 13, 2000
<PAGE>
CONTENTS OF AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
ARTICLE 1 - OFFICES............................................................1
1.1) Registered Offices.............................................1
1.2) Offices........................................................1
ARTICLE 2 - CORPORATE SEAL.....................................................1
ARTICLE 3 - SHAREHOLDERS.......................................................1
3.1) Regular Meeting................................................1
3.2) Special Meetings...............................................2
3.3) Quorum.........................................................2
3.4) Voting.........................................................2
3.5) Notice of Meeting..............................................3
3.6) Proxies........................................................3
3.7) Closing Transfer Books.........................................3
3.8) Record Date....................................................3
3.9) Presiding Officer..............................................3
3.10) Conduct of Meetings of Shareholders............................4
3.11) Order of Business..............................................4
3.12) Inspectors of Election.........................................5
3.13) Informal Action by Shareholders................................5
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...............................................6
4.6) Telephonic Meetings............................................6
4.7) Special Meetings...............................................6
4.8) Compensation...................................................6
4.9) Salaries.......................................................6
4.10) Committees.....................................................6
4.11) Committee of Disinterested Persons.............................7
4.12) Vacancies......................................................7
4.13) Order of Business..............................................7
4.14) Written Consent or Opposition in Advance of Meeting............7
4.15) Informal Action by Directors...................................8
4.16) Removal of Directors...........................................8
ARTICLE 5 - OFFICERS...........................................................8
5.1) Number.........................................................8
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.................................................9
5.7) Secretary......................................................9
<PAGE>
5.8) Treasurer and Chief Financial Officer..........................9
5.9) Assistant Officers.............................................9
5.10) Officers Shall Not Lend Corporate Credit.......................9
ARTICLE 6 - INDEMNIFICATION...................................................10
ARTICLE 7 - SHARES AND THEIR TRANSFER.........................................10
7.1) Certificates of Stock.........................................10
7.2) Facsimile Signature...........................................10
7.3) Issuance of Shares............................................10
7.4) Transfer of Shares............................................10
7.5) Lost Certificates.............................................11
7.6) Treasury Stock................................................11
7.7) Indebtedness of Shareholders..................................11
7.8) Transfer Agent and Registrar..................................11
ARTICLE 8 - BOOKS AND RECORDS.................................................11
8.1) Share Register; Dates of Issuance.............................11
8.2) Other Documents Required......................................11
8.3) Financial Records.............................................12
8.4) Right to Inspect..............................................12
8.5) Cost of Copies................................................12
8.6) Computerized Records..........................................12
8.7) Financial Statements..........................................12
ARTICLE 9 - DISTRIBUTIONS.....................................................13
9.1) Distributions.................................................13
9.2) Record Date...................................................13
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.....................................................14
10.4) Checks........................................................14
10.5) Deposits......................................................14
10.6) Voting Securities Held by Corporation.........................14
ARTICLE 11 - WAIVER OF NOTICE.................................................14
ARTICLE 12 - AMENDMENTS.......................................................14
<PAGE>
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, 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. To be properly brought before the annual meeting, business must be of a
nature that is appropriate for consideration at an annual meeting and must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly brought
before the meeting by a shareholder. In addition to any other applicable
requirements, for business to be properly brought before the annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, each such notice must be given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the corporation, not less than 45 days nor more than 60 days prior
to the date the proxy materials for the previous year's annual meeting were
mailed to shareholders of the corporation. Each such notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual
<PAGE>
meeting (w) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (x) the name and address of record of the shareholders proposing such
business, (y) the class or series (if any) and the number of shares of the
corporation which are owned by the shareholder, and (z) any material interest of
the shareholder in such business. Notwithstanding anything in these By-laws to
the contrary, no business shall be transacted at the annual meeting except in
accordance with the procedures set forth in this Article; provided, however,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting, in
accordance with these By-Laws.
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.
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.
<PAGE>
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.
3.7) Closing Transfer Books - The Board of Directors may close the
stock transfer books for a period of time not exceeding sixty (60) 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 sixty (60) 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 sixty
(60) 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
<PAGE>
authorized proxy, other than the individual who proposed
the resolution or motion; provided, however, that the
chairman shall have the discretion to rule out of order
any resolution or motion which seeks shareholder vote on a
proposal that has failed to comply with the requirements
of Article 3.1.
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 properly presented.
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.
ARTICLE 4
DIRECTORS
4.1) General Powers - The property, affairs, and business of the
corporation shall be managed by the Board of Directors.
<PAGE>
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 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.
<PAGE>
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:
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.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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
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.
<PAGE>
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.
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 13th day of March, 2000.
Patrick Delaney, Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>3
<DESCRIPTION>AGREEMENT
<TEXT>
Exhibit 10.7
AGREEMENT
This Agreement is entered into between Minnesota Mining and
Manufacturing Company ("3M") and CNS, Inc. ("CNS").
RECITALS
WHEREAS, 3M and CNS entered into a Distribution Agreement with an
effective date of August 2, 1995, ("the 1995 Agreement") and
WHEREAS, under the terms of the 1995 Agreement, 3M became CNS's
exclusive distributor of CNS's nasal dilator outside of the United States and
Canada, CNS provided product to 3M with 3M's label, either in bulk or through
packaging by CNS, and 3M licensed the Breathe Right(R) trademark from CNS, but
agreed to use 3M's trade dress, and
WHEREAS, certain disputes and disagreements have arisen between 3M and
CNS, and 3M and CNS wish to finally resolve any such disputes or disagreements,
and
WHEREAS, the parties now desire to amend the 1995 Agreement and change
their business relationship, and
WHEREAS, the purpose of this new Agreement is to allow CNS to assume
the international sales and distribution of nasal dilators from 3M, to provide
for an orderly transition process for doing so, and to provide compensation to
3M for doing so, releasing certain of its rights under the 1995 Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Effective Date. The effective date of this Agreement is September
30, 1999.
2. Amendment. This Agreement modifies and amends the 1995 Agreement,
and the parties deem this Agreement to be sufficient written amendment to meet
the requirements of paragraph 17G of the 1995 Agreement. The terms of this
Agreement control to the extent they are inconsistent with the terms of the 1995
Agreement.
3. Nonexclusive Distribution. Effective on the date hereof, 3M is
authorized by CNS to continue to distribute CNS's nasal dilator strips outside
of the United States and Canada, but its distribution
<PAGE>
shall no longer be exclusive. Notwithstanding the foregoing, 3M shall be the
exclusive distributor of CNS nasal dilators to its current drug store and
pharmacy customers outside the United States and Canada and to Boots, Migros and
Franklin's (Australia) provided 3M maintains distribution at those customers
through March 1, 2000. 3M's exclusive distribution rights for such customers
will terminate on March 1, 2000. On that date, 3M's rights will be nonexclusive
until the termination of 3M's distribution rights on June 30, 2000, as set forth
in this Agreement. During the period from the date of this Agreement until June
30, 2000, 3M will sell no nasal dilator strips or dilators other than those
supplied to it by CNS. CNS will not send any direct communications to 3M's
exclusive customers (identified above) regarding the termination of the
Distribution Agreement or the transfer of the business prior to the
communication referenced in paragraph 13(a).
4. Payment. Within ten business days of the effective date of this
Agreement, CNS shall pay to 3M $6,345,000.
5. End of Sales and Distribution. On June 30, 2000, all 3M's rights of
any sort to sell or distribute CNS nasal dilators shall terminate.
6. Non-Competition. 3M will not sell any nasal dilator devices during
the period beginning July 1, 2000 and ending June 30, 2002.
7. Fulfillment of Orders. CNS will continue to fill orders for nasal
dilators to be sold by 3M between the date of this Agreement and June 30, 2000,
and will cooperate to minimize ending inventory while assuring supply. Beginning
January 1, 2000, CNS will supply nasal dialators to fill orders received by 3M
in generic cold seal wrappers ("packaging") on a consignment basis. 3M will pay
for the nasal dilators upon 3M's sale of the nasal dilators to its customers.
8. Remaining Inventory. To the extent any inventory of 3M packaged
dilators is left in 3M's possession or control on June 30, 2000, such inventory
shall be the sole responsibility of 3M and 3M shall destroy that inventory and
shall have no rights to sell such inventory or return such inventory to CNS. The
parties recognize and agree that the purpose of this provision is to provide an
incentive to 3M to meet its responsibilities to continue its marketing and
distribution responsibilities until the termination of its distribution rights
and responsibilities, as set forth below. By September 30, 2000, 3M will return
unsold nasal dilators in generic packaging to CNS.
<PAGE>
9. Excessive Sales and Prices. In the period before June 30, 2000, 3M
shall not sell 'excessive' amounts of inventory to customers by offering prices
below 3M's original cost of CNS nasal dilators in local currency. For the
purposes of this paragraph, 'excessive' means amounts substantially in excess of
a reasonable forecast of sales by the customer. Nothing in this paragraph limits
3M's ability to promote CNS nasal dilators to consumers, for example, by
offering 'buy one get two free' or by offering a fee nasal dilator with the
purchase of other 3M products.
10. Product Returns. Customer returns of nasal strip product will be
the responsibility of the Company -- 3M or CNS -- who originally sold that
product.
11. Trade Fund Resolution. 3M will be responsible for any trade funding
commitments that it enters with customers for nasal strips purchased from 3M,
for example, promotional allowances, and volume incentives.
12. License. CNS hereby licenses to 3M the use of the CNS Breathe
Right(R) trademark or trade name for use outside of the United States and Canada
for sales of products provided or to be provided to 3M by CNS for sale and
distribution. This license and 3M's use of the Breathe Right(R) trademark and
trade name shall cease on June 30, 2000.
13. Business Transition. 3M shall make the following reasonable efforts
to arrange for the transition to CNS of its business relationships concerning
nasal dilators and of its sales and distribution of nasal dilators. To that end,
3M shall perform the following:
a) Provide to 3M's customers, and others assisting 3M in
distributing nasal dilators, a written communication concerning the
transfer of the nasal dilator business from 3M to CNS. The
communication shall be in the form of a letter, the text of which shall
be prepared by 3M and approved by CNS. CNS will not withhold its
approval unreasonably. The letter will be sent by March 1, 2000 and
will state that after June 30, 2000, Breathe Right(R) nasal dilators,
or whatever nasal dilator strips are being sold by 3M to customers,
shall thereafter be available from 3M's former licensor, CNS, and its
distributor specified by CNS.
<PAGE>
b) Provide to CNS by January 1, 2000, 3M's customer lists and
a two year sales history ending September 30, 1999. 3M will not be
obligated to provide such customer lists and sales history if, prior to
January 1, 2000, CNS announces an intent to be acquired or is acquired
by a competitor of any of 3M's First Aid Dressing and First Aid
Supplies businesses.
14. Release. CNS and 3M hereby release each other, as well as the
directors, officers, employees and agents of the other from all claims up to the
date of this Agreement which the parties have against each other, known or
unknown, including, but not limited to, claims relating to the parties'
performance or lack thereof under the 1995 Agreement. This release does not
excuse 3M from paying for any products that have been ordered or delivered to
date, or excuse CNS from delivering ordered products.
15. Independent Contractors. 3M and CNS are independent contractors.
They are not agents of each other, partners, joint ventures or
franchisor/franchisee. Neither has the right to bind or act on the other's
behalf.
16. No Assignment. Neither party will assign this Agreement without the
consent of the other, except for an assignment by CNS to a successor of CNS's
nasal dilator business.
17. No Waiver. Neither 3M nor CNS waives any of its rights provided by
this Agreement because it fails to enforce them.
18. Entire Agreement. This Agreement is the entire agreement between 3M
and CNS regarding the amendment of the 1995 Agreement. This Agreement supersedes
any other agreement concerning such amendment and may be modified only by a
written agreement.
19. Governing Law. This Agreement shall be governed by Minnesota law.
20. Dispute Resolution. Any controversy or claim arising out of or
relating to this Agreement or the 1995 Agreement, or the breach, termination or
validity thereof, shall be settled by arbitration in accordance with the rules
of the Center of Public Resources by a single arbitrator selected by mutual
agreement of the parties from the panel of the Center for Public Resources. The
arbitration will be governed by the United States Arbitration Act.
a) The arbitrator shall apply Minnesota law and shall have the
power to require specific performance, issue injunctions, declare the
rights of the parties and award damages.
b) Judgment of the arbitrator may be entered by any court with
appropriate jurisdiction.
<PAGE>
c) The arbitration hearing shall begin no more than 120 days
from the date Notice of Arbitration is delivered to the respondent.
MINNESOTA MINING AND MANUFACTURING COMPANY
By Dated:
Its
CNS, INC.
By Dated:
Its
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>4
<DESCRIPTION>LICENSE AGREEMENT
<TEXT>
Exhibit 10.9
[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY
WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]
LICENSE AGREEMENT
THIS AGREEMENT is made and effective as of this 10th day of November,
1997 by and between CNS, Inc., a Delaware corporation ("Licensee"), and Onesta
Nutrition, Inc., a Minnesota corporation ("Licensor").
RECITALS
WHEREAS, Licensor is now and has been engaged in developing certain
Products (as defined in Subsection 1.1) for use in providing dietary fiber in
tablet form.
WHEREAS, the Products embody inventions and designs owned exclusively by
Licensor and Licensor has available certain Know-how relating to the manufacture
of the Products;
WHEREAS, Licensor owns or controls, or may hereafter own or control,
certain Know-how, patents or patent applications relating to the Products;
WHEREAS, Licensee desires to obtain an exclusive worldwide license from
Licensor of certain Know-how, patents and patent applications of Licensor
relating to the manufacture and use of the Products for providing dietary fiber
and Licensor is willing to grant such a license to Licensee.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements hereinafter set forth and other good consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. GENERAL DEFINITIONS. As used herein, the following terms shall be
defined in the manner set forth below:
1.1 Products. The term "Products" shall mean the soluble fiber
supplement product described on Schedule 1.1 attached hereto, the manufacture,
use or sale of which is covered by the Licensed Patents or is made or developed
through the use of the Know-How, including all improvements thereto, and any
other inulin-based soluble fiber supplement products developed by Licensor or
any of its employees, consultants, agents or representatives during the term of
this Agreement using any Licensed Patents or Know-how; provided, however, that
for any such improvement or enhancement or similar product developed by Licensor
to be included within the license herein granted, Licensor shall notify Licensee
of any such improvement or enhancement and Licensee shall at its option make an
election to include such improvement or enhancement in this License by providing
written notice of such election to Licensor within thirty (30) days after
Licensee learns of such improvement, enhancement or similar product. If Licensee
shall make an such election, Licensee shall reimburse Licensor for reasonable
expenses incurred in developing such improvement or enhancement or similar
product.
1.2 Know-how. The term "Know-how" shall mean any and all
tangible and intangible information, technology, documents and materials in the
possession and control of Licensor, and necessary in order to enable Licensee to
utilize fully the rights granted by Licensor to Licensee hereunder and shall
include, without limiting the foregoing, the ideas, concepts, confidential
information, trade secrets and techniques, as well as all the materials,
documents, manuals, specifications, patterns, art work, bills of materials and
other information of Licensor relating to the Products.
<PAGE>
1.3 Licensed Patents. The term "Licensed Patents" shall mean the
following: (i) the United States and foreign patent(s) and patent application(s)
to the Products listed on Schedule 1.3 attached hereto; (ii) all future United
States or foreign patent applications related to the Products and any patents
arising therefrom; (iii) the rights, patents and patent applications, if any, in
any country or jurisdiction in the world corresponding to the United States
patent applications; and (iv) any division, continuation, continuation-in-part,
divisional, re-examined, reissued or extended letters patent, applications and
petty patents, utility models, utility model conversions, inventor's
certificates relating to the inventions claimed in any of the foregoing United
States patents and patents pending and foreign patent rights, which may be
developed, acquired or controlled by Licensor during the term of this Agreement
and with respect to which Licensor shall have the right to grant the license
hereinafter provided.
1.4. Contract Year and Quarter. The term "Contract Year" shall
mean each period following October 1 of 1998, 1999 and 2000. The term "Contract
Quarter" shall mean each period of three consecutive months commencing January
1, April 1, July 1 and October 1.
1.5. Gross Revenues. The term "Gross Revenues" shall mean the
gross amounts collected by Licensee from any end-user, sublicensee, assignee or
other person or entity relating to or arising from the sale of Products after
the deduction of (i) any amounts repaid or credited by reason of rejections or
returns, and (ii) trade and quantity discounts actually allowed and taken.
1.6. Earned Royalty . The term "Earned Royalty" shall mean the
royalty payable to Licensor on Products.
2. GRANT OF LICENSES.
2.1 Patent and Know-how License. Licensor hereby grants to
Licensee a sole and exclusive, worldwide, transferable right and license under
the Licensed Patents and Know-How to make, have made, use, import, offer for
sale and sell the Products and to practice worldwide any process claimed or
disclosed in the Licensed Patents and Know-how. Without limiting the foregoing,
the Licensed Products may be distributed as a product to consumers, retailers,
wholesalers or otherwise.
2.2 Sublicenses and Assignments. Licensee may sublicense and/or
assign to any third party, including affiliates of Licensee, any and all rights
granted hereunder. In the event of an assignment, Licensee shall enter into a
written agreement with the assignee pursuant to which the assignee shall assume
all of the obligations of Licensee under this Agreement and this Agreement shall
be binding upon and inure to the benefit of such assignee. In the event of a
sub-license, Licensee shall enter into a written agreement with sub-licensee (i)
with a term no greater than the term of this Agreement, (ii) with rights granted
to sub- licensee which are no greater than the terms of this Agreement, and
(iii) pursuant to which Licensee shall use reasonable business efforts to impose
upon sub-licensees similar obligations as Licensor has imposed upon Licensee
under this Agreement.
2.3 Patent Procurement and Costs. Licensee shall be responsible
for and pay all patent costs and expenses (including reasonable attorneys' fees)
incurred by Licensor in obtaining, prosecuting, owning and maintaining any of
the Licensed Patents issued or to be issued under the law of any country or
jurisdiction, including filing, prosecution, working and maintenance costs and
taxes. Licensee shall have the right to review and comment on Licensor's filings
with respect to the Licensed Patents, at Licensee's own expense. Notwithstanding
the above, Licensor shall direct and control the procurement of the Licensed
Patents using patent counsel of its own choosing for such procurement (the
choice and which counsel is subject to the reasonable consent of Licensee). Such
patent costs and expenses incurred by Licensor and reimbursed by Licensee
hereunder may be offset against the royalties payable under excess of running
royalties payable under Section 4.1 over the minimum royalties payable under
Section 4.3 in any Contract Quarter to the extent that such excess arises from
sales of Licensed Products in the country or region in which such patent costs
and expenses were incurred.
<PAGE>
2.4 Exploitation. Licensee hereby agrees that during the term of
this Agreement it will use its reasonable best efforts to manufacture, sell and
market the Products, and will exert its reasonable best efforts to create a
demand for the Products worldwide, and to increase and extend its business in
the manufacture, sale and marketing of the Products worldwide.
3. REPRESENTATIONS AND WARRANTIES.
3.1 Licensor hereby warrants and represents to Licensee as
follows:
(a) Licensor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Minnesota.
(b) This Agreement has been duly authorized, executed and
delivered by Licensor and constitutes a valid and binding obligation of
Licensor, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. The execution, delivery and performance of this Agreement by
Licensor and the consummation of the transactions contemplated hereby do
not and will not conflict with or result in any material breach of any
of the provisions of, or constitute a material default under, or result
in a material violation of, or require any authorization, consent or
approval, under the provisions of such party's Articles of Incorporation
or Bylaws or any other agreement or instrument to which such party is
bound or affected, or to he best of Licensor's knowledge, any law,
statute, rule, regulation, judgment order or decree to which such party
is subject.
(c) Licensor owns all the rights of Jerome J. Licari, Ph-D and
all other employees, agents, consultants or representatives of Licensor
with respect to the Products, Licensed Patents and Know-how.
(d) Licensor has filed the patent applications listed on
Schedule 1.3.
(e) To Licensor's knowledge, the Products, Licensed Patents and
Know-how do not infringe on any patent, copyright or other intellectual
property right of any third party.
(f) Licensor has not received notice of any claims, actions,
suits or proceedings pending or threatened effecting Licensor, the
Licensed Patents or Know-how which, if adversely determined, would have
a material adverse effect upon Licensee's ability to manufacture, have
manufactured, use or sell the Products or otherwise practice the rights
and technology licensed to Licensee by Licensor under this Agreement
and, to the best of Licensor's knowledge, there is no reasonable basis
for anyone to bring such claims, actions, suits or proceedings.
(g) Licensor has not received any claim from any third-party
proceedings relating to the Licensed Patents, Know-how, or the Products
which are based upon infringement of any patent or misappropriation or
misuse of trade secrets.
(h) Licensor represents that the product, in its current form,
is manufacturable in quantities sufficient enough to meet the sales
levels required for the minimum guaranteed royalties.
(i) That certain License Agreement between Licensor and Johnson
& Johnson/Merck Consumer Pharmaceuticals Company ("JJMCP"), dated March
31, 1997, was terminated effective June 25, 1997, and Licensor retains a
royalty-free unrestricted right to use any information concerning the
manufacture, formulation and use of the Licensed Products not generally
known to the public, and developed by JJMCP during the term of such
agreement (other than information covered by any published patent or
patent application).
<PAGE>
3.2 Licensee hereby warrants and represents to Licensor as
follows:
(a) Licensee is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) This Agreement has been duly authorized, executed and
delivered by Licensee and constitutes a valid and binding obligation of
Licensee, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. The execution, delivery and performance of this Agreement by
Licensee and the consummation of the transactions contemplated hereby do
not and will not conflict with or result in any material breach of any
of the provisions of, or constitute a material default under, or result
in a material violation of, or require any authorization consent or
approval, under the provisions of Licensee's Certificate of
Incorporation or Bylaws or, to the best of Licensee's knowledge, any
other agreement or instrument to which such party is bound or affected,
or any law, statute, rule, regulation, judgment order or decree to which
such party is subject.
4. CONSIDERATION AND REPORTS.
4.1 Royalties. Licensee agrees to pay to Licensor royalties as
follows based on the Gross Revenues from the sale of Products: (a) [CONFIDENTIAL
TREATMENT REQUESTED]% of Gross Revenues until royalties have been paid on an
aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross Revenues, then
(b) [CONFIDENTIAL TREATMENT REQUESTED]% of Gross Revenues until royalties have
been paid on an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross
Revenues, and then (c) [CONFIDENTIAL TREATMENT REQUESTED]% of all Gross Revenues
in excess of an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED]. The
royalty provided for in this Subsection 4.1 shall be reduced to [CONFIDENTIAL
TREATMENT REQUESTED]% of the otherwise applicable rate, on a country-by-country
basis if no Licensed Patent issues in such country.
4.2 Quarterly Payments. All royalties due Licensor from Licensee
hereunder shall be payable on a Contract Quarterly basis. Within forty-five (45)
days after the end of each Contract Quarter during the term of this Agreement,
Licensee shall pay to Licensor, by wire transfer to an account designated
pursuant to Section 10.4, the royalty due Licensor under Subsection 4.1 through
the end of the preceding Contract Quarter and shall furnish Licensor with a
written statement setting forth the number of Products sold and the Gross
Revenues received during such Contract Quarter, and the resulting amount of the
royalty due Licensor under Subsection 4.1.
4.3 Minimum Royalties.
(a) To maintain its rights hereunder, Licensee shall pay to
Licensor minimum royalties as follows in the event that the Products may
be marketed and sold without a prescription:
<TABLE>
<CAPTION>
Minimum Royalty Payment Minimum Royalty Payment
Contract Year* Per Contract Year per Contract Quarter
- -------------- ----------------------- -----------------------
<S> <C> <C>
Year 1 $[CONFIDENTIAL TREATMENT REQUESTED] $[CONFIDENTIAL TREATMENT REQUESTED]
Year 2 [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
Year 3** [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
</TABLE>
* Twelve-month periods beginning on the Contract Year.
** Through the Contract Year of the expiration date of the last of the
Licensed Patents or if no Licensed Patent issues, December 26, 2015.
<PAGE>
(b) In the event the royalty is reduced pursuant to Subsection
4.1 above, the minimum royalties provided for in Subsection 4.3(a) shall
be reduced by [CONFIDENTIAL TREATMENT REQUESTED] in each Contract Year,
pro rata on a country-by-country basis.
4.4 Minimum Royalty Payment. Licensee shall pay Licensor within
forty-five (45) days after the end of each Contract Quarter, by wire transfer to
an account designated pursuant to Section 10.4, an amount equal to the minimum
royalties payable pursuant to the terms of Subsection 4.3 for the Contract
Quarter then ended, less: (a) the aggregate amount of Earned Royalties actually
paid to Licensor pursuant to the terms of Subsections 4.1 and 4.2 for the
Contract Quarter then ended; and (b) any Earned Royalties paid to Licensor
during the prior Contract Quarters in the current Contract Year that exceed the
amount of cumulative minimum royalties payable for those Contract Quarters;
provided that in no event shall such deductions reduce the payment to Licensor
in any Contract Year below the then applicable minimum annual royalty payable
under 4.3 of this Agreement. Licensee's failure to pay any and all amounts
payable under the preceding sentence within thirty (30) days after receipt of
written notice from Licensor that such amounts have not been timely paid shall
render the licenses granted hereunder void and thereupon, Licensee shall have no
further rights or interests of any kind or nature with respect to the Products,
Know-how, License or Patents and Licensee shall take any and all action that
Licensor may request to further document the provisions hereof. In the event
that any law, statute, regulation, rule, guideline, ruling or decision of any
governmental or regulatory agency prevents Licensee from marketing or offering
Products for sale, the minimum royalty payment will be suspended until such time
that Licensee is no longer prevented from marketing or offering Products for
sale, such suspension to be determined pro rata on a country-by-country basis.
4.5 Late Payment. Licensee shall have ten (10) days to make any
late payments hereunder, without interest. Thereafter, Licensee shall pay a late
payment fee to Licensor calculated at a variable rate of 2% over the prime per
annum interest rate as set from time to time by Norwest Bank Minneapolis, N.A. ,
Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that are at
any time overdue and payable to Licensor under this Agreement, such interest
being calculated on each such overdue amount from the date when such amount
became due to the date of actual payment thereof. Such late payment fee shall be
in addition to and not in lieu of any and all other rights or remedies that
Licensor may have under this Agreement or law relating to a default by Licensee
under this Agreement.
4.6 Records. During the term of this Agreement and for three (3)
years after termination of this Agreement, Licensee shall at all times maintain
accurate and up-to-date records containing complete data from which amounts due
to Licensor under this Agreement may be readily calculated. Further, Licensee
shall preserve and permit examination of such records by Licensor's
representatives at reasonable intervals and under reasonable conditions during
the term of this Agreement and for three (3) years thereafter and, upon request,
shall supply to Licensor's representatives all information useful in making a
proper audit and verification of Licensee's performance of its obligations under
this Agreement.
4.7 Underpayment. If Licensor determines by audit and inspection
of Licensee's books and records that Licensee has failed to pay all royalties
due under Subsection 4.1, Licensee shall pay Licensor 105% of such additional
royalties as may be due, plus interest thereon. If the amount of underpayment
exceeds 5% of the royalties due under Subsection 4.1, then Licensor shall, in
addition to any other remedies available to it, recover from Licensee the
reasonable costs incurred in making any such audit and inspection pursuant to
Subsection 4.6 hereof which revealed such shortfall and Licensee shall pay
Licensor 105% of such additional royalties, plus interest thereon.
5. INDEMNIFICATION.
5.1 Indemnification by Licensor. Licensor shall indemnify and
hold Licensee harmless from and against any and all claims, damages, costs
(including reasonable attorneys' fees), judgments and liabilities of any kind or
nature arising out of any third party claim of (a) any breach by Licensor of any
of its warranties, representations and covenants under this Agreement or (b) any
misuse by Licensor of the patent process or fraud by Licensor on the patent
office or notice by Licensor before the date hereof of a claim by any party of a
prior or superseding right to practice the art of and commercialize the
Products.
<PAGE>
5.2 Indemnification by Licensee. Licensee shall indemnify and
hold Licensor harmless from and against any and all claims, damages, costs
(including reasonable attorneys'.fees), judgments -and liabilities of any kind
or nature: (a) arising out of any third party claim of the breach by Licensee of
any of its warranties, representations and covenants under this Agreement; or
(b) arising out of any actual or alleged defect in a Product.
6. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes
aware of activity on the part of any third party which may constitute
infringement of the Licensed Patents, or any other intellectual property rights
with respect to which Licensee is granted a license hereunder, Licensee shall
give Licensor written notice thereof. Upon reasonable request by Licensor,
Licensee shall, at its sole expense, initiate and thereafter diligently maintain
reasonable efforts to prevent and abate such infringement, including the
initiation of an appropriate civil action for infringement and the taking of
such other action as may be necessary or appropriate, to enforce the Licensed
Patents or other intellectual property rights with respect to -which Licensee is
granted a license hereunder. In such event, (i) Licensor will permit the use of
its name in, and as a party to, all such suits and execute all pleadings,
documents and other papers necessary or appropriate in conjunction therewith and
(ii) Licensee shall receive the full benefits of any action it takes pursuant to
this subsection, including retaining all sums recovered in any such suit or in
settlement thereof after paying Licensor the Earned Royalties which shall be
calculated from the amount of Gross Revenues, if any, asserted by Licensee to
support any award of compensatory damages (as opposed to punitive or any other
damages). Licensor may, at its option and its cost and expense, participate in
meetings with Licensee and/or its counsel and receive all pleadings, documents
and other related papers useful for the purpose of keeping Licensor informed of
the status of any proceedings commenced by Licensee pursuant to this Section 6.
7. TERM AND TERMINATION.
7.1 Term. This Agreement shall commence on the effective date
hereof and shall expire, unless earlier terminated pursuant to Subsections 4.8,
7.2 or 7.3 of this Agreement, upon the later of (a) the expiration of the last
of the Licensed Patents to expire or (b) December 26, 2015.
7.2 Termination by Licensor. If Licensee defaults in any of its
obligations under this Agreement, Licensor shall have the right to terminate
this Agreement by giving thirty (30) days' written notice of termination
specifying the reason for termination, provided that such notice will be of no
effect and termination will not occur if the specified default is cured prior to
the expiration of said thirty (30) day notice period.
7.3 Termination by Licensee. (a) This Agreement may be
terminated by Licensee at any time at will, with or without cause, by the giving
of at least ninety (90) days' written notice to Licensor by Licensee, in which
event such license shall terminate upon the effective date stated in any such
notice. In the event of the termination of any such license, neither Licensor
nor Licensee shall have any further obligation to the other party hereunder
except as expressly provided in Sections 7.4 and 8.1 below.
(b) Upon the termination of any license granted under this
Agreement, Licensee may, after the effective date of such termination,
sell any of its (i) completed Products, (ii) Products then in the
process of manufacture and (iii) Products with respect to which
manufacture has been committed at the time of termination by reason of
either (x) any contracts for the purchase of materials to be used in the
manufacture of such Products or (y) any contract for the sale of such
Products. All such sales and uses shall be subject to the royalty
provisions of Section 4 of this Agreement as though the termination of
this Agreement had not occurred.
<PAGE>
(c) Except as expressly provided in Subsection 7.3(b), after
termination of this Agreement, Licensee may not use develop, market or
sell the Products, Know-how, or Licensed Patents in any way or manner
that would violate any rights of Licensor and all rights with respect to
the Licensed Products, Know-how or Licensed Patents shall revert to
Licensor. In addition, Licensee shall assign to Licensor, and hereby
does, effective only upon such termination, any and all (i) improvements
to the Licensed Products, Know-how or Licensed Patents conceived or
reduced to practice during the term of this Agreement and (ii)
trademarks for the Licensed Products (other than master brand trademarks
of Licensee which shall be retained by Licensee). Licensee shall take
any and all steps reasonably requested by Licensor to fully document the
complete vesting of such rights in Licensor upon any such termination.
7.4 Continued Obligations. Termination shall not relieve or
release either party from its obligations to make any payment which may be owing
to the other under the terms of this Agreement or from any other liability which
either party may have to the other arising out of the terms of this Agreement.
Additionally, notwithstanding anything contained herein to the contrary,
Sections 3, 4 (including Subsection 4.8 to the extent then exercised), 5 and 8.2
shall survive termination of this Agreement and remain in full force and effect;
provided, that Licensor and Licensee hereby acknowledge that they may not bring
claims against one another based upon the representations and warranties
contained in Section 3, except to the extent such representations and warranties
are not accurate as of the date hereof.
8. LICENSEE'S UNDERTAKINGS.
8.1 Licensing Fee and Payment. Licensee will pay to Licensor the
sum of $[CONFIDENTIAL TREATMENT REQUESTED] as a license fee. The license fee
will be payable to, Licensee, by wire transfer to an account designated pursuant
to Section 10.4, as follows:
(a) $[CONFIDENTIAL TREATMENT REQUESTED] at the time of execution
of this License Agreement.
(b) $[CONFIDENTIAL TREATMENT REQUESTED] at the beginning of each
of the next three calendar quarters. If this Agreement is terminated by
Licensee prior to the payment of all license fees under this Section
8.1, the remaining payments shall be paid on or before the effective
date of such termination. All license fees shall be non-refundable. Of
the total $[CONFIDENTIAL TREATMENT REQUESTED] license fee,
$[CONFIDENTIAL TREATMENT REQUESTED] shall be set off against and reduce
the royalty payments to be made to Licensor under Section 4 of this
Agreement. Such credit shall be applied at the rate of [CONFIDENTIAL
TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of
the excess of running royalties payable under Section 4.1 over the
minimum royalties payable under Section 4.3 in any Contract Quarter.
8.2 Confidentiality. Licensee shall maintain the confidentiality
of Licensor's confidential information, both during and after the term of this
Agreement. After this Agreement is terminated, Licensee shall not use any of
Licensor's confidential information for any purpose that is not specifically
provided for in Subsection 7.3(b) of this Agreement.
8.3 Press Release. Upon launch of the first Licensed Product,
Licensee shall issue a press release, reasonably satisfactory to Licensor, which
shall, in part, acknowledge Onesta's and/or Licari's role in developing the
Licensed Products.
9. LICENSOR'S UNDERTAKINGS.
9.1 Disclosure of Improvements. Licensor agrees to promptly
disclose to Licensee any improvement, enhancement or modification to the
Products that Licensor may develop during the term of this Agreement or any
other inulin-based soluble fiber supplement products.
<PAGE>
10. MISCELLANEOUS.
10.1 Force majeure. Neither party shall be responsible for any
delay or failure in the performance of any obligation hereunder due to strikes,
lockouts, fires, floods, acts of God, embargoes, wars, riots, or act or order of
any government or governmental agency; provided, however, nothing set forth in
this Subsection 10.1 shall be construed to relieve Licensee of the requirement
that it pay minimum royalties pursuant to Subsections 4.3 and 4.4 hereof.
10.2 Waiver. The waiver or failure of either party to enforce
the terms of this Agreement in one instance shall not constitute a waiver of
said party's right under this Agreement with respect to other violations.
10.3 Remedies. The election by either party of any particular
right or remedy shall not be deemed to exclude any other right or remedy and all
rights and remedies of either party shall be cumulative. The parties agree that,
in addition to any other relief afforded under the terms of this Agreement or by
law, each party shall have the right to enforce this Agreement by injunctive or
mandatory relief to be issued against the other party, it being understood that
both damages and specific performance shall be proper modes of relief and are
not to be considered as alternative remedies.
10.4 Notices. All notices and replies thereto required hereunder
shall be in writing, signed by the party giving notice, placed in an envelope
and either delivered by hand or sent by facsimile or registered mail, postage
prepaid, return receipt requested, and properly addressed to the other party.
Notices sent by mail shall be deemed received on the date of receipt indicated
by the receipt verification provided by the United States Postal Service.
Notices sent by facsimile shall be deemed received on the date indicated on the
sender's confirmation report. Notice shall be given, mailed or sent to the other
party at the following addresses or at such other address as may be given by
proper notice:
If to Licensor: Onesta Nutrition, Inc.
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
Attn: Jerome J. Licari, Ph.D
Fax No.: [CONFIDENTIAL TREATMENT REQUESTED]
Wire transfer
information: Anchor Bank of Wayzata
1055 Wayzata Boulevard
Wayzata, MN 55391
ABA Routing No: [CONFIDENTIAL TREATMENT
REQUESTED]
Account No: [CONFIDENTIAL TREATMENT
REQUESTED]
With a copy to: Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402-1498
Attn: Karin A. Keitel
Fax No.: 612-340-8827
If to Licensee: CNS, Inc.
4400 West 78th Street
Minneapolis, MN 55435
Attn: Daniel E. Cohen, M.D.
Fax No.: 612-820-6697
<PAGE>
With a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2205
Attn: Patrick Delaney
Fax No.: 612-371-3207
Either party hereto may designate any other address for notices or account for
wire transfer given hereunder by written notice to the other party given at
least ten (10) days prior to the effective date of such change.
10.5 Entire Agreement. This Agreement represents the entire
agreement between the parties with respect to the subject matter hereof; there
are no oral promises, representations or warranties. No modification of this
Agreement or waiver of any of its terms shall be binding upon the parties unless
said modification or waiver is in writing, signed by both parties, and states
that it is an amendment to this Agreement.
10.6 Parties in Interest. This Agreement shall inure to the
benefit of, be binding upon, and be enforceable against the parties hereto,
their respective successors and assigns.
10.7 Governing Law. This Agreement shall be governed by,
construed and enforced under the internal laws (and not the laws of conflicts)
of the State of Minnesota. Licensee irrevocably submits to the jurisdiction of
the Minnesota state courts and federal courts sitting in Minneapolis or St.
Paul, Minnesota in connection with any action or proceeding arising out of or
relating to this Agreement and agrees that all claims in respect of such action
or proceeding shall be heard and determined in any such court.
10.8 Severability. If any portion of this Agreement is held
invalid by the final judgment of any court of competent jurisdiction, such
portion shall be deemed revised or "blue lined" so that it is enforceable to the
fullest extent possible under applicable law and the remaining provisions shall
remain in full force and effect as if such invalid provision had not been
included herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNS, INC.
By
--------------------------------------
Its:
----------------------------------
ONESTA NUTRITION, INC.
By
--------------------------------------
Its:
----------------------------------
<PAGE>
LIST OF SCHEDULES
Number Description
------ -----------
1.1 Products
1.3 Licensed Patents
<PAGE>
SCHEDULE 1.1
DESCRIPTION OF PRODUCTS
Soluble fiber supplement product covered by the Licensed Patents or made
or developed through the use of Know-How.
<PAGE>
SCHEDULE 1.3
DESCRIPTION OF LICENSED PATENTS
U.S. Patent Application Serial No. 60/009,231 filed December 26, 1995, "Dietary
Fiber Delivery System"
U.S. Patent Application Serial No. 08/771,960 filed December 23, 1995, "Dietary
Fiber Delivery System"
PCT Patent Application PCT/US 96/20245 filed December 23, 1996, "Dietary Fiber
Delivery System"
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>5
<DESCRIPTION>LICENSE AGREEMENT
<TEXT>
Exhibit 10.10
[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY
WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]
LICENSE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and effective as of this 12th
day of March, 1999 by and between CNS, Inc., a Delaware corporation
("Licensee"), and WinEase, L.L.C., a Minnesota limited liability company
("Licensor").
RECITALS
WHEREAS, Licensor is now and has been engaged in developing certain
technology related to animal care and specifically has developed products and
methods directed to the support of nasal passages for animals, including the
"Products" (as defined in Paragraph 1.1 below);
WHEREAS, Licensor owns certain patents, pending patent applications and
Know-how (as defined in Paragraph 1.4) related to the Products and methods,
these patents and pending applications listed in the attached Schedule 1.5, and
Licensor is willing to license such patents, pending applications and Know-how
to Licensee exclusively and in accordance with the terms of this Agreement;
WHEREAS, Licensor has also developed certain trademarks related to the
Products and owns certain trademark registrations and pending trademark
applications as listed in the attached Schedule 1.6, and Licensor is willing to
license such trademarks including the trademark registrations and pending
applications in accordance with the terms of the Trademark License Agreement
attached hereto as Exhibit A;
WHEREAS, Licensee desires to obtain an exclusive, worldwide,
royalty-bearing license from Licensor under all of those certain patents, patent
applications, Know-how, Product Improvements (as defined in Paragraph 1.3),
trademarks, and trademark applications relating to the development, manufacture,
sale and use of the Products and Licensed Methods (as defined in Paragraph 1.2).
NOW, THEREFORE, in consideration of these premises, and the mutual
covenants and agreements hereinafter set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. GENERAL DEFINITIONS. As used herein, the following terms shall be
defined in the manner set forth below:
1.1 Products. The term "Products" shall mean the nasal support devices
for animals and parts and components thereof and related thereto and any other
products similar in function and purpose developed by Licensor or any of its
employees, consultants, agents or representatives prior to or during the term of
this Agreement based upon or using the Know-how or any claim within Patent
Rights. The term Products also specifically includes any product that is made by
a Licensed Method or is intended to be used in accordance with a Licensed
Method.
1.2 Licensed Methods. The term "Licensed Methods" shall mean any
methods or techniques developed by Licensor of making or using the nasal support
devices for animals and parts and components thereof and related thereto and any
other products similar in function and purpose developed by Licensor or any of
its employees, consultants, agents or representatives prior to or during the
term of this Agreement based upon or using the Know-how or any claim within the
Patent Rights.
1.3 Product Improvements. The term "Product Improvements" shall mean
any improvement or enhancement to the Products or any similar product conceived
of by Licensor or any of its officers, employees, consultants, agents or
representatives after the effective date of this Agreement which utilize any of
the Know-how, Patent Rights or Licensed Methods.
<PAGE>
1.4 Know-how. The term "Know-how" shall mean any and all of the
information of any description directly relating to the Products and Licensed
Methods developed by or for Licensor at any time prior to or after the effective
date of this Agreement and connected or associated with the Patent Rights,
including, but not limited to, any and all tangible and intangible information,
technology, documents and materials in the possession and control of Licensor
(prior to the term of this Agreement), necessary or desirable in order to enable
Licensee to utilize fully the rights granted by Licensor to Licensee hereunder
and shall include, without limiting the foregoing, the ideas, concepts,
confidential information, trade secrets and techniques, as well as all the
materials, documents, manuals, schematics, blueprints, specifications, patterns,
art work, bills of materials and technical specifications and other information
owned or controlled by Licensor relating to the Products, Patent Rights and
Licensed Methods.
1.5 Patent Rights. The term "Patent Rights" shall mean the following:
(i) the United States and foreign patent(s) and patent application(s) listed on
the attached Schedule 1.5 relating to the Products and Licensed Methods; (ii)
all future United States or foreign patent applications related to the Products,
Product Improvements and Licensed Methods and any patents arising therefrom;
(iii) the rights, patents and patent applications, if any, in any country or
jurisdiction in the world corresponding to the United States patents or patent
applications; and (iv) any division, continuation, continuation-in-part,
divisional, re-examined, reissued or extended letters patent, applications and
petty patents, utility models, utility model conversions, inventor's
certificates relating to the inventions claimed in any of the foregoing United
States patents and patents pending and foreign patent rights, which may be
developed, acquired or controlled by Licensor during the term of this Agreement
and with respect to which Licensor has or shall have the right to grant the
license hereinafter provided.
1.6 Trademark Rights. The term "Trademark Rights" shall mean those
trademarks procured by Licensor and listed on the attached Schedule 1.6 for use
in connection with Products and Licensed Methods, including all current and
future registrations and pending trademark applications in the United States and
foreign countries that are related to those trademarks listed in Schedule 1.6.
The term Trademark Rights also includes any new trademarks that may be developed
by Licensor for application to the Products or the Licensed Methods.
1.7 Contract Year and Quarter. The term "Contract Year" shall mean each
period of twelve (12) consecutive months commencing on the first day of the
first month of the Contract Quarter following the date Licensee elects, in its
sole discretion, to commercially introduce the Products (the "Product Acceptance
Date"); provided, however, the Product Acceptance Date shall in no event be
later than September 1, 1999 unless otherwise agreed by both parties. The term
"Contract Quarter" shall mean each period of three (3) consecutive months
commencing on the first day of (i) July, 1999 in the event that the Product
Acceptance Date occurs on or before August 15, 1999; or (ii) October, 1999 in
the event that the Product Acceptance Date occurs after August 15, 1999.
1.8 Net Sales The term "Net Sales" shall mean the total amount
collected by Licensee or any sublicensee for sales of the Products to third
parties after a deduction of any: (i) sales, use or excise taxes; (ii) freight
or shipping charges; (iii) duty or insurance included therein; (iv) credits or
prepayments due to rejections; (v) defects or returns; and (vi) amounts for
trade and quantity discounts actually allowed and taken.
1.9 Earned Royalty. The term "Earned Royalty" shall mean the royalty
payable to Licensor on the Net Sales from the sale of the Products.
2. LICENSING AND COMMERCIALIZATION.
2.1 Patent Rights and Know-how License. Licensor hereby grants to
Licensee a sole and exclusive, worldwide, royalty-bearing license, subject to
Paragraph 2.3 below, to manufacture, have others manufacture for it, use, sell,
distribute, export, or otherwise dispose of the Products and to practice the
Licensed Methods to make or use the Products under the Patent Rights and the
Know-how of Licensor.
<PAGE>
2.2 Confidentiality of Know-how. Except as required by law or by a
governmental agency or as may otherwise be necessary or desirable for Licensee
to fully utilize the rights granted under this Agreement, Licensee agrees that
it will not, directly or indirectly, disseminate, disclose or otherwise make
available to any third party Know-how without the prior consent of Licensor and
will take all steps reasonably necessary to carry out this obligation so long as
Licensor has a reversionary right to such Know- how by the terms of this
Agreement, or unless such Know-how is already known to Licensee or until such
Know-how is, or becomes, generally known to the public or is subsequently
received by Licensee in good faith and without any restrictions as to disclosure
from a third party which has the right to make such disclosure. Notwithstanding
the foregoing, Licensee may disclose any Know-how to its directors, officers,
employees, representatives and agents who may need to know such information.
2.3 Sublicenses. Except as may be otherwise necessary or desirable to
manufacture or have manufactured the Products or any components therefore,
Licensee may not sublicense to any third party, including affiliates of
Licensee, any rights granted by Licensor to Licensee hereunder in the United
States. Licensee may, however, sublicense any such rights to a third party or
affiliates outside the United States for selling the Products outside the United
States and without the right to import the Products into the United States. In
the event of any sublicense granted under this Paragraph 2.3, Licensee shall (1)
retain all rights and be responsible for all obligations under this Agreement,
and (2) enter into a written agreement with any such sublicensee (x) with a term
no greater than the term of this Agreement, (y) with rights granted to any such
sublicensee which are no greater than the terms of this Agreement, and (z)
pursuant to which Licensee shall use reasonable business efforts to impose upon
such sublicensees similar obligations as Licensor has imposed upon Licensee
under this Agreement.
2.4 Assignments. Licensee may assign, convey or transfer any and all of
its rights under this Agreement ("Transfer") to a successor in interest of
substantially all of the assets or capital stock of Licensee (the "Acquirer").
In the event of such a Transfer, any such Acquirer shall assume all of the
obligations of Licensee hereunder and this Agreement shall be binding upon and
inure to the benefit of such Acquirer. Except as otherwise set forth in or
contemplated by Paragraph 2.3 above, no other Transfer may be made by Licensee
or the Acquirer unless Licensee or the Acquirer grants Licensor an exclusive
right of first refusal to purchase all of the rights conferred under this
Agreement in accordance with the following procedure:
(a) First, Licensee or the Acquirer, as the case may be, shall
give Licensor written notification of its intention to enter
into a transaction which operates to effectuate a Transfer (a
"Transaction") and shall not enter into any such Transaction
without first disclosing all material information about the
proposed Transaction to Licensor and offering to enter into a
Transaction on substantially identical terms with Licensor;
and then
(b) Second, Licensor shall, unless otherwise waived in writing by
Licensor, have a period of thirty (30) days after receipt of
written notification of any proposed Transaction to exercise
its right of first refusal and enter into a Transaction on
substantially identical terms. The right of first refusal
procedure outlined in this Paragraph 2.4 shall be repeated
prior to entering into by Licensee or the Acquirer of any
Transaction that is (a) on terms less favorable in a material
respect to the Licensee or the Acquirer than specified in an
earlier written notice to Licensor, or (b) with a party other
than that specified in an earlier written notice.
2.5 Option for Product Improvements. Licensor shall own all of its
Product Improvements. Upon Licensor's conception and reduction to practice of
any Product Improvement, Licensor will disclose such Product Improvement to
Licensee in writing within a reasonable period of time, and subsequently,
Licensee shall have the first option to include any such Product Improvement
within the exclusive license granted above in Paragraph 2.1. Licensee shall make
its election under this option within thirty (30) days after disclosure from
Licensor.
2.6 Patent Procurement and Costs. Licensee shall be solely responsible
for and pay all patent costs and expenses (including reasonable attorneys' fees)
to be incurred during the term of this Agreement in obtaining, prosecuting, and
maintaining any of the Patent Rights issued or to be issued under the law of any
country or jurisdiction identified on Schedule 2.6, including filing,
prosecution, working and maintenance costs and taxes. Notwithstanding the above,
Licensor shall direct and control the procurement and maintenance of the Patent
Rights and shall select patent counsel for such procurement or maintenance
(which counsel is subject to the reasonable consent of Licensee); provided,
however, that Licensee shall have
<PAGE>
the right to terminate such patent counsel if Licensee has a reasonable basis
for not being satisfied with such counsel's efforts or results, and in such
event Licensee shall select a new patent counsel (which counsel is subject to
the reasonable consent of Licensor). With respect to the procurement and
maintenance of any of the Patent Rights in countries not identified on Schedule
2.6, Licensor shall not be responsible for or required to pay any patent costs
or expenses unless it has given its prior written consent to the procurement of
such Patent Rights in any such country.
2.7 Trademark Licensing. The Trademark Rights are licensed pursuant to
the "Trademark License Agreement" that is attached to this Agreement as Exhibit
A and made a part hereof.
3. REPRESENTATIONS AND WARRANTIES.
3.1 Licensor hereby warrants and represents to Licensee as follows:
(a) Licensor is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of
Minnesota.
(b) This Agreement has been duly authorized, executed and
delivered by Licensor and constitutes a valid and binding obligation of
Licensor, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as and to the extent that the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles. The execution, delivery and performance of this
Agreement and the agreements attached hereto by Licensor and the
consummation of the transactions contemplated thereby have been
authorized by all necessary corporate action and do not and will not
conflict with or result in any material breach of any of the provisions
of, or constitute a material default under, or result in a material
violation of, or require any authorization, consent or approval, under
the provisions of any organizational charter, articles, bylaw, member
control, operating or other agreement, contract or instrument to which
Licensor is bound or affected, or any law, statute, rule, regulation,
judgment order or decree to which Licensor is subject.
(c) Licensor is the sole and exclusive owner of all the rights
of James R. Chiapetta, Edward L. Blach and all other employees, agents,
consultants or representatives of Licensor with respect to the
Products, Licensed Methods, Patent Rights, Know-how and Trademark
Rights.
(d) Licensor has been allowed and the issue fee has been paid
for the United States patent(s) as listed on Schedule 1.5 covering the
Products or Licensed Methods. Additional United States and
international patent applications that are directed to the Products and
Licensed Methods are currently pending as set forth on Schedule 1.5.
Licensor has no knowledge of information that would render any of the
listed patent applications (or patents granted therefrom) invalid or
unenforceable.
(e) Licensor has good and marketable title to the Trademark
Rights, Patent Rights and Know-how, free and clear of any and all
liens, pledges, claims, licenses, assignments, conditional sales
contracts, agreements or encumbrances of any kind that would impair
Licensor's ability to grant the licenses under this Agreement or the
Trademark License Agreement.
(f) Licensor has no knowledge that any of the Trademark
Rights, Products, Licensed Methods, Patent Right or Know-how infringes
on any patent, copyright, trademark, trade secret, trade dress or any
other intellectual property right of any third party.
(g) None of Licensor's undertakings or activities in
connection with the development, manufacture and sale of the Products
involve the wrongful use of the proprietary rights or assets of any
third party or give rise to any claim by any third party of ownership
or rights in the Trademark Rights, Patent Rights, Licensed Methods or
Know-how.
<PAGE>
(h) Licensor has not received notice of any claims, actions,
suits or proceedings pending or threatened effecting Licensor, the
Trademark Rights, the Patent Rights, the Licensed Methods or the
Know-how, which, if adversely determined, would have a material adverse
effect upon Licensee's ability to manufacture, have manufactured, use
or sell the Products or otherwise practice the rights and technology
licensed to Licensee by Licensor under this Agreement and, to
Licensor's knowledge, there is no reasonable basis for anyone to bring
such claims, actions, suits or proceedings.
(i) Licensor has not received any claim from any third-party
proceedings relating to the Trademark Rights, Licensed Methods, Patent
Rights or Know-how, or that the Products are based upon infringement of
any patent or misappropriation or misuse of trade secrets or any other
intellectual property right.
3.2 Licensee hereby warrants and represents to Licensor as follows:
(a) Licensee is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) This Agreement has been duly authorized, executed and
delivered by Licensee and constitutes a valid and binding obligation of
Licensee, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. The execution, delivery and performance of this Agreement
and the agreements attached hereto by Licensee and the consummation of
the transactions contemplated thereby do not and will not conflict with
or result in any material breach of any of the provisions of, or
constitute a material default under, or result in a material violation
of, or require any authorization, consent or approval, under the
provisions of Licensee's Certificate of Incorporation or Bylaws or
other agreement, contract or instrument to which Licensee is bound or
affected, or any law, statute, rule, regulation, judgment order or
decree to which Licensee is subject.
4. PAYMENTS, ROYALTIES AND REPORTS.
4.1 Initial License Fee. On the date hereof, Licensee will pay to
Licensor the sum of $[CONFIDENTIAL TREATMENT REQUESTED] as an initial license
fee.
4.2 Additional License Fees. Unless this Agreement is earlier
terminated or notice of termination is furnished in accordance with Paragraph
7.3 hereof, Licensee will pay to Licensor additional license fees in accordance
with the following:
(a) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the
Product Acceptance Date;
(b) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the
earlier of: (i) six (6) months after the Product Acceptance Date; or
(ii) Net Sales from the sales of Products equal or exceed
$[CONFIDENTIAL TREATMENT REQUESTED] in the aggregate; and
(c) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the
earlier of: (i) twelve (12) months after the Product Acceptance Date;
or (ii) aggregate Net Sales from the sales of Products equal or exceed
$[CONFIDENTIAL TREATMENT REQUESTED] U.S. in the aggregate.
4.3 Royalties on Account of Net Sales.
(a) Licensee agrees to pay to Licensor royalties as follows
based on the annual Net Sales from the sale of Products which are
manufactured, used, sold or imported into a jurisdiction in which
Licensor owns or controls an unexpired granted patent of Patent Rights
containing a valid claim covering such manufacture, use, sale or
importation: (a) [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales until
royalties have been paid on a total of $[CONFIDENTIAL TREATMENT
REQUESTED] U.S., then (b) [CONFIDENTIAL TREATMENT REQUESTED]% of Net
Sales until royalties have been paid on a total of $[CONFIDENTIAL
TREATMENT REQUESTED] U.S., then (c) [CONFIDENTIAL TREATMENT REQUESTED]%
of Net Sales until royalties have been paid on a total of
$[CONFIDENTIAL TREATMENT REQUESTED] U.S., and then (d) [CONFIDENTIAL
TREATMENT REQUESTED]% of all Net Sales in excess of a total of
$[CONFIDENTIAL TREATMENT REQUESTED] U.S.
<PAGE>
(b) The royalty percentages provided for in Paragraph 4.3(a)
above shall be reduced by [CONFIDENTIAL TREATMENT REQUESTED]
([CONFIDENTIAL TREATMENT REQUESTED]) on account of Net Sales of
Products which are manufactured, used, sold or imported into a
jurisdiction in which Licensor does not own or control an unexpired
granted patent of Patent Rights containing a valid claim covering such
manufacture, use, sale or importation.
(c) In the event that any third party sells or markets a nasal
support device that competes with the Products in a particular
jurisdiction and Licensee is unable to prohibit such competitor from
marketing or selling such a competitive product in the particular
jurisdiction through patent proceedings or other measures set forth in
or contemplated by Section 6, the royalties provided for hereunder
shall be proportionately reduced such that the royalty percentages then
in effect under either Paragraphs 4.3(a) and 4.3(b) above shall be
multiplied by the market share held by Licensee in the particular
jurisdiction as determined by Licensee every six (6) months in a good
faith analysis of the relevant markets and the competitive effect of
such products on Net Sales.
(d) It is further understood and agreed by the parties that a
Product sold and subject to royalty under this Agreement shall not be
subject to more than one royalty payment and that the royalties
provided for under this Agreement shall in no event be reduced to less
than [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales.
4.4 Quarterly Payments. All royalties due Licensor from Licensee
hereunder shall be payable on a Contract Quarterly basis. Within thirty (30)
days after the end of each Contract Quarter during the term of this Agreement,
Licensee shall pay to Licensor the royalty due Licensor under Paragraph 4.3
through the end of the preceding Contract Quarter and shall furnish Licensor
with a written statement setting forth the number of Products sold and the Net
Sales received during such Contract Quarter, and the resulting amount of the
royalty due Licensor under Paragraph 4.3.
4.5 Minimum Royalties. To maintain its rights hereunder, Licensee shall
pay to Licensor minimum royalties after the Product Acceptance Date in
accordance with Paragraph 4.4 and the following:
<TABLE>
<CAPTION>
Minimum Royalty Payment Minimum Royalty Payment
Contract Year* Per Contract Year Per Contract Quarter
- -------------- ----------------- --------------------
<S> <C> <C>
Year 1 $[CONFIDENTIAL TREATMENT REQUESTED] $[CONFIDENTIAL TREATMENT REQUESTED]
Year 2** [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
</TABLE>
*Twelve-month periods beginning on the Contract Year.
**Unless earlier terminated in accordance with Section 7 of this Agreement,
through the Contract Year of the expiration date of the last of the Patent
Rights.
4.7 Minimum Royalty Payment. Licensee shall pay Licensor within thirty
(30) days after the end of each Contract Quarter, an amount equal to (i) the
minimum royalties payable pursuant to the terms of Paragraph 4.5 for the
Contract Quarter then ended, less (ii): (a) the aggregate amount of Earned
Royalties actually paid to Licensor pursuant to the terms of Paragraphs 4.3 and
4.4 for the Contract Quarter then ended; and (b) any Earned Royalties paid to
Licensor during the prior Contract Quarters in the current Contract Year that
exceed the amount of cumulative minimum royalties payable for those Contract
Quarters. Licensee's failure to pay any and all amounts payable under the
preceding sentence within thirty (30) days after receipt of written notice from
Licensor that such amounts have not been timely paid shall render the licenses
granted hereunder void and thereupon, Licensee shall have no further rights or
interests of any kind or nature with respect to the Products, Patent Rights and
Know-how, and Licensee shall take any and all action that Licensor may
reasonably request to further document the provisions hereof. In the event that
any law, statute, regulation, rule, guideline, ruling, order or decision
prevents Licensee from marketing or offering the Products for sale, the minimum
royalty payment will be suspended until such time that Licensee is no longer
prevented from marketing or offering the Products for sale.
<PAGE>
4.8 Late Payment. Licensee shall pay a late payment fee to Licensor for
any Contract Quarter when the royalty amount that is due and payable is not made
within thirty (30) days after the end of that Contract Quarter. The late payment
fee shall be calculated at a variable rate of two percent (2%) over the prime
per annum interest rate as set from time to time by Norwest Bank Minneapolis,
N.A., Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that
are at any time overdue and payable to Licensor under this Agreement, such
interest being calculated on each such overdue amount from the date when such
amount became due to the date of actual payment thereof. Such late payment fee
shall be in addition to and not in lieu of any and all other rights or remedies
that Licensor may have under this Agreement or law relating to a default by
Licensee under this Agreement.
4.9 Records. During the term of this Agreement and for three (3) years
after termination of this Agreement, Licensee shall at all times maintain
accurate and up-to-date records containing complete data from which amounts due
to Licensor under this Agreement may be readily calculated. Further, Licensee
shall preserve and permit examination of such records by Licensor's
representatives or independent auditors at reasonable intervals and under
reasonable conditions during the term of this Agreement and for three (3) years
thereafter and, upon request, shall supply to Licensor's representatives or
independent auditors all information reasonably requested that is useful in
making a proper audit and verification of Licensee's performance of its
obligations under this Agreement and of any sublicensee's performance in
accordance with the terms of this Agreement.
4.10 Underpayment. If Licensor determines by audit and inspection of
Licensee's books and records that Licensee has failed to pay all royalties due
under Paragraph 4.4, Licensee shall pay Licensor one hundred five percent (105%)
of such additional royalties as may be due in addition to the interest as
provided for in Paragraph 4.8 above. If the amount of underpayment exceeds 5% of
the royalties due under Paragraph 4.4, then Licensor shall, in addition to any
other remedies available to it, recover from Licensee the reasonable costs
incurred in making any such audit and inspection pursuant to Paragraph 4.9
hereof which revealed such shortfall.
5. INDEMNIFICATION.
5.1 Indemnification by Licensor. Licensor shall defend, indemnify and
hold Licensee and its shareholders, directors, officers, agents,
representatives, successors and assigns harmless from and against any and all
claims, damages, costs (including reasonable attorneys' fees), judgments, fines,
penalties, losses, diminution in value and liabilities of any kind or nature:
(a) arising out of the breach by Licensor of any of its warranties,
representations and covenants under this Agreement or the Trademark License
Agreement; (b) arising out of any misuse by Licensor of the patent process or
fraud by Licensor on the patent office.
5.2 Indemnification by Licensee. Licensee shall defend, indemnify and
hold Licensor and its shareholders, directors, officers, agents,
representatives, successors and assigns harmless from and against any and all
claims, damages, costs (including reasonable attorneys' fees), judgments, fines,
penalties, losses, diminution in value and liabilities of any kind or nature
arising out of any act of Licensee including, but not limited to, those: (a)
arising out of the breach by Licensee of any of its warranties, representations
and covenants under this Agreement or the Trademark License Agreement; or (b)
arising out of any actual or alleged defect in a Product.
6. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes
aware of activity on the part of any third party which may constitute
infringement of the Patent Rights, or any other intellectual property rights
with respect to which Licensee is granted a license hereunder, Licensee shall
give Licensor written notice thereof. Licensee shall, at its sole discretion and
expense, have the first exclusive right to initiate and thereafter maintain
reasonable efforts to prevent and abate such infringement, including the
initiation of an appropriate civil action for infringement and the taking of
such other action as may determine to be necessary or appropriate to enforce the
Patent Rights or other intellectual property rights with respect to which
Licensee is granted a license hereunder. In such event, (i) Licensor will permit
the use of its name in, and as a party to, all such suits and execute all
pleadings, documents and other papers necessary or appropriate in conjunction
therewith, and (ii) Licensee shall receive the full benefits of any action it
takes pursuant to this Paragraph, including retaining all sums recovered in any
such suit or in settlement thereof after paying Licensor the Earned Royalties
which shall be calculated from the amount of Net Sales, if any, asserted by
Licensee to support any award of compensatory damages (as opposed to
<PAGE>
punitive or any other damages). In the event that Licensee fails or refuses to
take or cause to be taken any such measures against any third party after six
(6) months from the date of receipt of written notice to Licensee by Licensor of
such infringement, Licensor may take such legal action in its own name or in the
name of Licensee (if needed) and at its own expense upon giving fourteen (14)
days advance, written notice of its intention to do so. In this case, all
damages recovered as a result of such action by Licensor shall be and become the
property of Licensor. If either party litigates under this Section 6, the other
party may, at its option and its cost and expense, participate in meetings with
the litigating party and/or its counsel and receive all pleadings, documents and
other related papers useful for the purpose of keeping the other party informed
of the status of any proceedings commenced by the litigating party.
7. TERM AND TERMINATION.
7.1 Term. This Agreement and the Trademark License Agreement shall
commence on the effective date hereof and shall expire, unless earlier
terminated pursuant to Paragraphs 7.2 or 7.3 of this Agreement, upon the
expiration of the last of the Licensed Patents to expire.
7.2 Termination by Licensor. If Licensee is in material default of any
of its obligations under this Agreement, Licensor shall have the right to
terminate this Agreement by giving thirty (30) days' written notice of
termination specifying the reason for termination, provided that such notice
will be of no effect and termination will not occur if the specified default is
cured prior to the expiration of said thirty (30) day notice period.
7.3 Termination by Licensee.
(a) This Agreement and the Trademark License Agreement may be
terminated by Licensee at any time at will, with or without cause, by
the giving of at least ninety (90) days' prior written notice to
Licensor by Licensee in which event any license granted hereunder
shall, except as otherwise set forth in or contemplated by Paragraph
7.3(b) hereof, terminate upon the effective date of the termination
(the "Termination Date") stated in any such notice. In the event of the
termination of any such license, neither Licensor nor Licensee shall
have any further obligation to the other party hereunder except as
expressly provided in Paragraphs 7.3(b), 7.3(c) or 7.4 of this
Agreement below.
(b) Upon termination of any license granted hereunder or under
the Trademark License Agreement, Licensee may, after the effective date
of such termination, sell any of its (i) completed Products, (ii)
Products then in the process of manufacture, and (iii) Products with
respect to which manufacture has been committed at the time of
termination by reason of either (x) any contracts for the purchase of
materials to be used in the manufacture of such Products or (y) any
contract for the sale of such Products, and may, in its sole
discretion, utilize any of the rights granted by Licensor under the
Trademark License Agreement. All such sales and uses shall be subject
to the royalty provisions of Section 4 of this Agreement as though the
termination of this Agreement had not occurred.
(c) Except as expressly provided in Paragraph 7.3(b), after
termination of this Agreement, Licensee may not use develop, market or
sell the Products, Product Improvements, Licensed Methods, Patent
Rights and Know-how, in any way or manner that would violate any rights
of Licensor and Licensee shall take any and all steps reasonably
requested by Licensor to completely vest all rights licensed hereunder
to Licensee back to Licensor upon any such termination. Furthermore,
Licensee may not use any trademark of the Trademark Rights, and all
Trademark Rights shall remain the property of Licensor or will
thereafter be assigned to Licensor. Termination of this Agreement shall
operate to terminate the Trademark License Agreement.
(d) In the event that Licensee terminates this Agreement and
the Trademark License Agreement under this Section 7, Licensee shall,
upon written request of Licensor, deliver to Licensor copies of all
material scientific and marketing research documentation related to or
used in connection with the Products including, but not limited to,
manufacturing sources and technical specifications, reports, surveys,
know-how, trademarks (except the Breathe Right(R) trademark), customer
lists and other information prepared for or by Licensee with respect to
which Licensee shall have the right to deliver; provided, however, that
the delivery of any such information and materials will not impair any
trade secret relating to Licensee's other existing or contemplated
products or be deemed by Licensee to be otherwise confidential in
nature.
<PAGE>
(e) In the event that Licensee terminates this Agreement under
this Section 7, Licensee shall grant to Licensor a limited,
non-exclusive, worldwide, non-royalty bearing license to any and all
improvements to the Products developed by Licensee or any of its
employees or consultants between the date hereof and Termination Date
which Licensee shall have the right to grant; provided, however, that
(i) nothing contained in this Paragraph 7(e) shall be in any way
construed to confer upon Licensor or any third party any rights to such
improvements which may be subject to the proprietary protection of a
party other than Licensee including, without limitation, the rights
granted to Licensee by Creative Integration & Design, Inc. and its
affiliates; (ii) the license granted shall be applicable to the
Products and limited for use in the area of nasal support devices for
animals and no other purpose.
7.4 Continued Obligations. Termination shall not relieve or release
either party from its obligations to make any payment which may be owing to the
other under the terms of this Agreement or from any other liability which either
party may have to the other arising out of the terms of this Agreement.
Additionally, notwithstanding anything contained herein to the contrary,
Sections 3, 5 and 9 shall survive termination of this Agreement and remain in
full force and effect.
8. LICENSEE'S UNDERTAKINGS.
8.1 Exploitation. Licensee hereby agrees that during the term of this
Agreement it will use its best efforts to manufacture, sell and market the
Products, and will exert its best efforts to create a demand for the Products in
appropriate worldwide markets, and to increase and extend its business in the
manufacture, sale and marketing of the Products in appropriate worldwide
markets.
8.2 Distribution. Licensee agrees to undertake and will use its best
efforts to investigate and, if determined by Licensee to be commercially
feasible, develop a direct distribution system whereby the Products may be
marketed directly to the end user.
8.3 Marking. Licensee agrees to apply appropriate patent notices to the
Products and to any product advertisements and packaging.
8.4 Additional Consent or License. In the event that Licensee believes
it to be necessary or desirable to obtain the consent or a license from Creative
Integration & Design, Inc. to practice some or all of the Patent Rights under
this Agreement, the fees paid by Licensee for any such consent or license shall
not affect the royalties set forth in this Agreement. In addition, Licensor
acknowledges and agrees that any and all of the rights granted to Licensee by
Creative Integration & Design, Inc. are not in any way intended to be considered
transferrable or impaired hereunder any circumstances.
9. MISCELLANEOUS.
9.1 Recitals, Schedules and Exhibits Incorporated. The Recitals,
Schedules and Exhibits are true and correct, incorporated herein and made a part
of this Agreement as specifically set forth.
9.2 Force Majeure. Neither party shall be responsible for any delay or
failure in the performance of any obligation hereunder due to strikes, lockouts,
fires, floods, acts of God, embargoes, wars, riots, or act or order of any
government or governmental agency; provided, however, nothing set forth in this
Paragraph 9.2 (except as otherwise set forth in or contemplated by Paragraph 4.7
of this Agreement) shall be construed to relieve Licensee of the requirement
that it pay minimum royalties pursuant to Paragraphs 4.5 hereof.
9.3 Waiver. The waiver or failure of either party to enforce the terms
of this Agreement in one instance shall not constitute a waiver of said party's
right under this Agreement with respect to other violations.
<PAGE>
9.4 Remedies. The election by either party of any particular right or
remedy shall not be deemed to exclude any other right or remedy and all rights
and remedies of either party shall be cumulative. The parties agree that, in
addition to any other relief afforded under the terms of this Agreement or by
law, each party shall have the right to enforce this Agreement by injunctive or
mandatory relief to be issued against the other party, it being understood that
both damages and specific performance shall be proper modes of relief and are
not to be considered as alternative remedies.
9.5 Notices. All notices and replies thereto required hereunder shall
be in writing, signed by the party giving notice, placed in an envelope and
either delivered by hand or sent by facsimile or registered mail, postage
prepaid, return receipt requested, and properly addressed to the other party.
Notices sent by mail shall be deemed received on the date of receipt indicated
by the receipt verification provided by the United States Postal Service.
Notices sent by facsimile shall be deemed received on the date indicated on the
sender's confirmation report. Notice shall be given, mailed or sent to the other
party at the following addresses or at such other address as may be given by
proper notice:
If to Licensor: WinEase, LLC
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
Attn: James R. Chiapetta
Fax No.: [CONFIDENTIAL TREATMENT REQUESTED]
If to Licensee: CNS, Inc.
4400 West 78th Street
Minneapolis, MN 55435
Attn: Daniel E. Cohen, M.D.
Fax No.: (612) 820-6697
With a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2205
Attn: Patrick Delaney
Fax No.: (612) 317-3207
Either party hereto may designate any other address for notices given
hereunder by written notice to the other party given at least ten (10) days
prior to the effective date of such change.
9.6 Entire Agreement. This Agreement, together with the attached
schedules and exhibits, represents the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements and
discussions (whether written or oral); there are no oral promises,
representations or warranties not set forth in this Agreement. No modification
of this Agreement or waiver of any of its terms shall be binding upon the
parties unless said modification or waiver is in writing, signed by both
parties, and states that it is an amendment to this Agreement.
9.7 Parties in Interest. This Agreement shall inure to the benefit of,
be binding upon, and be enforceable against the parties hereto, their respective
successors and assigns.
9.8 Governing Law. The parties hereby irrevocably submit and consent to
the jurisdiction of Minnesota state and federal courts over any action or
proceeding arising out of or relating to this Agreement and further agree that
all claims in respect of such action or proceeding shall be heard and determined
in any such court which shall construe and enforce the Agreement under the
internal laws (and not the laws of conflicts) in such state. Licensor and
Licensee hereby waive any argument that venue in such forums is not convenient.
<PAGE>
9.9 Severability. If any portion of this Agreement is held invalid by
the final judgment of any court of competent jurisdiction, such portion shall be
deemed revised or "blue lined" so that it is enforceable to the fullest extent
possible under applicable law and the remaining provisions shall remain in full
force and effect as if such invalid provision had not been included herein.
9.10 Reasonableness. Licensor and Licensee agree that the restrictions,
covenants, agreements and obligations contained in this Agreement are reasonable
and necessary to protect the legitimate interests of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNS, INC.
By:
--------------------------------------
Its:
---------------------------------
WINEASE, LLC
By:
--------------------------------------
Its:
---------------------------------
<PAGE>
LIST OF SCHEDULES
Number Description
------ -----------
1.5 Patent Rights
1.6 Trademark Rights
2.6 Countries List
<PAGE>
SCHEDULE 1.5
DESCRIPTION OF LICENSED PATENTS
U.S. Patent Applications and all other applications and continuations
thereof filed in connection with the Products together with any and all
international filings as further described in Section 1.3 of this Agreement.
Application Status
----------- ------
U.S. patent application serial no. 08/843,741 Issue fee paid 12/3/98
U.S. patent application serial no. 09/018,603 Filed 2/4/99
U.S. patent application serial no. 09/250,658 Filed 2/16/99
M&G docket no. 12460.1-US-I2 Filed 3/8/99
PCT/US98/07885 Filed 4/17/98
<PAGE>
SCHEDULE 1.6
DESCRIPTION OF CERTAIN TRADEMARK RIGHTS
U.S. trademark registration and pending trademark applications as
further described in Section 1.6 of this Agreement.
FLAIR
NSD
<PAGE>
SCHEDULE 2.6
COUNTRIES LIST
1. United States;
2. Canada;
3. China;
4. Japan;
5. Mexico;
6. New Zealand;
7. Australia; and
8. Countries located in Europe.
<PAGE>
EXHIBIT A
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement (the "Agreement") is entered into and
is effective as of this 12th day of March, 1999 by and between WinEase, L.L.C.
("LICENSOR"), a Minnesota limited liability company, and CNS, Inc. ("LICENSEE"),
a Delaware corporation, upon the following terms and conditions:
Recitals
WHEREAS, LICENSOR and LICENSEE have entered into that certain license
agreement on even date herewith (the "License Agreement");
WHEREAS, LICENSOR is the sole and exclusive owner of the certain
"Trademark Rights" (as defined in the License Agreement); and
WHEREAS, LICENSEE wishes to have the right but not the obligation use
the Trademark Rights in connection with the sale and marketing of the "Products"
(as defined in the License Agreement) and to license from LICENSOR whatever
rights LICENSOR may have in the Trademark Rights for use in connection with the
Products;
WHEREAS, LICENSOR is willing to grant such a license on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by the parties hereto, LICENSOR and
LICENSEE agree as follows:
Terms and Conditions
1. Definitions. The following definitions shall apply to this
Agreement:
1.1 The term "Marks" shall mean the Trademark Rights.
1.2 The term "Licensed Goods" shall mean the Products.
1.3 The term "Term" shall mean the time period specified in
paragraph 3 of this Agreement.
1.4 The term "Territory" shall mean worldwide.
2. Grant of Rights and Licenses. Subject to all of the terms and
conditions of this Agreement, LICENSOR hereby grants to LICENSEE an exclusive,
worldwide, royalty-free right and license during the Term of this Agreement to
reproduce, display, broadcast, publish and otherwise use any of the Marks in
connection with the Licensed Goods by LICENSEE throughout the Territory, and
LICENSEE hereby accepts such right and license subject to the terms and
conditions of this Agreement. Notwithstanding anything contained in this
Agreement to the contrary, LICENSEE shall not be under any obligation to use any
of the Marks in connection with the sale of the Products or otherwise.
3. Term. This Agreement and any licenses granted by LICENSOR hereunder
shall commence as of the effective date hereof and shall continue in full force
and effect through the term of the License Agreement, at which time they will
automatically terminate, unless sooner terminated in accordance with the terms
and conditions of the License Agreement.
<PAGE>
4. Quality Assurance.
4.1 LICENSOR is familiar with LICENSEE'S human nasal dilator
products and finds them to be of acceptable quality. LICENSEE agrees that any of
the Licensed Goods used with the Marks will be of substantially similar quality.
LICENSEE agrees to submit evidence of the nature of the Licensed Goods used with
the Marks to LICENSOR for review and approval from time to time upon LICENSOR's
reasonable request.
4.2 LICENSEE agrees to take all responsibility for any
Licensed Goods with which the Marks are used. LICENSEE agrees to comply in all
material respects with all applicable laws and regulations and obtain all
appropriate governmental approvals pertaining to the Licensed Goods offered in
connection with the Marks.
5. Trademark Use and Ownership.
5.1 In the event that LICENSEE shall at any time elect to use
any of the Marks, LICENSEE agrees to use the Marks only in the form and manner
with appropriate legends as may be prescribed from time to time by LICENSOR.
5.2 In the event that LICENSEE shall at any time elect to use
any of the Marks, LICENSEE agrees that it shall cause to appear in connection
with the Licensed Goods, such reasonable trademark notice as LICENSOR may
reasonably designate.
5.3 LICENSEE acknowledges and agrees that LICENSOR is the
owner of all rights in and to the Marks and that LICENSEE will not during the
Term of this Agreement or at any time thereafter use the Marks or any element
thereof in any form and for any goods or services or challenge the use or
registration thereof except as permitted under this Agreement or contemplated by
the License Agreement without the prior written permission of LICENSOR.
5.4 LICENSEE agrees that it will not state or imply either
directly or indirectly that LICENSEE or LICENSEE's activities, other than those
permitted by this Agreement, are supported, endorsed, or sponsored by LICENSOR
and, upon the direction of LICENSOR, LICENSEE.
5.5 LICENSEE recognizes the goodwill associated with the Marks
and acknowledges that said goodwill belongs exclusively to LICENSOR and that any
use of the Marks by LICENSEE at any time (whether during or after the term of
this Agreement) will, except as otherwise contemplated by the transactions set
forth in the License Agreement, inure solely to the benefit of LICENSOR, and
LICENSEE hereby assigns any such goodwill in its entirety to LICENSOR upon
termination of this Agreement. Nothing contained herein shall be construed to
confer upon LICENSOR any rights of LICENSEE in or to the Breathe Right(R) mark.
5.6 LICENSEE will comply with the provisions of all laws of
the United States and each state in which it elects, in its sole discretion, to
use the Marks regarding trademarks and service marks.
6. Infringement. LICENSEE agrees to notify LICENSOR promptly of any
known use of the Mark by others not duly authorized by LICENSOR. Notification of
such infringement shall include all details known by LICENSEE that would enable
or aid LICENSOR to investigate such infringement.
7. Disputes Relating to the Mark. The parties acknowledge and agree
that all of the provision of Paragraph 6 of the License Agreement shall govern
the parties' rights with respect to disputes relating to the Marks with third
parties.
<PAGE>
8. No Agency. Nothing contained herein shall be deemed to create an
agency, joint venture, franchise, or partnership relationship between LICENSEE,
on the one hand, and LICENSOR, on the other hand, and no party shall so hold
itself out. LICENSEE shall have no right to obligate or bind LICENSOR in any
manner whatsoever.
9. Limited Warranty.
9.1 LICENSOR warrants it has the lawful capacity to execute
this Agreement, but does not warrant and shall not be held to have warranted the
validity or scope of the Marks licensed under this Agreement except as may
otherwise be set forth in the License Agreement.
9.2 LICENSOR makes no representations or warranties with
respect to the Licensed Goods provided by LICENSEE and disclaims any liability
arising out of the Licensed Goods offered by LICENSEE under the Marks except as
may otherwise be set forth in the License Agreement.
10. Assignability. This Agreement shall inure to the benefit of
LICENSOR, its successors and assigns, but will be personal to LICENSEE and shall
be assignable by LICENSEE only to the extent that the rights of LICENSEE are
assignable under the License Agreement.
11. Termination. The termination of the License Agreement shall operate
to terminate this Agreement.
12. Effect of Termination.
12.1 Except as may otherwise be set forth in Section 7 of the
License Agreement, the license granted hereunder shall cease immediately upon
termination of this Agreement for any reason.
12.2 The exercise by any party of its rights to terminate this
Agreement as provided herein shall be in addition to and not in lieu of any
other remedies such party may have under this Agreement or otherwise.
13. Waiver. No waiver by a party of any breach of any term or provision
of this Agreement shall be construed to be a waiver of any preceding or
succeeding breach of the same or any other term or provision hereof. The
parties' various rights and remedies under this Agreement shall be construed to
be cumulative and no one of them is exclusive of any other or of any right or
remedy allowed by law or in equity.
14. Notices. All notices to be given hereunder must be in writing and
shall be given hereto in the manner and at the addresses set forth in the
License Agreement.
15. No Act Contrary to Law; Severability. Nothing contained in this
Agreement shall be construed to require the commission of any act contrary to
law and wherever there is any conflict between any provision of this Agreement
and any present or future statute, law, governmental regulation or order or
ordinance, then the latter shall prevail, and in such event the provision or
provisions of the Agreement affected shall be curtailed and limited only to the
extent necessary to bring it or them within legal requirements. All other terms
of the Agreement shall remain unaffected.
16. Governing Law; Jurisdiction. This Agreement shall be deemed to have
been made in the State of Minnesota, and its validity, construction and effect
shall be governed by and enforced pursuant to the substantive laws of the State
of Minnesota without regard to its conflicts of laws principles.
<PAGE>
17. Entire Agreement. This Agreement, together with the License
Agreement and attached schedules, constitutes the entire agreement between the
parties relating to the subject matter hereof and shall supersede any and all
prior written or oral agreements between the parties relating to the subject
matter hereof. This Agreement may not be amended except by a written instrument
signed by each of the parties hereto. Each party acknowledges that it has not
executed this Agreement in reliance upon any representation or promise made by
any person, except as expressly provided for in this Agreement or the License
Agreement.
18. Inconsistent Provisions. To the extent that any term or provision
in this Agreement is inconsistent with any term or provision in the License
Agreement, the terms and provisions of the License Agreement shall in all
respects control.
19. Unavoidable Delay. If any party's obligations hereunder are
affected by reason of fire, flood, casualty, Act of God, lockout, strike, labor
conditions, unavoidable accident, LICENSOR calamity, mechanical or other
breakdown, riot, enactment of law or by any similar cause (collectively referred
to as "Unavoidable Delay"), its obligations hereunder herein shall be suspended
during the period of such suspension period due to the Unavoidable Delay, except
that any such suspension period due to such Unavoidable Delay shall in no event
exceed six (6) months.
20. Headings. The headings or captions of this Agreement or any
paragraph hereof are inserted for purposes of convenience only and shall not be
deemed to limit, affect the scope, meaning or intent of this Agreement, nor
shall they otherwise be given any legal effect.
21. Recitals. The Recitals are true and correct, incorporated herein
and made a part of this Agreement.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original and will, when taken
together, constitute this Agreement notwithstanding that each party is not a
signator to the same counterpart.
23. Binding on Successors. This Agreement will fully bind and inure to
the benefit of each party and its respective heirs, successors, permissible
assigns, and agents.
24. Further Documents. The parties agree to execute such further
documents as may be reasonably requested by the others to effectuate any of the
provisions or purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their authorized agents effective as of the date first written
above.
LICENSOR:
WinEase, LLC
By
---------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
LICENSEE:
CNS, Inc.
By
---------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>6
<DESCRIPTION>EXCLUSIVE LICENSE AGREEMENT
<TEXT>
Exhibit 10.11
[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY
WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]
EXECUTION COPY
--------------
CNS-CRONKS
EXCLUSIVE LICENSE AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
----
WITNESSETH...................................................................-1-
1 - DEFINITIONS..............................................................-1-
2 - GRANT....................................................................-4-
3 - REPRESENTATIONS AND WARRANTIES OF CRONKS.................................-5-
4 - DILIGENCE................................................................-6-
5 - ROYALTIES................................................................-7-
6 - REPORTS AND RECORDS......................................................-9-
7 - PATENT PROSECUTION......................................................-10-
8 - INFRINGEMENT............................................................-11-
9 - INDEMNIFICATION AND INSURANCE...........................................-13-
10 - ASSIGNMENT.............................................................-14-
11 - DISPUTE RESOLUTION.....................................................-14-
12 - TERMINATION............................................................-15-
13 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS.............................-17-
14 - MISCELLANEOUS PROVISIONS...............................................-18-
APPENDIX A.........................................................-20-
APPENDIX B.........................................................-21-
<PAGE>
CNS-CRONKS
EXCLUSIVE LICENSE AGREEMENT
This Agreement is made and entered into as of the last date of
signature hereto (the "EFFECTIVE DATE") by and between Peter and Kristen Cronk
(married) located at 919 McElwee Road, Moorestown, NJ 08057 (hereinafter
referred to as "CRONKS"), and CNS, Inc., a corporation duly organized under the
laws of the State of Delaware and having its principal office at 4400 West 78th
Street, Minneapolis, Minnesota 55435 (hereinafter referred to as "LICENSEE").
WITNESSETH
WHEREAS, CRONKS are the owners of certain PATENT RIGHTS (as later
defined herein) and information and KNOW HOW (as later defined herein) relating
to improvements to nasal dilators, and methods of making and using the same, and
have the right to grant licenses to the said KNOW HOW and PATENT RIGHTS;
WHEREAS, LICENSEE desires to obtain an exclusive license under the
PATENT RIGHTS and KNOW HOW upon the terms and conditions hereinafter set forth;
and
WHEREAS, CRONKS desire to have the PATENT RIGHTS and KNOW HOW developed
and commercialized and are willing to grant an exclusive license thereunder to
LICENSEE.
NOW, THEREFORE, inconsideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1 - DEFINITIONS
For the purposes of this Agreement, the following words and phrases
shall have the following meanings:
1.1 "LICENSEE" shall mean LICENSEE or any ASSIGNEE (as later defined).
1.2 "PATENT RIGHTS" shall mean all the following CRONKS' intellectual
property:
a. the United States patents listed in Appendix A;
b. the United States patent applications listed in Appendix A,
and divisionals, continuations and claims of
continuation-in-part applications which shall be directed to
subject matter specifically described in this Paragraph b. or
Paragraph a. above;
<PAGE>
c. any and all patents resulting from reissues or reexaminations
of the United States patents described in Paragraphs a. and b.
above.
d. the foreign patent applications listed in Appendix A, and
divisionals, continuations and claims of
continuation-in-part-applications which shall be directed to
subject matter specifically described in such foreign patent
applications, and the resulting patents;
e. the foreign patent applications filed after the EFFECTIVE DATE
in the countries listed in Appendix B or elsewhere and
divisionals, continuations and claims of continuation-in-part
applications which shall be directed to subject matter
specifically described in such patent applications, and the
resulting patents;
f. any foreign patents, resulting from equivalent foreign
procedures to United States reissues and reexaminations, of
the foreign patents described in d., e. and f. above; and
g. any and all other future United States and foreign patents and
patent applications covering the PRODUCTS which may be
developed, acquired or controlled by CRONKS during the term of
this Agreement and with respect to which CRONKS shall have the
right to grant the license hereinafter provided.
1.3 "PRODUCTS" shall mean any product or part thereof which is covered
in whole or in part by an issued, unexpired claim or a pending claim contained
in any of the PATENT RIGHTS as well as any and all improvements, modifications
or enhancements thereto, whether now existing or in the future developed, and
any other products, methods or compositions similar in function or purpose
developed by CRONKS or any of their agents, employees or affiliates during the
term of this Agreement.
1.4 "KNOW HOW" shall mean any and all tangible and intangible
information, technology, documents and materials in the possession and control
of CRONKS, necessary or desirable in order to enable LICENSEE to utilize fully
the rights granted by CRONKS to LICENSEE hereunder and shall include, without
limiting the foregoing, the ideas, methods, concepts, confidential information,
trade secrets and techniques, as well as all the materials, documents, manuals,
schematics, blueprints, specifications, compositions, patterns, artwork, bills
of materials and technical specifications and other information of CRONKS
relating to the PRODUCTS.
<PAGE>
1.5 "CONTRACT QUARTER" shall mean March 31, June 30, September 30 and
December 31 of each calendar year beginning in the year 2000.
1.6 "NET SALES" shall mean the gross sales price for LICENSED PRODUCTS
from any end-user, sublicensee or other person or entity relating to or arising
from the sale of PRODUCTS after deduction of the following:
a. discounts allowed in amounts customary in the trade for
quantity purchases, cash payments and prompt payments;
b. sales, tariff duties and/or use taxes directly imposed and
with reference to particular sales;
c. outbound transportation or other costs directly related to the
outbound transportation of the PRODUCTS; and
d. amounts allowed or credited on account of rejections or
returns.
No deductions, shown above, shall be made from the sales price shall be
allowed unless all such deductions are shown on an invoice. No deductions shall
be made for commissions paid to individuals whether they be with independent
sales agencies or regularly employed by LICENSEE and on its payroll.
1.7 "MINIMUM ROYALTIES" shall be the amounts set forth in and payable
by LICENSEE in accordance with Paragraph 5.1(c).
1.8 "RUNNING ROYALTIES" shall be the amounts payable by LICENSEE as
determined in accordance with the percentages on account of NET SALES of the
PRODUCTS as set forth in Paragraph 5.1(d).
1.9 "ABATEMENT EFFORTS" shall have the meaning ascribed to the term in
Paragraph 8.2.
1.10 "ASSIGNEE" shall have the meaning ascribed to the term in
Paragraph 10.1.
1.11 "CLAIMS" shall have the meaning ascribed to the term in Paragraph
9.2.
<PAGE>
2 - GRANT
2.1 CRONKS each hereby grant to LICENSEE the exclusive, world-wide
right and license to exploit and practice under the PATENT RIGHTS (as well as
any invention disclosed or claimed therein) and under the KNOW HOW and the
exclusive, world-wide right and license to make, have made, use, lease, sell,
offer for sale, import and export the PRODUCTS until the expiration of the last
to expire of the PATENT RIGHTS, unless this Agreement shall be sooner terminated
according to the terms hereof.
2.2 LICENSEE shall have the right to enter into sublicensing agreements
with third parties for the rights, privileges and licenses granted hereunder. In
the event of a sublicense, LICENSEE shall enter into a written agreement with
sublicensee (i) with a term no greater than the term of this Agreement, (ii)
with rights granted to sublicensee which are no greater than the terms of this
Agreement, and (iii) pursuant to which Licensee shall impose upon any such
sublicensees substantially the same obligations as CRONKS have imposed upon
LICENSEE under this Agreement.
2.3 Any material breach of a sublicense under this Agreement with
respect to obligations of such sublicensee to CRONKS shall be treated as a
material breach of this Agreement by LICENSEE and all provisions for notice and
remedies to cure such breach and terminate this Agreement shall apply.
2.4 LICENSEE agrees to forward to CRONKS a copy of any and all
sublicense agreements promptly upon execution by the parties.
2.5 LICENSEE shall not receive from sublicensees consideration that is
material in value in lieu of cash payments in exchange for any sublicense under
this Agreement, without the express prior written permission of CRONKS.
<PAGE>
2.6 Nothing in this Agreement shall be construed to confer any rights
upon LICENSEE by implication, estoppel or otherwise as to any technology or
patent rights of CRONKS or any other entity other than the PATENT RIGHTS and
KNOW HOW.
3 - REPRESENTATIONS AND WARRANTIES OF CRONKS
Each of the CRONKS, jointly and severally, represent and warrant to
LICENSEE as follows:
3.1 CRONKS are the sole and exclusive owners of all the PATENTS RIGHTS,
KNOW HOW and other rights granted under this Agreement.
3.2 Claims have been allowed and the issue fee has been paid for the
United States patent(s) as listed on Appendix A covering the PRODUCTS.
Additional United States and foreign patent applications that are directed to
the PRODUCTS are currently pending as set forth on Appendix A. To the best of
their knowledge, CRONKS have disclosed to the United States Patent and Trademark
Office all material evidence relating to the validity or enforceability of the
PATENT RIGHTS.
3.3 CRONKS have good and marketable title to the PATENT RIGHTS and KNOW
HOW, free and clear of any and all liens, pledges, claims, licenses,
assignments, conditional sales contracts, agreements or encumbrances of any kind
that would impair the ability of CRONKS to grant the exclusive licenses under
this Agreement.
3.4 To the best of CRONKS' knowledge, the PATENT RIGHTS, PRODUCTS and
KNOW HOW do not infringe on any patent, copyright, trademark, trade secret,
trade dress or any other intellectual property right of any third party.
3.5 To the best of CRONKS' knowledge, none of the undertakings or
activities of CRONKS in connection with the development of the PRODUCTS involve
the wrongful use of the proprietary rights or assets of any third party.
3.6 CRONKS have not received notice of any claims, actions, suits or
proceedings pending or threatened effecting CRONKS, the PATENT RIGHTS or the
KNOW HOW which, if adversely determined, would have a material adverse effect
upon LICENSEE's ability to manufacture and have manufactured, use or sell the
PRODUCTS or otherwise practice the rights and technology licensed to LICENSEE by
CRONKS under this Agreement.
<PAGE>
4 - DILIGENCE
4.1 LICENSEE shall use its best efforts to bring one or more of the
PRODUCTS to market through a thorough, vigorous and diligent program for
exploitation of the PATENT RIGHTS and to continue active, diligent marketing
efforts for one or more PRODUCTS throughout the term of this Agreement.
4.2 In addition, LICENSEE shall adhere to the following milestones:
a. LICENSEE shall, within sixty (60) days of executing this
Agreement, provide to CRONKS, correspondence or other
documentation generally describing how LICENSEE intends to
research, develop, market, distribute and sell the PRODUCTS.
b. LICENSEE shall make a first commercial sale of a PRODUCT on or
before March 31, 2000.
4.3 LICENSEE's failure to perform in accordance with Paragraphs 4.1 and
4.2 above shall be grounds for CRONKS to terminate this Agreement pursuant to
Paragraph 12.3 hereof.
5 - ROYALTIES
5.1 For the rights, privileges and licenses granted hereunder, LICENSEE
shall pay royalties to CRONKS in the manner hereinafter provided to the end of
the term of the PATENT RIGHTS or until this Agreement shall be terminated:
a. Up-Front License Fee: of [CONFIDENTIAL TREATMENT REQUESTED]
Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be
non-refundable, and deemed earned and due immediately upon the
EFFECTIVE DATE.
b. Liquidated Expense Fee: of [CONFIDENTIAL TREATMENT REQUESTED]
Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be
non-refundable, and due immediately upon the EFFECTIVE DATE.
c. Minimum Royalty Fees:
(i) for the calendar year 2000, [CONFIDENTIAL TREATMENT
REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]),
payable for each CONTRACT QUARTER in four (4) equal
installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars
($[CONFIDENTIAL TREATMENT REQUESTED]) each;
<PAGE>
(ii) for the calendar year 2001, [CONFIDENTIAL TREATMENT
REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]),
payable for each CONTRACT QUARTER in four (4) equal
installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars
($[CONFIDENTIAL TREATMENT REQUESTED]) each; and
(iii) for the calendar year 2002, and each year thereafter
while PATENT RIGHTS are in force in any country, [CONFIDENTIAL
TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT
REQUESTED]), payable for each CONTRACT QUARTER in four (4)
equal installments of [CONFIDENTIAL TREATMENT REQUESTED]
Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]) each;
provided, however, that RUNNING ROYALTIES due on NET SALES for
each said CONTRACT QUARTER, if any, shall be creditable
against any of the MINIMUM ROYALTIES due during the calendar
year. RUNNING ROYALTIES paid in excess of MINIMUM ROYALTIES
shall not be creditable against MINIMUM ROYALTIES for future
calendar years.
d. Running Royalties: shall, subject to setoff, adjustment or
credit in accordance with Paragraph 5.1(c) above, be payable
in an amount equal to:
(i) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL
TREATMENT REQUESTED]%) for the first [CONFIDENTIAL TREATMENT
REQUESTED] Dollars in NET SALES; then
(ii) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL
TREATMENT REQUESTED]%) of the next [CONFIDENTIAL TREATMENT
REQUESTED] Dollars in NET SALES; and then
(iii) [CONFIDENTIAL TREATMENT REQUESTED] percent
([CONFIDENTIAL TREATMENT REQUESTED]%) of NET SALES over
[CONFIDENTIAL TREATMENT REQUESTED] Dollars;
for PRODUCTS manufactured, used, leased or sold by LICENSEE
its sublicensees, or by others on their behalf.
e. In addition to RUNNING ROYALTIES, [CONFIDENTIAL TREATMENT
REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of
other payments, including, but not limited to, sublicense
issue fees, up-front fees, and milestone fees, received by
LICENSEE from sublicensees in consideration for the right to
utilize the licenses granted hereunder and sell the PRODUCTS.
5.2 All payments due hereunder shall be paid in full, without deduction
of taxes or other fees which may be imposed by any government, except as
otherwise provided in Paragraph 1.6(b).
<PAGE>
5.3 No multiple royalties shall be payable because any PRODUCT, its
importation, manufacture, use, lease, offer for sale or sale are or shall be
covered by more than one claim, patent application or patent licensed under this
Agreement.
5.4 Royalty payments shall be paid in United States dollars to CRONKS'
address in Paragraph 13, or at such other place CRONKS may reasonably designate
consistent with the laws and regulations controlling in any foreign country. If
any currency conversion shall be required in connection with the payment of
royalties hereunder, such conversion shall be made by using the exchange rate as
published in the Wall Street Journal on the last business day of the CONTRACT
QUARTER to which such royalty payments relate.
5.5 In the event PATENT RIGHTS are invalidated or declared
unenforceable by a court or patent office of competent jurisdiction in any
country where they existed, LICENSEE shall pay a RUNNING ROYALTY of only
[CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%)
of NET SALES for products sold, made or imported into said jurisdiction, for a
period of two (2) years from the date said decision becomes final, or
unappealable, which products would have been, but for the unfavorable decision,
PRODUCTS. Such payments shall be in consideration of CRONKS' KNOW HOW only.
6 - REPORTS AND RECORDS
6.1 LICENSEE shall keep full, true and accurate books of account
containing all particulars that may be necessary for the purpose of showing the
amounts payable to CRONKS hereunder. Said books of account shall be kept at
LICENSEE's principal place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times for three (3) years
following the end of the calendar year to which they pertain to the reasonable
inspection of CRONKS or their agents, which shall in no event be more than twice
in a calendar year, for the purpose of verifying LICENSEE's royalty calculations
or compliance in other respects with this Agreement. Should such inspection lead
to the discovery of a greater than five percent (5%) discrepancy in reporting of
RUNNING ROYALTIES to CRONKS' detriment, LICENSEE agrees to pay the reasonable
cost of the inspection which resulted in the discovery of the discrepancy, plus
interest as required under Paragraph 6.4.
<PAGE>
6.2 All royalties due CRONKS from LICENSEE under this Agreement shall
be payable on a CONTRACT QUARTERLY basis. Within forty-five (45) days after the
end of each CONTRACT QUARTER during the term of this Agreement, LICENSEE shall
pay CRONKS the royalties due in accordance with Paragraphs 5.1(c) and 5.1(d).
LICENSEE shall simultaneously deliver with the payment of the royalties due to
CRONKS true and accurate reports, giving such particulars to the business
conducted by LICENSEE and its sublicensees under this Agreement as shall be
pertinent to a royalty accounting hereunder. These reports shall include at
least the following:
a. number of PRODUCTS manufactured and/or sold by or for LICENSEE
and all sublicensees;
b. total invoiced dollar amount for PRODUCTS manufactured and/or
sold by or for LICENSEE and all sublicensees;
c. accounting for NET SALES, noting the deductions applicable as
provided in Paragraph 1.6;
d. RUNNING ROYALTIES less any applicable MINIMUM ROYALTIES
previously paid, due under Paragraph 5.1(c);
e. royalties due on other payments from sublicensees under
Paragraph 5.1(e);
f. total royalties due; and
g. names and addresses of all sublicensees, if any, of LICENSEE.
6.3 If no RUNNING ROYALTIES shall be due under this Agreement, LICENSEE
shall so report.
6.4 Royalty and other payments set forth in Article 5 and amounts due
under Article 7 shall, if overdue, bear interest until payment at a per annum
rate two percent (2%) above the prime rate as published in the Wall Street
Journal on the due date. The payment of such interest shall not foreclose CRONKS
from exercising any other rights they may have as a consequence of the lateness
of any payment.
<PAGE>
7 - PATENT PROSECUTION
7.1 CRONKS shall apply for, seek prompt issuance of, and maintain the
PATENT RIGHTS through their choice of law firm during the term of this
Agreement. Appendix B is a list of the foreign countries in which patent
applications corresponding to the United States Patent applications listed in
Appendix A shall be filed. Appendix B may be amended by mutual agreement of both
parties. The filing, prosecution and maintenance of all PATENT RIGHTS
applications and patents shall be the primary responsibility of CRONKS and their
law firm; provided, however, LICENSEE and its counsel shall have reasonable
opportunities to advise CRONKS and shall cooperate with CRONKS in such filing,
prosecution and maintenance. LICENSEE shall have the right to terminate any such
patent counsel retained by CRONKS if LICENSEE has a reasonable basis for not
being satisfied with such counsel's efforts, and in such event CRONKS shall
select a new patent counsel (which counsel is subject to the reasonable consent
of LICENSEE).
7.2 Payment of all fees and costs relating to the filing, prosecution
and maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE.
LICENSEE shall pay such fees and costs to CRONKS choice of law firm within
thirty (30) days of invoicing from said law firm; late payments shall accrue
interest and shall be subject to Paragraph 6.4.
8 - INFRINGEMENT
8.1 LICENSEE shall inform CRONKS, and CRONKS shall inform LICENSEE
promptly in writing of any alleged infringement of the PATENT RIGHTS or other
intellectual property rights with respect to which LICENSEE is granted a license
hereunder by a third party and of any available evidence thereof.
<PAGE>
8.2 Upon reasonable request by CRONKS or in LICENSEE's own discretion,
LICENSEE shall, at its sole expense, initiate and thereafter diligently maintain
reasonable efforts to prevent and abate any infringement of the PATENT RIGHTS or
other intellectual property rights with respect to which LICENSEE is granted a
license hereunder, including, without limitation, the initiation of an
appropriate civil action for infringement and the taking of such other action as
may be necessary or appropriate ("ABATEMENT EFFORTS"). In furtherance thereof,
CRONKS hereby agree that LICENSEE may join CRONKS as a party plaintiff in any
suit, without expense to CRONKS. LICENSEE shall indemnify CRONKS against any
order for costs or legal fees that may be made against CRONKS in such
proceedings. In the event that LICENSEE shall undertake the enforcement and/or
defense of the PATENT RIGHTS or other intellectual property rights licensed
hereunder, LICENSEE shall receive the full benefits of any action it takes
pursuant to this Paragraph, including retaining all sums recovered in any suit
or in settlement thereof after paying CRONKS the RUNNING ROYALTIES which shall
be calculated from the amount of NET SALES, if any, asserted by LICENSEE to
support any award of compensatory damages (as opposed to punitive or any other
damages). In connection with the foregoing, the amount of damages awarded and
received by LICENSEE on account of such infringer's sales shall be added to
LICENSEE's NET SALES and paid in the CONTRACT QUARTER in which such sums are
received by LICENSEE or within forty-five (45) days after the expiration of such
CONTRACT QUARTER.
8.3 A refusal by LICENSEE to undertake ABATEMENT EFFORTS within ninety
(90) days of a reasonable request made by CRONKS in accordance with Paragraph
8.2 above, or to consent to allowing CRONKS to undertake such ABATEMENT EFFORTS,
shall constitute a material breach of this Agreement and be grounds for
termination by CRONKS in accordance with Paragraph 12.3 unless LICENSEE provides
CRONKS with a reasonable business justification for its refusal in writing
within said ninety (90) day period, which justification is acceptable to CRONKS.
Any disagreement regarding this Paragraph 8.3 shall be subject to the dispute
resolution provisions of Article 11.
<PAGE>
8.4 In the event that a declaratory judgment action or defense alleging
invalidity of any of the PATENT RIGHTS shall be brought against LICENSEE,
CRONKS, at their option, shall have the right but not the obligation, within
thirty (30) days after commencement of such action, to intervene at their sole
expense.
8.5 In any infringement which may be instituted by LICENSEE to enforce
the PATENT RIGHTS or other intellectual property rights licensed pursuant to
this Agreement, CRONKS shall, at the request and expense of LICENSEE, cooperate
in all respects and testify if requested and make available relevant records,
papers, information, samples, specimens, and the like.
9 - INDEMNIFICATION AND INSURANCE
9.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold CRONKS harmless from and against all
claims, costs, proceedings, demands, judgments and liabilities of any kind
whatsoever, including legal expenses and reasonable attorneys' fees, arising out
of the death of or injury to any person or persons or out of any damage to
property, resulting from the production, manufacture, sale, use lease,
consumption or advertisement of the PRODUCTS.
9.2 CRONKS shall, jointly and severally, at all times during the term
of this Agreement and thereafter, indemnify, defend and hold LICENSEE harmless
from and against all claims, costs, proceedings, demands, judgments and
liabilities of any kind whatsoever, including legal expenses and reasonable
attorneys' fees ("CLAIMS"), arising out of the breach by CRONKS of any of their
representations and warranties under Paragraphs 3.1 and 3.3 of this Agreement.
Except for LICENSEE's remedy at equity for specific performance, CRONKS'
liability under this Paragraph 9.2 for CLAIMS arising out of a breach by CRONKS
of all representations and warranties under this Agreement other than those set
forth in Paragraph 3.1 and 3.3 shall be limited to Ten Thousand Dollars
($10,000). Except as otherwise expressly set forth in this Agreement, CRONKS
make no representations and extend no warranties of any kind, either express or
implied.
<PAGE>
9.3 LICENSEE shall obtain and carry in full force and effect
commercial, general liability insurance in amounts which shall protect LICENSEE
and CRONKS with respect to events covered by Paragraph 9.1 above. Such insurance
shall be written by a reputable insurance company and shall list CRONKS as an
additional insured thereunder throughout the term of this Agreement.
10 - ASSIGNMENT
10.1 LICENSEE may assign any and all rights granted hereunder to any
third party ("ASSIGNEE") upon providing CRONKS with at least thirty (30) days
prior written notice.
11 - DISPUTE RESOLUTION
11.1 Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, a preliminary
injunction, or other equitable relief to preserve the status quo or prevent
irreparable harm, any and all claims, disputes or controversies arising under,
out of, or in connection with the Agreement, including any dispute relating to
patent enforcement, validity or infringement, which the parties shall be unable
to resolve within sixty (60) days shall be mediated in good faith. The party
raising such dispute shall promptly advise the other party of such claim,
dispute or controversy in a writing which describes in reasonable detail the
nature of such dispute. By not later than five (5) business days after the
recipient has received such notice of dispute, each party shall have selected
for itself a representative who shall have the authority to bind such party, and
shall additionally have advised the other party in writing of the name and title
of such representative. By not later than ten (10) business days after such
notice of dispute, the party against whom the dispute shall be raised, shall
select a mediation firm either in the area of their principal residence (in the
case of CRONKS) or in the area of its principal place of business (in the case
of LICENSEE) and such representatives shall schedule a date with such firm for a
mediation hearing. The parties shall enter into good faith mediation and shall
pay their own expenses, and shall share the costs and expenses of the mediator
equally.
<PAGE>
11.2 If the representatives of the parties have not been able to
resolve the dispute within fifteen (15) business days after such mediation
hearing, then any and all claims or controversies arising under, out of, or in
connection with this Agreement, including any dispute relating to patent
validity or infringement, shall be resolved by final and binding arbitration to
be held in Philadelphia, Pennsylvania, in the event that the dispute is raised
or initiated by LICENSEE against CRONKS, or held in Minneapolis, Minnesota, in
the event that the dispute is raised or initiated by CRONKS against LICENSEE, in
either case using a single neutral arbitrator, acceptable to both parties, but
otherwise employing the rules of the American Arbitration Association, or the
Patent Arbitration Rules if applicable, then prevailing. The arbitrator shall in
all cases and for all purposes apply the law set forth in Paragraph 14.1 and
have no power to add to, subtract from or modify any of the terms or conditions
of this Agreement, nor to award punitive damages. Any award rendered in such
arbitration may be enforced by either party in all state or federal courts
located in Pennsylvania or in Minnesota to whose jurisdiction and venue for such
purposes CRONKS and LICENSEE each hereby irrevocably consent and submit.
11.3 Notwithstanding the foregoing, nothing in this Article shall be
construed to waive any rights or timely performance of any obligations existing
under this Agreement.
12 - TERMINATION
12.1 If LICENSEE shall cease to carry on its business, or enters into
bankruptcy voluntarily or involuntarily, this Agreement shall terminate upon
written notice by CRONKS.
12.2 Should LICENSEE fail to make any payment whatsoever due and
payable to CRONKS hereunder, CRONKS shall have the right to terminate this
Agreement effective on thirty (30) days' written notice, unless LICENSEE shall
make all such payments to CRONKS within said thirty (30) day period. Upon the
expiration of the thirty (30) day period, if LICENSEE shall not have made all
such payments to CRONKS, the rights, privileges and license granted hereunder
shall automatically terminate.
<PAGE>
12.3 Upon any material breach or default of this Agreement by LICENSEE
(including, but not limited to, breach or default under Paragraph 4.3), other
than those occurrences set out in Paragraphs 12.1 and 12.2 hereinabove, which
shall always take precedence in that order over any material breach or default
referred to in this Paragraph 12.3, CRONKS shall have the right to terminate
this Agreement and the rights, privileges and license granted hereunder
effective on ninety (90) days' written notice to LICENSEE. Such termination
shall become automatically effective unless LICENSEE shall have cured any such
material breach or default prior to the expiration of the ninety (90) day
period.
12.4 LICENSEE may in its sole discretion terminate this Agreement at
any time, for any reason, by giving CRONKS at least sixty (60) days prior
written notice in which event such license shall terminated upon the effective
date stated in any such notice; provided, however, that LICENSEE shall, except
as otherwise set forth in and contemplated by Paragraph 12.5 below, do all of
the following:
(a) Cease making, using, selling, offering for sale, and importing
all PRODUCTS;
(b) Cancel and terminate all sublicense agreements between
LICENSEE and all of LICENSEE's sublicensees; and
(c) Render all required payments of fees, and earned royalties,
and MINIMUM ROYALTIES to CRONKS.
12.5 Upon termination of this Agreement by LICENSEE in accordance with
Paragraph 12.4, LICENSEE and any sublicensee thereof may, for a period of one
(1) year after the effective date of such termination, sell all PRODUCTS, and
complete the PRODUCTS in the process of manufacture at the time of such
termination or for which a written contract exists for the purchase of material
or for the sale of the PRODUCTS, and sell the same, provided that LICENSEE shall
make the payments to CRONKS as required by Paragraph 5, 7 or 8 of this Agreement
and shall submit the reports required by Paragraph 6 hereof.
<PAGE>
12.6 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination; and Paragraphs 1, 6, 9, 10, 11,
12.5, 12.6 and 14 shall survive any such termination.
12.7 Upon termination of this Agreement for any reason, any sublicensee
not then in default shall have the right to seek a license from CRONKS and
CRONKS agree to negotiate such licenses in good faith under reasonable terms and
conditions.
13 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
13.1 Any payments, notices or other communications pursuant to this
Agreement shall be sufficiently made or given on the date of mailing if sent to
such party by first class mail, addressed to it at its address below, or as it
shall otherwise designate by written notice given to the other party:
In the case of CRONKS:
Peter Cronk
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
In the case of LICENSEE:
Daniel E. Cohen, M.D.
Chairman and Chief Executive Officer
CNS, Inc.
4400 West 78th Street
Minneapolis, Minnesota 55435
With a copy to:
Patrick Delaney, Esq.
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
<PAGE>
14 - MISCELLANEOUS PROVISIONS
14.1 All disputes arising out of or related to this Agreement, or the
performance, enforcement, breach or termination hereof, and any remedies
relating thereto, shall be construed, governed, interpreted and applied in
accordance with the internal laws of the State of Minnesota U.S.A., (without
regard to the laws of conflicts), except that questions affecting the
construction and effect of any patent outside the United States shall be
determined by the law of the country in which the patent shall have been
granted.
14.2 The parties hereto acknowledge that this Agreement sets forth the
entire Agreement and understanding of the parties hereto as to the subject
matter hereof, and shall not be subject to any change or modification except by
the execution of a written instrument signed by the parties.
14.3 The provisions of this Agreement are severable, and in the event
that any provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof.
14.4 LICENSEE agrees to mark the PRODUCTS sold in the United States
with the applicable United States patent numbers. All PRODUCTS shipped to or
sold in other countries shall be marked in such a manner as to conform with the
patent laws and practice of the country of manufacture or sale.
14.5 The failure of either party to assert a right hereunder or to
insist upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.
14.6 Neither party shall be responsible for any delay or failure in the
performance of any obligation hereunder due to strikes, lockouts, fires, floods,
acts of God, embargoes, wars, riots, or act or order of any government or
governmental agency; provided, however, that nothing set forth in this Paragraph
14.6 shall be construed to relieve LICENSEE of the requirement that it pay
MINIMUM ROYALTIES hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement the
day and year set forth below.
for: CRONKS for: CNS, Inc.
By: By
Peter Cronk Daniel E. Cohen, M.D.
Chairman and Chief
Executive Officer
Date: Date:
By:
Kristen Cronk
Date:
<PAGE>
APPENDIX A
PATENT RIGHTS on the EFFECTIVE DATE
UNITED STATES PATENT RIGHTS U.S. Patent No. 5,706,800, issued January 13,
1998 and entitled "Medical Nasal Dilator"
U.S. Patent Application Serial No. 08/942,797
filed on October 2, 1997, and entitled "Improved
Medicated Nasal Dilator"
U.S. Patent Application Serial No. 09/099,825
filed on June 18, 1998, and entitled,
"Adhesively Applied External Nasal Strips and
Dilators Containing Medications and Fragrances".
FOREIGN PATENT RIGHTS
Non-PCT
South African Patent Application Serial No. 98/0144, filed on January 8, 1998,
and entitled "Medicated Nasal Dilator".
PCT
PCT Application Serial No. US98/01513, filed on January 28, 1998, and entitled
"Medical Nasal Dilator" (designating Europe, China, Canada, Brazil, Australia,
Japan).
<PAGE>
APPENDIX B
PCT DESIGNATED FOREIGN COUNTRIES
Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and
maintained in accordance with Article 7:
1. Europe: Italy, Portugal, United Kingdom, Germany, Spain and France;
2. Canada;
3. Brazil;
4. Australia;
5. China; and
6. Japan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>7
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
Exhibit 21.1
SUBSIDIARIES
CNS International, Inc.
CNS FSC, Inc.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
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, 2000, relating to the consolidated balance sheets of
CNS, Inc. and subsidiaries as of December 31, 1999, and 1998, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999, which report is included in the December 31, 1999, annual
report on Form 10-K of CNS, Inc.
/s/ KMPG LLP
Minneapolis, Minnesota
March 28, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>9
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 859,852
<SECURITIES> 37,997,409
<RECEIVABLES> 11,369,815
<ALLOWANCES> 0
<INVENTORY> 4,905,449
<CURRENT-ASSETS> 61,935,669
<PP&E> 3,738,059
<DEPRECIATION> 1,728,000
<TOTAL-ASSETS> 65,336,835
<CURRENT-LIABILITIES> 11,752,761
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 192,946
<OTHER-SE> 53,391,128
<TOTAL-LIABILITY-AND-EQUITY> 65,336,835
<SALES> 46,050,208
<TOTAL-REVENUES> 46,050,208
<CGS> 18,358,435
<TOTAL-COSTS> 46,387,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,857,489)
<INCOME-TAX> (2,101,138)
<INCOME-CONTINUING> (13,756,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,756,351)
<EPS-BASIC> (.89)
<EPS-DILUTED> (.89)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
