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Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<SEC-DOCUMENT>0000897101-01-500081.txt : 20010409
<SEC-HEADER>0000897101-01-500081.hdr.sgml : 20010409
ACCESSION NUMBER: 0000897101-01-500081
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CNS INC /DE/
CENTRAL INDEX KEY: 0000814258
STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]
IRS NUMBER: 411580270
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-16612
FILM NUMBER: 1589708
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-K405
<SEQUENCE>1
<FILENAME>cns010440_10k.htm
<DESCRIPTION>CNS, INC. FORM 10-K 12-31-2000
<TEXT>
<HTML>
<HEAD>
<!-- Control Number: 010440 -->
<!-- Rev Number: 3.0 -->
<!-- Client Name: CNS, Inc. -->
<!-- Project Name: Form 10-K -->
<!-- Firm Name: Prepared by AFPI EDGAR Plus -->
<TITLE>CNS, Inc. Form 10-K</TITLE>
</HEAD>
<BODY>
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<H1 ALIGN=CENTER><FONT SIZE=3>UNITED STATES<BR>SECURITIES AND EXCHANGE COMMISSION</FONT><BR>
<FONT SIZE=2>Washington, D.C. 20549<BR><BR></FONT><FONT SIZE=3>FORM 10-K</FONT></H1>
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<P ALIGN="left"><B></B></P>
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<P><FONT SIZE="2"><B>|X| ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></P>
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<P ALIGN="CENTER">For the fiscal year ended December 31, 2000</P>
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<A NAME="A006"></A>
<P ALIGN="CENTER"><B>OR</B></P>
<P><FONT SIZE="2"><B>|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934</B></FONT></P>
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<P ALIGN="CENTER"><FONT SIZE="2">For the Transition period from _________ to __________</FONT></P>
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<A NAME="A008"></A>
<P ALIGN="CENTER"><B>COMMISSION FILE NUMBER: 0-16612</B></P>
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<A NAME="A009"></A>
<P ALIGN="CENTER"><FONT SIZE=3><B>CNS, INC.</B><BR></FONT><FONT SIZE=2>(Exact name of registrant as specified in its charter)</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" ALIGN="CENTER" WIDTH="600">
<TR VALIGN="BOTTOM">
<TD WIDTH="65%" ALIGN="CENTER"><B><U>Delaware</U></B></TD>
<TD WIDTH="34%" ALIGN="CENTER"><B><U>41-1580270</U></B></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="CENTER">(State or other jurisdiction</TD>
<TD ALIGN="CENTER">(I.R.S. Employer</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="CENTER">of incorporation or organization)</TD>
<TD ALIGN="CENTER">Identification No.)</TD></TR>
</TABLE>
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<P ALIGN="CENTER"><B>P.O. Box 39802 <BR>Minneapolis, MN 55439</B> <BR>(Address of principal executive
offices and zip code)</P>
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<P><FONT SIZE=3>Registrant's telephone number, including area code: (952) 229-1500 </FONT></P>
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<P><FONT SIZE=3>Securities registered pursuant to section 12(b) of the Act: None </FONT></P>
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<P><FONT SIZE=3>Securities registered pursuant to section 12(g) of the Act: </FONT></P>
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<TR VALIGN=TOP>
<TD WIDTH=15%> </TD>
<TD WIDTH=85%>
<FONT SIZE="3"><U>Title
of each class</U><BR> Common Stock, par value of $.01 per share <BR>Preferred Stock purchase rights</FONT></TD>
</TR>
</TABLE>
<BR>
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<P><FONT SIZE=3>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>
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<P><FONT SIZE=3>Indicate by check mark if disclosure of delinquent filers
pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X| </FONT></P>
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<P><FONT SIZE=3>As of March 15, 2001, assuming as market value the price of
$4.375 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 $49,000,000. </FONT></P>
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<P><FONT SIZE=3>As of March 15, 2001, the Company had outstanding 14,126,269
shares of Common Stock of $.01 par value per share. </FONT></P>
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<P><FONT SIZE=3>Documents Incorporated by Reference: Portions of the
Company’s Proxy Statement for its Annual Meeting of Stockholders to be held
on May 23, 2001, are incorporated by reference into Part III of this Form 10-K. </FONT></P>
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<P ALIGN="CENTER"><B><U>TABLE OF CONTENTS</U></B></P>
<PRE><FONT SIZE="1">
<B><U>PART I</U></B>
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 17
Item 3. Legal Proceedings.............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................ 17
<B><U>
PART II</U></B>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 18
Item 6. Selected Financial Data....................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................... 26
Item 8. Financial Statements and Supplementary Data................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 26
<B><U>PART III</U></B>
Item 10. Directors and Executive Officers of the Registrant............................ 27
Item 11. Executive Compensation........................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 27
Item 13. Certain Relationships and Related Transactions................................ 27
<B><U>PART IV</U></B>
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................................ 28
SIGNATURES...................................................................................... 29
EXHIBIT INDEX................................................................................... 31
FINANCIAL STATEMENTS............................................................................ F-1
</FONT></PRE>
<BR><BR><BR>
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<P ALIGN="CENTER">2</P>
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<P><FONT SIZE=3><B><U>Forward-Looking Statements </U></B> </FONT></P>
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<P> 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 the patents on its
Breathe Right nasal strip technology which have been, and in the future may be,
the subject of litigation and could be narrowed as a result of the outcome of the
reexamination of one such patent by the United States Patent and Trademark
Office (see Item 1, “Patents, Trademarks and Proprietary Rights” and
Item 3, “Litigation”); (iv) the Company has faced and will continue to
face challenges in successfully developing and introducing new products; (v) the
Company operates in competitive markets where recent and potential entrants into
the nasal dilator segment pose competitive challenges (see Item 1,
“Competition”); (vi) the Company is dependent upon contract
manufacturers for the production of substantially all of its products; and (vii) the
Company currently purchases most of its major components for its nasal strip
products from different contract manufacturers that obtain the raw materials
from a single supplier that has the right to discontinue the production and sale
of the materials at any time (see Item 1, “Manufacturing and
Operations”).</P>
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<A NAME="A018"></A>
<P ALIGN="CENTER"><B>PART I</B></P>
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<A NAME="A019"></A>
<P><FONT SIZE=3><B><U>Item 1. BUSINESS</U></B> </FONT></P>
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<P><FONT SIZE="3"><B>General</B></FONT> </P>
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<P> CNS, Inc. (the
“Company”) is in the business of developing and marketing 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. In
2000, the Company expanded its 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 are available in multiple
colors.</P>
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<P> The Company introduced its
new FiberChoice® chewable fiber tablets in the second quarter of 2000. The
FiberChoice product is an orange-flavored, chewable fiber tablet that offers
consumers an effective, convenient and good-tasting way to supplement their
daily intake of dietary fiber. In the fourth quarter of 1999, the Company
introduced a product for race horses called the FLAIR™ 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.</P>
<BR><BR><BR>
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<P ALIGN="CENTER">3</P>
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<P> 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>
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<P><FONT SIZE="3"><B>Management</B></FONT> </P>
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<P> The Company’s management
structure is organized 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; International Team; FLAIR
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>
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<P> <B><I>Breathe Right Brand
Team.</I></B><I></I> 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 introduced two new products during the fall of 2000 to coincide with
the cough/cold season, nasal strips for colds with Vicks mentholated vapors for
the entire family and nasal strips for children.</P>
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<P> <B><I>FiberChoice
Team.</I></B><I></I> The Company introduced its FiberChoice chewable fiber
tablets 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 leads the Company’s launch of the
product.</P>
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<P> <B><I>International
Team</I>.</B> The Company began shipping Breathe Right nasal strips to new
distributor partners in Europe, Australia and Japan during the second and third
quarters of 2000. The International Team is responsible for developing and
managing the Company’s overseas business and its relationships with
distributors and representatives in international markets. See Item 1,
“International Distribution.”</P>
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<P> <B><I>FLAIR Team.</I></B> The Company introduced the
FLAIR equine nasal strip during the fourth quarter of 1999. The Company's FLAIR Product
Team is responsible for the strategic development and management of the FLAIR equine
nasal strip business.</P>
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<P> <B><I>Business Development
Team.</I></B><I></I> 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>
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<P><FONT SIZE="3"><B>Products</B></FONT> </P>
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<P> <B><I>Breathe Right Nasal
Strips</I></B><I></I>. 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 in tan, clear, mentholated
and stars for kid’s varieties.</P>
<BR><BR><BR>
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<P ALIGN="CENTER">4</P>
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<P> The Breathe Right nasal strip
includes two embedded plastic strips. When folded down onto the sides of the
nose, the Breathe Right nasal strip lifts the side walls of the nose outward to
open the nasal passages. The product improves nasal breathing upon application
and does not include any medication, thereby avoiding any medicinal side
effects. The Breathe Right nasal strip is offered in three sizes (kid’s,
small/medium and large) to accommodate the range of nose sizes. The Breathe
Right nasal strip is packaged for the consumer market in various quantities
ranging between 8 to 38 strips per box. The Company believes that the Breathe
Right nasal strip is priced comparably to medicinal decongestants on a daily or
nightly dosage basis at suggested retail prices ranging between $3.99 and $11.99
per box.</P>
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<P> The Company expanded the
Breathe Right nasal strip line with the introduction of the Breathe Right nasal
strip with Vicks mentholated vapors and the Breathe Right nasal strip for kids
in the second half of 2000. The Company has licensed the Vicks trademark from
The Proctor & Gamble Company for use with the new mentholated nasal strip
product. The Vicks mentholated nasal strip 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. Research has
suggested that the mentholated nasal strip product could increase the
Company’s customer base for nasal strip products by more clearly
communicating that Breathe Right nasal strips can ease the congestion associated
with the common cold. The Kid’s Strips are sized specifically to fit
children and include a brightly colored version and a mentholated version.</P>
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<P> <B><I>Breathe Right Brand
Products.</I></B><I></I> 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>
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<P> <B><I>FiberChoice Chewable
Fiber Tablets.</I></B><I></I> The Company introduced nationally its FiberChoice
chewable fiber tablets in the second quarter of 2000. FiberChoice is an
orange-flavored, chewable tablet that offers consumers an effective, convenient,
good-tasting way to supplement their daily intake of dietary fiber. The active
ingredient in FiberChoice tablets is fructan, a natural fiber source. Fructan is
a prebiotic that helps promote the growth of healthy intestinal tract bacteria.
The FiberChoice tablets can be taken without water and have been clinically
proven to be as effective as powder alternatives. The product is available in
both regular and sugar-free varieties and packaged in 160-count and 90-count
bottles and 10-count rolls.</P>
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<P> <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 several clinical trials 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>
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<P> 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 equine nasal
strips are being sold in tack shops and equine supply stores and through equine
catalogs. The Company’s FLAIR product remains a developing business but is
not expected to have a material impact on the Company’s revenues. The
Company is in the process of exploring strategic alternatives for the FLAIR
equine nasal strip business.</P>
<BR><BR><BR>
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<P ALIGN="CENTER">5</P>
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<P><FONT SIZE="3"><B>Markets</B></FONT> </P>
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<P> <B><I>Breathe Right Brand Product Line.</I></B> The
Breathe Right brand of products includes the Breathe Right nasal strip and the Breathe
Right saline nasal spray.</P>
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<P> 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 usage and 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.</P>
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<P> 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
advertising emphasizes the ability of Breathe Right nasal strips to provide
immediate relief from nasal congestion due to colds.</P>
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<P> The Company’s marketing
efforts capitalize on the benefits of Breathe Right products to consumers in
various, and often overlapping, consumer market segments:</P>
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<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>
<TD WIDTH=90%><FONT SIZE=3>
<I><U>Nasal Congestion Relief</U>.</I> Most 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<B> </B>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. In the fall of 2000, this repositioning as a product for colds was
reinforced by the introduction of Breathe Right nasal strips with Vicks
mentholated vapors. At the same time, the product line was extended into kid
sizes, with a brightly colored “stars” strip and a Kid Strip with
Vicks mentholated vapors.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>
<TD WIDTH=90%><FONT SIZE=3>
<I><U>Snoring Relief</U>.</I> Breathe Right nasal strips were effective in
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></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>
<TD WIDTH=90%><FONT SIZE=3>
<I><U>Improved Breathing for Consumers with Deviated Septa</U>.</I>
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.</FONT></TD>
</TR>
</TABLE>
<BR>
<BR><BR><BR>
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<P ALIGN="CENTER">6</P>
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<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>
<TD WIDTH=90%><FONT SIZE=3>
<I><U>Athletic Market</U></I><U></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 and the Breathe Right brand.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FiberChoice Chewable
Fiber Tablets.</I></B><I></I> 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 $325 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FLAIR Equine Nasal
Strips.</I></B><I></I> 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 and exhaled during which
soft tissue on the side of the nose can collapse. The equine nasal strip
supports those soft tissues so they do not collapse, which allows a horse to
breathe more easily with less stress developing in the lungs. Results from
several clinical trials indicate that horses wearing the FLAIR equine nasal
strip use less energy to breathe 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="3"><B>Business Strategies</B></FONT> </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company’s business
strategy includes attempting to increase 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, maximizing the potential of recently introduced products and
successfully introducing new products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>Increasing New Consumer
Product Trial and Increasing Product Usage.</I></B><I></I> 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 1999, the Company began to emphasize the
position of the Breathe Right nasal strip as a product that provides instant,
drug-free</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">7</P>
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<P><FONT SIZE=3>relief for those suffering from nasal congestion and other
symptoms due to the common cold, allergies and sinusitis. The Company’s new
advertising introduced the Breathe Right nasal stip for the common cold with
Vicks mentholated vapors, emphasizing the ability of Breathe right nasal strips
to provide instant, drug-free relief from nasal congestion. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>Marketing New Breathe
Right Brand Products.</I></B><I></I> 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 were introduced during the
fall of 2000 in order to coincide with the cough/cold season.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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
Company is devoting significant resources to the development of its
international business. During 2000, the Company entered into agreements with
new distributors and representatives for the distribution of the Company’s
nasal strip products in Japan, Australia and a number of major markets in
Europe. The Company is currently in negotiations with additional distributors
and representatives for distribution of the its nasal strip products in
international markets. The Company believes that the network that it has
established 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.” During 2001, the Company intends to launch its Breathe Right
nasal strips with Vicks mentholated vapors in international markets in
conjunction with each market’s cough/cold season.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>Acquiring, Developing
and Marketing New Products.</I></B><I></I> 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
FiberChoice chewable fiber tablet was launched in the second quarter of 2000 and
the FLAIR equine nasal strip was introduced in the fourth quarter of 1999. See
Item 1, “Marketing Strategies.” 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B><B>Marketing Strategies</B></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>Breathe Right Nasal
Strips</I>.</B> The Company’s marketing efforts for Breathe Right products
are directed to different consumer markets–the nasal congestion market and
the snoring market. The Company has primarily used television and magazine
advertising to market its products. The Company’s advertising focuses on
the Breathe Right brand benefit of providing instant, drug-free relief from
nasal congestion. The Company also uses product promotion programs, such as
sampling, coupons, public relations activities and joint promotional programs
with Vicks products, to encourage product trial and repeat purchases.
Introduction of the new Breathe Right nasal strips for colds with Vicks
mentholated vapors has aided in expanding the Company’s penetration into
this significant market. Marketing communications are generally designed to
promote trial of Breathe Right brand products by increasing consumer awareness
of the benefits of each product.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Marketing efforts for Breathe
Right nasal strips as an aid in the prevention of snoring were also extended in
2000 into direct mail sampling and sampling through direct response television.
In both programs, self-identified snorers were sent a sample of Breathe Right
nasal strips along with a brochure explaining the causes of snoring and how the
Company’s Breathe Right products can alleviate the condition.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">8</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 8, page: 8" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>recognized consumer market research firm indicated that
approximately 35% of those in the United States who had purchased Breathe Right
nasal strips have purchased additional product in the same year. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FiberChoice Chewable
Fiber Tablets</I>.</B> The Company’s marketing efforts for FiberChoice
chewable fiber tablets has concentrated on advertising through television and
magazines to consumers who are 55 or more years old. In addition, the Company
has distributed samples of the product and coupons to current users of bulk
fiber products. The Company believes that direct response television is an
efficient sampling vehicle. In these advertisements, consumers are invited to
call a toll-free number to receive a free 10-count sample of FiberChoice fiber
tablets. This risk-free trial has led to a high conversion rate among both
existing users of fiber products and those new to the fiber category.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FLAIR Equine Nasal
Strips</I>.</B> The Company’s marketing communications for FLAIR equine
nasal strips focus on the health benefits of using the product identified in
clinical studies. Marketing efforts have included 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 has also used top horse trainers and competitors to
endorse the FLAIR equine nasal strip. FLAIR remains a developing business, but
is not expected to have a material impact on the Company’s revenues. The
Company is in the process of exploring strategic alternatives for the FLAIR
equine nasal strip.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>New Products Strategy</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company is committed to
the future expansion of its product base through the acquisition and development
of unique consumer health care products and technologies that have good market
potential. 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. For example, the Company has
licensed the Vicks trademarks from The Proctor & Gamble Company for use with
its new product, Breathe Right nasal strips for colds with Vicks mentholated
vapors. The Company has also licensed the intellectual property that enabled
recent introductions of the FiberChoice dietary fiber supplement and the FLAIR
equine nasal strip.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Domestic Distribution</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Breathe Right nasal
strip, the Breathe Right saline nasal spray and the FiberChoice chewable fiber
tablets 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 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">9</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 9, page: 9" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>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.
FiberChoice chewable tablets are positioned in the bulk fiber and laxative
sections of stores. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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
2000, one retail chain accounted for approximately 19% 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 Company’s products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The FLAIR equine nasal strip
is sold primarily to trainers and owners in the horse racing industry through
tack shops, equine catalogs, veterinarians and equine supply stores.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>International Distribution</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> From August of 1995 through
September of 1999, The 3M Company (“3M”) was the exclusive distributor
of the Company’s Breathe Right nasal strip products outside the United
States and Canada. The contractual relationship with 3M produced less than
anticipated results in international markets. On September 30, 1999, the Company
and 3M agreed to terminate the existing distribution agreement in a manner that
enabled the Company to take a direct and immediate role in the sale, marketing
and distribution of its nasal strip products in international markets. Under the
agreement, 3M had the right to sell its existing stock of the Company’s
nasal strip products outside the United States and Canada until June 30, 2000.
As part of the agreement, 3M also agreed not sell any nasal dilator devices for
a period of two years.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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. In 2000, the
Company established a broad-ranging international distribution system for the
Breathe Right nasal strip business that consists of both sales representatives
and reselling distributors. The Company has established relationships with
distributors in Canada, Australia, Japan and most of the major markets in
Europe. The Company is also pursuing additional distribution opportunities.
Sales are supervised by the Company from its Minnesota headquarters and by CNS
International, Inc., a wholly-owned domestic subsidiary with one business
manager in Europe. The business manager supervises and coordinates the
activities of the distributors and sales representatives in Europe. Distributors
are appointed largely on an exclusive basis, with territories consisting of one
or more countries, and it is expected that this pattern will continue. The
Company retains control over the packaging and advertising in all territories.
Most shipments are made in bulk, either to reselling distributors who package
for the local market, or to warehouse facilities abroad, where final packaging
is arranged by the Company directly before shipment to retailers.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Manufacturing and Operations</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company currently
subcontracts with multiple manufacturers to produce Breathe Right nasal strips,
Breathe Right saline nasal spray, FiberChoice chewable fiber tablets and FLAIR
equine nasal strips. 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.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">10</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 10, page: 10" -->
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Each of the manufacturers
builds the product to the Company’s specifications using materials
specified by the Company. 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 to ensure that they meet quality
requirements. The Company inspects its contract manufacturers on a regular basis
in an attempt to ensure compliance with 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 9001/EN 46001.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> To ensure consistent quality,
the Company contracts with converters that currently purchase most of the major
components for the Breathe Right nasal strips directly from 3M. Although similar
materials are currently available from other suppliers, the Company has
historically utilized 3M components in its products. While the Company does not
expect 3M to do so, 3M has the right to discontinue its production or sale of
the materials used in its nasal strip products at any time. 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Competition</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>Breathe Right Nasal
Strips</I>.</B> 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, herbs, supplements and homeopathic
remedies. 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
approximately 90% of the nasal dilator market despite the entry of other
competitors into the market place.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.”</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FiberChoice Chewable
Fiber Tablet</I>.</B> 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 with significant market potential that offers consumers an effective,
convenient and good-tasting alternative to existing products.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">11</P>
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<!-- MARKER LABEL="sheet: 11, page: 11" -->
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <B><I>FLAIR Equine Nasal
Strip</I>.</B> 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
Furosemide (“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. Unlike Lasix, however, the FLAIR equine nasal strip has not
been shown to be a race-day, performance enhancing product.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Government Regulation</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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. Nasal dilators have been classified by the FDA as Class I
devices and exempt from pre-market notification.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 most states, including the leading racing states
of Kentucky, California and Florida,</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">12</P>
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<!-- MARKER LABEL="sheet: 12, page: 12" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>and most of the provinces in Canada. The product has not, however, been
approved for racing in New York or New Jersey. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Sales of the Company’s
products outside the United States are subject to regulatory requirements that
vary widely from country to country. 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 Breathe
Right nasal strips in Europe. Regulatory approvals have also been obtained for
the Breathe Right nasal strip in Australia and additional approvals in other
jurisdictions will be sought by the Company as needed for all of its products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Patents, Trademarks and Proprietary Rights</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company has registered
trademarks, owns a patent and pending patent application, 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, methods and
designs for the Company’s current and possible future products. The Company
believes its trademarks are important as protection for the Company’s image
in the marketplace. The Company’s success is and will continue to be
dependent upon the existence of and ability to protect its patents, trademarks
and those under its licenses and the Company intends to take such steps as are
necessary to protect its intellectual property rights.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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
patents and licensed patents on the basis of prior art or introduce competitive
products. In addition to seeking patent protection for its products, the Company
also intends to protect its proprietary technologies and proprietary information
as trade secrets.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 licensors’ patents issued in any country, including those that issue on
pending applications. The Company is obligated</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">13</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 13, page: 13" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>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>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 one patent and one patent application
pending in the U.S. and has filed a corresponding patent application seeking
protection in several foreign countries of rights to nasal dilation technology
that it acquired.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The licensor of the
FiberChoice chewable fiber tablet has filed 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 four patent applications with the U.S. Patent and
Trademark Office resulting in one issued patent so far. Eight 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
three issued U.S. patents. Each of these licensors has filed corresponding
patent applications for acquiring patent protection in several foreign countries
on the licensed products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 that may
be issued in the future, if any, will effectively foreclose the development of
competitive products. 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company has engaged in
litigation to enforce its patent rights relating to the Breathe Right nasal
strip. In 1999, the Company brought a suit in federal district court to enforce
one of the licensed nasal strip patents containing the broadest claims and
providing the most comprehensive protection. See Item 3, “Legal
Proceedings.” In the course of this suit, the defendant requested
reexamination in the U.S. Patent and Trademark Office (the “Patent
Office”) of the Company’s primary licensed patent. On September 29,
2000, the Patent Office issued an Office Action in Reexamination and rejected
certain of the claims. Other claims that were not subject to reexamination
remain in effect. The Company has joined the licensor in the exercise of its
right to contest the action of the Patent Office and has provided reasons that
it believes establish that the claims should not have been rejected. The Company
and its licensor are also seeking to amend certain claims to provide the Company
with additional protection under the patent. The final outcome of the
reexamination by the Patent Office is therefore uncertain. Although an adverse
ruling from the Patent Office could narrow the range of protection available for nasal
dilators and limit the breadth of the Company’s patent protection, the
Company believes that its current portfolio of both pending patent applications
and issued patents will enable it to maintain significant patent protection for
its nasal strip products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company has registered
its Breathe Right and FiberChoice trademarks in the United States and in several
foreign countries and is seeking further registration of those trademarks and
other trademarks. The Company has also licensed the right to a U.S. trademark
registration for the FLAIR equine nasal strip product.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">14</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 14, page: 14" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Employees</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> At March 15, 2001, the
Company had 80 full-time employees and 1 part-time employee, of whom 19 were
engaged in operations, 32 in general administration, 25 in marketing and sales
and 5 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.</P>
<!-- MARKER FORMAT-SHEET="Head Major" -->
<A NAME="A046"></A>
<H1 ALIGN=CENTER><FONT SIZE=3>EXECUTIVE OFFICERS OF THE COMPANY</FONT></H1>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="100%">
<TR VALIGN="BOTTOM">
<TD><U>Name and Age</U></TD>
<TD> <U>Office</U></TD></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="31%" ALIGN="LEFT">Daniel E. Cohen (48)</TD>
<TD WIDTH="69%" ALIGN="LEFT">Chairman of the Board, Chief Executive Officer and Director</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">Marti Morfitt (43)</TD>
<TD ALIGN="LEFT">President, Chief Operating Officer and Director</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">M. W. Anderson, Ph.D (50)</TD>
<TD ALIGN="LEFT">Vice President of Product Development and Regulatory Affairs</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">David J. Byrd (47)</TD>
<TD ALIGN="LEFT">Vice President of Finance, Chief Financial Officer and Treasurer</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">Kirk P. Hodgdon (41)</TD>
<TD ALIGN="LEFT">Vice President of Business Development</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">John J. Keppeler (39)</TD>
<TD ALIGN="LEFT">Vice President of Worldwide Sales</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">Larry R. Muma (50)</TD>
<TD ALIGN="LEFT">Vice President of Operations</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">Teri P. Osgood (37)</TD>
<TD ALIGN="LEFT">Vice President of U.S. Marketing</TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT">Carol J. Watzke (53)</TD>
<TD ALIGN="LEFT">Vice President of Consumer Strategy</TD></TR>
</TABLE>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">15</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 15, page: 15" -->
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>David J. Byrd</I> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Larry R. Muma</I> has
served as the Company’s Vice President of Operations since January of 2001.
From May of 2000 to December of 2000, Mr. Muma served as Director of Supply
Chain for Novartis, Inc., a worldwide manufacturer and distributor of health
care and pharmaceutical products. From February of 1992 to April of 2000, Mr.
Muma served in various operations positions of increasing responsibility with
The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food
products, serving from February 1994 to April of 1999 as Vice President of
Operations for Pillsbury North America and most recently from April of 1999 to
April of 2000 as Vice President of Operations Frozen Division.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">16</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 16, page: 16" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 2. PROPERTIES</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company leases approximately 73,000 square feet of office, manufacturing and warehouse space
in Eden Prairie, Minnesota. The lease expires in November of 2010 and contains a renewal option.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 3. LEGAL PROCEEDINGS</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 contended that nasals strips manufactured, sold and/or offered for sale by JMS
infringed the Company's licensed United States Patent No. 5,533,499 (the "499 Patent"),
and that JMS 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 was invalid, unenforceable and not infringed, and that the
complained of statements were not false and misleading. JMS also moved before the United
States Patent and Trademark Office (the "Patent Office") for reexamination of the 499
Patent.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> On August 14, 2000, the United States
District Court for the District of Minnesota approved a Stipulation and Order of
Dismissal without prejudice in the above-referenced matter. The case was dismissed
without prejudice based on the pendency of the reexamination proceeding concerning the
499 Patent. As previously reported, certain of the claims relating to the Company's 499
Patent that were pending in reexamination were rejected by the Patent Office. Other
claims that were not subject to reexamination remain in effect. The Company has joined
the licensor in the exercise of its right to contest the action of the Patent Office, and
has provided reasons that it believes that the claims should not have been rejected and
is seeking to amend certain claims to provide additional protection under the 499 Patent.
Although an adverse ruling from the Patent Office could narrow the range of protection available
for nasal dilators and limit the breadth of the Company's patent protection, the Company
believes that its current portfolio of both pending and issued patents will enable it to
maintain significant patent protection for its nasal strip products. See Item 1,
"Patents, Trademarks and Proprietary Rights."</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> None.</P>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">17</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 17, page: 17" -->
<!-- MARKER FORMAT-SHEET="Head Major" -->
<A NAME="A056"></A>
<H1 ALIGN=CENTER><FONT SIZE=3>PART II</FONT></H1>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED<BR>
STOCKHOLDER MATTERS</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Market Information</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<PRE><FONT SIZE="1">
FISCAL YEAR ENDED DECEMBER 31, 2000 HIGH LOW
---- ---
First Quarter...............................................7.109 3.938
Second Quarter..............................................5.000 3.500
Third Quarter...............................................5.500 3.906
Fourth Quarter..............................................4.125 3.125
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
---- ---
First Quarter...............................................4.063 3.000
Second Quarter..............................................3.469 2.813
Third Quarter...............................................4.188 3.469
Fourth Quarter..............................................7.188 3.625
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> On March 15, 2001, the last sale price
of the Common Stock was $4.375 per share.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Shareholders</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> As of March 15, 2001, there were
approximately 750 owners of record of Common Stock and an estimated 8,000 beneficial
holders whose shares were registered in the names of nominees.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Dividends</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">18</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 18, page: 18" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<A NAME="A062"></A>
<P><FONT SIZE=3><B><U>Item 6. SELECTED FINANCIAL DATA</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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, 1998 through December 31, 2000 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.</P>
<PRE><FONT SIZE="1">
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
Years ended December 31,
2000 1999 1998 1997 1996
------------------------------------------------------------
Net sales $ 68,892 $ 46,050 $ 53,623 $ 66,957 $ 85,866
Operating income (loss) (17,843) (18,696) 701 9,644 21,743
Net income (loss) (15,660) (13,756) 2,982 8,770 15,522
Diluted net income (loss) per share (1.09) (0.89) 0.16 0.44 0.78
Working capital $ 32,507 $ 50,183 $ 72,025 $ 76,919 $ 78,403
Total assets 56,344 65,337 84,963 88,495 89,409
Stockholders' equity 36,937 53,584 75,866 80,645 79,775
</FONT></PRE>
<BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">19</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 19, page: 19" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION<BR> AND RESULTS OF OPERATIONS</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Overview</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company was founded in
1982. From 1987 until 1995, the Company designed, manufactured and marketed
computer-based diagnostic devices for sleep disorders. In 1995, the Company
divested itself of the assets related to its sleep disorders business to focus
on the Breathe Right® nasal strip. In 2000, the Company launched
FiberChoice® chewable fiber tablets.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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. The Company has also received
FDA clearance to market the Breathe Right nasal strip for the reduction or
elimination of snoring, for the temporary relief of nasal congestion and for the
temporary relief of breathing difficulties due to a deviated nasal septum.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 enabled the Company to regain control of the
marketing, sales and distribution of Breathe Right nasal strips in international
markets. In exchange for the one-time contract termination fee noted below, the
international distribution agreement with 3M terminated on June 30, 2000. During
2000, the Company added distributors who have reintroduced nasal strips in
Europe, Japan and Australia.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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. During 2000, the U.S. Patent and Trademark Office (“Patent
Office”) reexamined the Company's primary licensed patent and rejected certain claims. The
Company has joined its licensor in the exercise of its right to contest the action of the Patent Office. The Company and
its licensor are also seeking to amend certain claims to provide the Company with additional
protection under the patent. The final outcome of the reexamination is therefore
uncertain. Although an adverse ruling could narrow the range of protection available for nasal dilators and limit the breadth of the
Company’s patent protection, the Company believes that its current
portfolio of both pending patent applications and issued patents will enable it to maintain
significant patent protection for its nasal strip products.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 </P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">20</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 20, page: 20" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>a road map for new product development. During 1999 and 2000, the Company
invested aggressively in marketing, selling and product development expenses to build the
Breathe Right brand and launch additional products. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> During 2000, the Company
launched FiberChoice chewable fiber tablets. The tablets are positioned in the
bulk fiber supplement market and give the Company an entry into the digestive
health products market. FiberChoice tablets can be taken without water and have
been clinically proven to be as effective as powder alternatives.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Operating Results</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<PRE><FONT SIZE="1">
Three Months Ended Year
---------------------------------------------------- Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
2000 2000 2000 2000 2000
---------- --------- ---------- --------- -----------
(In thousands)
Domestic net sales $ 14,338 $ 12,697 $ 16,618 $ 19,082 $ 62,735
International net sales 296 606 2,603 2,652 6,157
---------- --------- ---------- --------- -----------
Net sales 14,634 13,303 19,221 21,734 68,892
Cost of goods sold 4,846 5,110 6,875 8,076 24,907
---------- --------- ---------- --------- -----------
Gross profit 9,788 8,193 12,346 13,658 43,985
---------- --------- ---------- --------- -----------
Operating expenses:
Marketing and selling 14,312 7,876 11,606 21,487 55,281
General and administrative 1,173 1,178 1,237 1,237 4,825
Product development 488 414 403 417 1,722
Contract termination fee 0 0 0 0 0
---------- --------- ---------- --------- -----------
Total operating expenses 15,973 9,468 13,246 23,141 61,828
---------- --------- ---------- --------- -----------
Operating loss (6,185) (1,275) (900) (9,483) (17,843)
Investment income 498 566 507 612 2,183
---------- --------- ---------- --------- -----------
Loss before income taxes $ (5,687) $ (709) $ (393) $ (8,871) $(15,660)
========== ========= ========== ========= ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Three Months Ended Year
------------------------------------------------ Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
2000 2000 2000 2000 2000
--------- -------- -------- --------- --------
Domestic net sales
International net sales
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 33.1 38.4 35.8 37.2 36.2
--------- -------- -------- --------- --------
Gross profit 66.9 61.6 64.2 62.8 63.8
--------- -------- -------- --------- --------
Operating expenses:
Marketing and selling 97.8 59.2 60.4 98.9 80.2
General and administrative 8.0 8.9 6.4 5.7 7.0
Product development 3.3 3.1 2.1 1.9 2.5
Contract termination fee 0.0 0.0 0.0 0.0 0.0
--------- -------- -------- --------- --------
Total operating expenses 109.1 71.2 68.9 106.5 89.7
--------- -------- -------- --------- --------
Operating loss (42.3) (9.6) (4.7) (43.6) (25.9)
Investment income 3.4 4.3 2.6 2.8 3.2
--------- -------- -------- --------- --------
Loss before income taxes (38.9)% (5.3)% (2.0)% (40.8)% (22.7)%
========= ======== ======== ========= ========
<PAGE>
Three Months Ended Year
--------------------------------------------------- Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
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
Cost of goods sold 4,688 3,629 3,992 6,049 18,358
---------- --------- ---------- --------- -----------
Gross profit 7,246 4,556 6,471 9,419 27,692
---------- --------- ---------- --------- -----------
Operating expenses:
Marketing and selling 11,430 4,361 4,644 12,918 33,353
General and administrative 803 824 941 815 3,383
Product development 979 843 782 702 3,306
Contract termination fee 0 0 6,345 0 6,345
---------- --------- ---------- --------- -----------
Total operating expenses 13,212 6,028 12,712 14,435 46,387
---------- --------- ---------- --------- -----------
Operating loss (5,966) (1,472) (6,241) (5,016) (18,695)
Investment income 899 698 643 598 2,838
---------- --------- ---------- --------- -----------
Loss before income taxes $ (5,067) $ (774) $ (5,598) $ (4,418) $(15,857)
========== ========= ========== ========= ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Three Months Ended Year
------------------------------------------------ Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
1999 1999 1999 1999 1999
--------- -------- -------- --------- --------
Domestic net sales
International net sales
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 39.3 44.3 38.2 39.1 39.9
--------- -------- -------- --------- --------
Gross profit 60.7 55.7 61.8 60.9 60.1
--------- -------- -------- --------- --------
Operating expenses:
Marketing and selling 95.8 53.3 44.4 83.5 72.4
General and administrative 6.7 10.1 9.0 5.3 7.3
Product development 8.2 10.3 7.5 4.5 7.2
Contract termination fee 0.0 0.0 60.6 0.0 13.8
--------- -------- -------- --------- --------
Total operating expenses 110.7 73.6 121.5 93.3 100.7
--------- -------- -------- --------- --------
Operating loss (50.0) (18.0) (59.6) (32.4) (40.6)
Investment income 7.5 8.5 6.1 3.9 6.2
--------- -------- -------- --------- --------
Loss before income taxes (42.5)% (9.5)% (53.5)% (28.6)% (34.4)%
========= ======== ======== ========= ========
<PAGE>
Three Months Ended Year
-------------------------------------------------- Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
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
Cost of goods sold 4,470 4,454 4,242 5,320 18,486
---------- --------- ---------- --------- -----------
Gross profit 10,011 7,503 8,507 9,115 35,136
---------- --------- ---------- --------- -----------
Operating expenses:
Marketing and selling 9,694 5,581 7,032 6,470 28,777
General and administrative 1,047 1,167 810 596 3,620
Product development 395 589 540 515 2,039
---------- --------- ---------- --------- -----------
Total operating expenses 11,136 7,337 8,382 7,581 34,436
---------- --------- ---------- --------- -----------
Operating income (loss) (1,125) 166 125 1,534 700
Investment income 690 730 712 660 2,792
---------- --------- ---------- --------- -----------
Income (loss) before income taxes $ (435) $ 896 $ 837 $ 2,194 $ 3,492
========== ========= ========== ========= ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Three Months Ended Year
--------------------------------------------- Ended
Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,
1999 1999 1999 1999 1999
--------- -------- -------- --------- --------
Domestic net sales
International net sales
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 30.9 37.3 33.3 36.9 34.5
--------- -------- -------- --------- --------
Gross profit 69.1 62.7 66.7 63.1 65.5
--------- -------- -------- --------- --------
Operating expenses:
Marketing and selling 66.9 46.7 55.2 44.8 53.7
General and administrative 7.2 9.8 6.4 4.1 6.8
Product development 2.7 4.9 4.2 3.6 3.8
--------- -------- -------- --------- --------
Total operating expenses 76.9 61.4 65.7 52.5 64.2
--------- -------- -------- --------- --------
Operating income (loss) (7.8) 1.4 1.0 10.6 1.3
Investment income 4.8 6.1 5.6 4.6 5.2
--------- -------- -------- --------- --------
Income (loss) before income taxes (3.0)% 7.5% 6.6% 15.2% 6.5%
========= ======== ======== ========= ========
</FONT></PRE>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">21</P>
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<!-- MARKER LABEL="sheet: 21, page: 21" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>2000 Compared to 1999</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Net Sales</I>. Net sales
were $68.9 million for 2000 compared to $46.1 million for 1999. Sales increased
by 49.6% for the year due to increased advertising expenditures and new product
introductions. For the year 2000, domestic sales increased to $62.7 million from
$45.1 for 1999. The increase reflects increased Breathe Right nasal strip sales
and shipments of FiberChoice chewable tablets. Breathe Right strip sales grew
due to initial shipments of the Company’s new mentholated and kids strips
and the growth of the core Breathe Right nasal strip business. In addition, 1999
sales were reduced by reserves for returns of product in connection with the
introduction of new packaging that year.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> International sales increased
to $6.2 million for 2000 from $988,000 for 1999. The higher level of sales
reflects the reintroduction of Breathe Right nasal strips through the
Company’s new international distributors in Japan, Europe and Australia.
The distribution agreement with the Company’s previous international
distributor was terminated effective June 30, 2000.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Gross Profit</I>. Gross
profit was $44.0 million for 2000 compared to $27.7 million for 1999. Gross
profit as a percentage of net sales was 63.8% for 2000 compared to 60.1% for
1999. Gross profit in 2000 was unfavorably impacted by the lower gross profit on
FiberChoice chewable tablets, especially the 10-count trial size tubes. The
Company also disposed of an excess inventory of pillow covers and incurred
higher costs associated with expediting inventory purchases and deliveries.
During the third and early fourth quarters, customer orders exceeded forecasts,
resulting in additional costs to meet customer delivery schedules. Margins
should improve 2 to 4% during 2001. The gross profit percentage was lower in
1999, primarily due to costs for the transition of Breathe Right nasal strips to
new product packaging.</P>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">22</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 22, page: 22" -->
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Marketing and Selling
Expenses</I>. Marketing and selling expenses were $55.3 million for 2000
compared to $33.4 million for 1999. Marketing and selling expenses as a
percentage of net sales increased to 80.2% in 2000 from 72.4% in 1999,
reflecting the planned investment in advertising needed to return the Breathe
Right brand to growth, relaunch Breathe Right nasal strips in key international
markets and launch FiberChoice tablets.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>General and Administrative
Expenses</I>. General and administrative expenses were $4.8 million for 2000
compared to $3.4 million for 1999. This increase was primarily from
infrastructure to support the growing business and business development expenses
to identify future product opportunities. General and administrative expenses as
a percentage of net sales decreased to 7.0% in 2000 from 7.3% in 1999 as a
result of the higher level of sales in 2000.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Product Development
Expenses</I>. Product development expenses were $1.7 million for 2000 compared
to $3.3 million for 1999. Product development expenses as a percentage of net
sales decreased to 2.5% in 2000 from 7.2% in 1999. This decrease represents the
substantial completion of development expenses for new products the Company
introduced in 2000 and a shift in emphasis to business development efforts.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Investment Income.</I> Investment income
was $2.2 million for 2000 compared to $2.8 million for 1999. The decrease was primarily
the result of a decrease in investments.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Income Tax Benefit (Expense).</I> There
was no income tax provision for 2000 due to tax loss carryforwards.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>1999 Compared to 1998</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 was terminated
effective June 30, 2000.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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 1998. Marketing and selling expenses as a
percentage of net sales increased to 72.4% in 1999</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">23</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 23, page: 23" -->
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>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>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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 FiberChoice chewable
fiber tablets and FLAIR equine nasal strips. Product development expenses as a
percentage of net sales increased to 7.2% in 1999 from 3.8% in 1998.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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 allowed
the Company to regain control of the international business on a phased schedule
that was completed June 30, 2000.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Investment Income.</I> Investment income
was $2.8 million for 1999 and 1998.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Seasonality</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company believes that a
portion of Breathe Right nasal strip use is for the temporary relief of nasal
congestion and congestion-related snoring. Sales of nasal congestion remedies
are higher during the fall and winter seasons because of increased use during
the cold and allergy seasons.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Liquidity and Capital Resources</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> At December 31, 2000, the
Company had cash, cash equivalents and marketable securities of $31.3 million
and working capital of $32.5 million.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Operating Activities</I>.
The Company used cash in operations of approximately $4.4 million in 2000
primarily due to the net loss for the year offset by an increase in operating
liabilities. The Company used cash in operations of $12.1 million in 1999
compared to cash provided of $9.3 million in 1998. The decreased cash flow in
1999 was primarily due to the net loss for the year.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Investing Activities</I>.
Sales and maturities of marketable securities exceeded purchases by $9.2 million in 2000. Net proceeds were
used to fund the cash used in operations, purchases of property and equipment and
purchase treasury shares. Sales and maturities of marketable</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">24</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 24, page: 24" -->
<P>securities exceeded
purchases by $21.1 million in 1999. Net proceeds were used to fund the cash used in
operations and purchase treasury shares. Marketable securities purchased consisted of
cash equivalents, corporate bonds, U.S. Government obligations and municipal bonds. </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company purchased $2.0
million of property and equipment in 2000, primarily associated with the
Company’s move to different facilities, and $331,000 in 1999, primarily
associated with the upgrade of management information systems.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> <I>Financing Activities</I>.
The Company purchased 396,000 shares of its common stock for $1.5 million in
2000 and purchased 2.3 million shares for $8.6 million in 1999. 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 $103,000 in 2000 and $499,000 in 1999 from
the exercise of stock options and issuance of stock under the employee stock
purchase plan.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company believes that its
existing funds will be sufficient to support its planned operations for the
foreseeable future.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>Recent Accounting Pronouncements</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> In 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging
Activities (as amended by SFAS No. 137 with respect to the effective date and
SFAS No. 138 with respect to certain interpretations). SFAS No. 133 establishes
new standards for recognizing all derivatives as either assets or liabilities,
and measuring those instruments at fair value. The Company adopted the new
standard on January 1, 2001. Adoption of this standard had no impact of the
Company’s financial position or results of operations.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> In December 1999, the
Securities and Exchange Commission (“SEC”) staff issued Staff
Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB 101”). SAB 101 summarizes certain SEC staff
views in applying accounting principals generally accepted in the United States
of America to revenue recognition in financials. SAB 101 was adopted by the
Company in the fourth quarter of 2000 and had no impact on the results of
operations.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> In 2000, the Emerging Issues
Task Force (“EITF”) reached a consensus on Issue No. 00-14,
“Accounting for Certain Sales Incentives”. This EITF requires
companies to present in their statements of operations, certain sales incentives
as sales allowances, resulting in a reduction of net sales. The Company
currently records sales incentives covered by this EITF as operating expenses.
The Company will be required to adopt this EITF beginning with the quarter
ending June 30. 2001. If the Company would have applied the presentation set
forth in this issue in 2000, 1999 and 1998, net sales would have been reduced by
$1,527,000, $3,126,000 and $1,263,000, respectively. Operating expenses would
have also been reduced by the same amounts in the corresponding years. This
issue does not impact operating income (loss) for any of these years.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">25</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 25, page: 25" -->
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The table below provides information
about the Company's cash and cash equivalents and marketable securities as of December
31, 2000:</P>
<PRE><FONT SIZE="1">
(In thousands)
COST FAIR VALUE
---- ----------
Due within one year $17,829 $17,812
Due after one year
through three years 13,394 13,511
------- -------
$31,223 $31,323
======= =======
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Consolidated Balance Sheets of the
Company as of December 31, 2000 and 1999, 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, 2000, 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> None.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">26</P>
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<!-- MARKER LABEL="sheet: 26, page: 26" -->
<!-- MARKER FORMAT-SHEET="Para Center Bold" -->
<A NAME="A101"></A>
<P ALIGN="CENTER"><B>PART III</B></P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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 23, 2001 (the “2001
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.</P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 11. EXECUTIVE COMPENSATION</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Information required under this item
is contained in the section entitled “Executive Compensation” in the Company's 2001 Proxy
Statement and is incorporated herein by reference.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Information required under this item
is contained in the section entitled “Security Ownership of Principal Stockholders and
Management” in the Company's 2001 Proxy Statement and is incorporated herein by reference.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Not Applicable.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">27</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 27, page: 27" -->
<!-- MARKER FORMAT-SHEET="Para Center Bold" -->
<A NAME="A107"></A>
<P ALIGN="CENTER"><B>PART IV</B></P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->
<P><FONT SIZE=3><B><U>Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K</U></B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>(a) Documents filed as part of this Report: </FONT></P>
<PRE><FONT SIZE="1">
FORM 10-K
PAGE REFERENCE
--------------
1. Financial Statements.
Independent Auditors' Report.................................................F-1
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998..........................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.................F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 2000, 1999 and 1998........F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998..........................................F-5
Notes to Consolidated Financial Statements...................................F-6
2. Financial Statement Schedules.
None.
3. Exhibits.
See "Exhibit Index" on the page following the Signature Page.
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=3>(b) Reports on Form 8-K. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> The Company did not file a report on
Form 8-K during the fourth quarter ended December 31, 2000.</P>
<BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">28</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 28, page: 28" -->
<!-- MARKER FORMAT-SHEET="Head Major" -->
<A NAME="A110"></A>
<H1 ALIGN=CENTER><FONT SIZE=3>SIGNATURES</FONT></H1>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<TABLE WIDTH="100%">
<TR><TD WIDTH=50%></TD>
<TD>CNS, INC.<BR>
("Registrant")</TD></TR>
<TR><TD> </TD></TR>
<TR>
<TD>
Dated: March 26, 2001 </TD> <TD> <U>By /s/ Daniel E. Cohen</U><BR>
Daniel E. Cohen<BR>
Chairman of the Board, Chief Executive Officer
<BR>and Director</TD></TR>
</TABLE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed by the following persons on
March 26, 2001 on behalf of the Registrant in the capacities indicated.</P>
<!-- MARKER FORMAT-SHEET="Para Center Bold" -->
<P ALIGN="CENTER"><B>(Power of Attorney and Signatures)</B></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> 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.</P>
<P><FONT SIZE=3>
<U>/s/ Daniel E. Cohen</U><BR>
Daniel E. Cohen
Chairman of the Board, Chief Executive Officer<BR>
and Director<BR>
(Principal Executive Officer)</FONT></P>
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<P><FONT SIZE="3"><U>/s/ Marti Morfitt</U> <BR>Marti Morfitt <BR>President, Chief Operating Officer and
Director</FONT> </P>
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<P><FONT SIZE="3"><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)</FONT> </P>
<BR><BR><BR><BR><BR><BR><BR>
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<P ALIGN="CENTER">29</P>
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<P><FONT SIZE="3"><U>/s/ Patrick Delaney</U> <BR>Patrick Delaney<BR>Director</FONT> </P>
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<P><FONT SIZE="3"><U>/s/ H. Robert Hawthorne</U> <BR>H. Robert Hawthorne<BR>Director</FONT> </P>
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<P><FONT SIZE="3"><U>/s/ R. Hunt Greene</U> <BR>R. Hunt Greene<BR>Director</FONT> </P>
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<P><FONT SIZE="3"><U>/s/ Andrew J. Greenshields</U><BR> Andrew J. Greenshields<BR>Director</FONT> </P>
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<P><FONT SIZE="3"><U>/s/ Richard W. Perkins</U> <BR>Richard W. Perkins<BR>Director</FONT> </P>
<BR><BR><BR><BR><BR><BR><BR>
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<P ALIGN="CENTER">30</P>
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<A NAME="A126"></A>
<P ALIGN="CENTER">CNS, INC.<BR><U>EXHIBIT INDEX</U></P>
<PRE><FONT SIZE="1">
<B><U>Exhibit No.</U></B> <B><U>Description</U></B>
3.1 Company's Certificate of Incorporation as amended to date (incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December
31, 1995 (the "1995 Form 10-K")).
3.2 Company's Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form
10-K)).
10.1* CNS, Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-8, File No. 33-14052C).
10.2* CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-8, File No. 33-29454).
10.3* CNS, Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990).
10.4* 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).
10.5* CNS, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit A of the Definitive
Proxy Statement for the Company's Annual Meeting of Stockholders that was held on May
3, 2000).
10.6** License Agreement dated January 30, 1992 between the Company and Creative Integration
and Design, Inc. (incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-2, File No. 33-46120).
10.7** License Agreement dated November 10, 1997 between the Company and Onesta Nutrition,
Inc. (incorporated by reference to Exhibit 10.9 to the 1999 Form 10-K).
10.8** License Agreement dated March 12, 1999 between the Company and WinEase LLC
(incorporated by reference to Exhibit 10.10 of the 1999 Form 10-K).
10.9** License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen
Cronk (incorporated by reference to Exhibit 10.11 of the 1999 Form 10-K).
10.10** License Agreement dated March 1, 2000 between the Company and The Procter & Gamble
(the "P&G" License Agreement).
10.11** Distributor Agreement dated August 1, 2000 between the Company and Eisai Co., Ltd.
10.12** Repackaging Agreement dated August 1, 2000 between the Company and Herusu, Co., Ltd.
</FONT></PRE>
<BR><BR><BR>
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<P ALIGN="CENTER">31</P>
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<PRE><FONT SIZE="1">
10.13* 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")).
10.14* 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).
10.15* 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).
10.16* 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).
10.17* 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).
10.18* 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).
10.19* 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).
10.20* 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).
10.21* Employment Agreement between the Company and Larry R. Muma dated January 2, 2001.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the 1999 Form
10-K).
23.1 Consent of KPMG LLP.
24.1 Powers of Attorney (included on the signature page hereof).
</FONT></PRE>
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<P>__________
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<P><FONT SIZE=3>*Indicates Compensatory Agreement. </FONT></P>
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<P><FONT SIZE=3>**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>
<BR><BR><BR>
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<P ALIGN="CENTER">32</P>
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<P ALIGN="CENTER"><B>Independent Auditors’Report</B></P>
<BR><BR><BR><BR><BR>
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<P><FONT SIZE=3>The Board of Directors and Stockholders<BR>CNS, Inc.: </FONT></P>
<BR><BR>
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<P><FONT SIZE=3>We have audited the accompanying consolidated balance sheets of
CNS, Inc. and subsidiaries as of December 31, 2000 and 1999 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, 2000. These consolidated 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>
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<P><FONT SIZE=3>We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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>
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<P><FONT SIZE=3>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, 2000 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. </FONT></P>
<BR>
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<P><FONT SIZE=3>/s/ KPMG LLP</FONT></P>
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<P><FONT SIZE=3>Minneapolis, Minnesota<BR>January 18, 2001 </FONT></P>
<BR><BR><BR><BR><BR>
<P ALIGN="CENTER">F-1</p>
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<P ALIGN="CENTER"><B>CNS, INC.</B><BR>Consolidated Statements of Operations <BR>Years ended December 2000, 1999
and 1998<BR> (in thousands, except per share amounts)</P>
<PRE><FONT SIZE="1">
2000 1999 1998
- -------------------------------------------------------------------------------------------------
Net sales $ 68,892 $ 46,050 $ 53,623
Cost of goods sold 24,907 18,358 18,485
- -------------------------------------------------------------------------------------------------
Gross profit 43,985 27,692 35,138
- -------------------------------------------------------------------------------------------------
Operating expenses:
Marketing and selling 55,281 33,354 28,777
General and administrative 4,825 3,383 3,621
Product development 1,722 3,306 2,039
Contract termination fee 0 6,345 0
- -------------------------------------------------------------------------------------------------
Total operating expenses 61,828 46,388 34,437
- -------------------------------------------------------------------------------------------------
Operating income (loss) (17,843) (18,696) 701
Interest income 2,234 2,596 2,791
Gain (loss) on sales of marketable securities (51) 243 0
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes (15,660) (15,857) 3,492
Income tax benefit (expense) 0 2,101 (510)
- -------------------------------------------------------------------------------------------------
Net income (loss) $(15,660) $(13,756) $ 2,982
=================================================================================================
Basic net income (loss) per share $ (1.09) $ (.89) $ .16
=================================================================================================
Weighted average number of common shares outstanding 14,372 15,435 18,079
=================================================================================================
Diluted net income (loss) per share $ (1.09) $ (.89) $ .16
=================================================================================================
Weighted average number of common
and assumed conversion shares outstanding 14,372 15,435 18,249
=================================================================================================
</FONT></PRE>
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<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial
statements. </FONT></P>
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<P ALIGN="CENTER">F-2</P>
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<P ALIGN="CENTER"><B>CNS, INC.</B><BR> Consolidated Balance Sheets <BR>December 31, 2000 and 1999 <BR>(in
thousands, except per share amounts)</P>
<PRE><FONT SIZE="1">
Assets 2000 1999
- ---------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 2,079 $ 860
Marketable securities 29,244 37,998
Accounts receivable, net of allowance for doubtful accounts
of $300 in 2000 and $280 in 1999 12,582 11,370
Income taxes receivable 0 3,178
Inventories 4,752 4,905
Prepaid expenses and other current assets 3,257 3,625
- ---------------------------------------------------------------------------------------------
Total current assets 51,914 61,936
Property and equipment, net 3,201 2,010
Product rights, net 1,229 1,391
- ---------------------------------------------------------------------------------------------
$ 56,344 $ 65,337
=============================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 12,600 $ 5,422
Accrued expenses 6,251 6,331
Accrued income taxes 556 0
- ---------------------------------------------------------------------------------------------
Total current liabilities 19,407 11,753
- ---------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - authorized 8,484 shares;
none issued or outstanding 0 0
Common stock - $.01 par value; authorized 50,000 shares;
issued and outstanding 19,295 shares in 2000 and 1999 193 193
Additional paid-in capital 61,182 61,531
Treasury shares - at cost; 5,179 shares in 2000
and 4,838 shares in 1999 (23,279) (22,221)
Retained earnings (deficit) (1,259) 14,401
Accumulated other comprehensive income (loss) 100 (320)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 36,937 53,584
Commitments (notes 9 and 10)
- ---------------------------------------------------------------------------------------------
$ 56,344 $ 65,337
=============================================================================================
</FONT></PRE>
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<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial
statements. </FONT></P>
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<P ALIGN="CENTER">F-3</P>
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<P ALIGN="CENTER"><B>CNS, INC.</B> <BR>Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) <BR>Years ended December 31, 2000, 1999 and 1998 <BR>(in thousands)</P>
<PRE><FONT SIZE="1">
Common stock Treasury shares
--------------------- Additional -------------------------
Number Par paid-in Number
of shares value capital of shares Cost
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 19,295 $ 193 $ 63,496 961 $ (8,220)
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (25) (5) 43
Stock options exercised 0 0 (1,538) (172) 1,777
Treasury shares purchased 0 0 0 1,908 (8,270)
Comprehensive income:
Net income for the year 0 0 0 0 0
Unrealized gains on marketable securities
net of income tax effect of $154 0 0 0 0 0
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 19,295 193 61,933 2,692 (14,670)
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (98) (18) 151
Stock options exercised 0 0 (414) (108) 860
Warrants issued 0 0 110 0 0
Treasury shares purchased 0 0 0 2,272 (8,562)
Comprehensive loss:
Net loss for the year 0 0 0 0 0
Unrealized losses on marketable securities
net of income tax effect of $154 0 0 0 0 0
Total comprehensive loss
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 19,295 193 61,531 4,838 (22,221)
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (131) (26) 214
Stock options exercised 0 0 (218) (29) 238
Treasury shares purchased 0 0 0 396 (1,510)
Comprehensive loss:
Net loss for the year 0 0 0 0 0
Unrealized gains on marketable securities
net of income tax effect of $0 0 0 0 0 0
Total comprehensive loss
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 19,295 $ 193 $ 61,182 5,179 $ (23,279)
======================================================================================================================
<PAGE>
[WIDE TABLE CONTINUED FROM ABOVE]
Accumulated
Retained other Total
earnings comprehensive stockholders'
(deficit) income (loss) equity
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 25,175 $ 0 $ 80,644
Stock issued in connection with
Employee Stock Purchase Plan 0 0 18
Stock options exercised 0 0 239
Treasury shares purchased 0 0 (8,270)
Comprehensive income:
Net income for the year 2,982 0 2,982
Unrealized gains on marketable securities
net of income tax effect of $154 0 253 253
---------------
Total comprehensive income 3,235
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 28,157 253 75,866
Stock issued in connection with
Employee Stock Purchase Plan 0 0 53
Stock options exercised 0 0 446
Warrants issued 0 0 110
Treasury shares purchased 0 0 (8,562)
Comprehensive loss:
Net loss for the year (13,756) 0 (13,756)
Unrealized losses on marketable securities
net of income tax effect of $154 0 (573) (573)
---------------
Total comprehensive loss (14,329)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 14,401 (320) 53,584
Stock issued in connection with
Employee Stock Purchase Plan 0 0 83
Stock options exercised 0 0 20
Treasury shares purchased 0 0 (1,510)
Comprehensive loss:
Net loss for the year (15,660) 0 (15,660)
Unrealized gains on marketable securities
net of income tax effect of $0 0 420 420
---------------
Total comprehensive loss (15,240)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ (1,259) $ 100 $ 36,937
=============================================================================================================
</FONT></PRE>
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<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial
statements. </FONT></P>
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<P ALIGN="CENTER">F-4</P>
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<P ALIGN="CENTER"><B>CNS, INC.</B> <BR>Consolidated Statements of Cash Flows<BR> Years ended December
31, 2000, 1999 and 1998 <BR>(in thousands)</P>
<PRE><FONT SIZE="-2">
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ (15,660) $ (13,756) $ 2,982
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,051 1,029 855
Net loss on disposal of property and equipment 81 0 0
Warrants issued 0 110 0
Deferred income taxes 0 1,486 284
Changes in operating assets and liabilities:
Accounts receivable (1,212) (3,579) 3,601
Inventories 153 3,918 (199)
Prepaid expenses and other current assets 3,546 (4,009) 500
Accounts payable and accrued expenses 7,654 2,655 1,247
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (4,387) (12,146) 9,270
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of marketable securities (63,151) (97,157) (43,429)
Sales and maturities of marketable securities 72,324 118,230 43,497
Payments for purchases of property and equipment (2,019) (330) (1,101)
Payments for product rights (141) (259) (229)
Redemption of certificate of deposit, restricted 0 0 360
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 7,013 20,484 (902)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from the issuance of common stock
under Employee Stock Purchase Plan 83 53 18
Proceeds from the exercise of stock options 20 446 239
Purchase of treasury shares (1,510) (8,562) (8,270)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,407) (8,063) (8,013)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,219 275 355
Cash and cash equivalents:
Beginning of year 860 585 230
- ---------------------------------------------------------------------------------------------------------------------------
End of year $ 2,079 $ 860 $ 585
===========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 0 $ 0 $ 0
Cash paid during the year for income taxes 0 344 700
===========================================================================================================================
</FONT></PRE>
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<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial
statements. </FONT></P>
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<P ALIGN="CENTER">F-5</P>
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<P ALIGN="CENTER"><B>CNS, INC.</B><BR> Notes to Consolidated Financial Statements <BR>December 31, 2000,
1999 and 1998</P>
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<P><FONT SIZE=3><B>(1) Summary of Significant Accounting Policies</B> </FONT></P>
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<TD WIDTH=5%> </TD>
<TD WIDTH=95%>
<FONT SIZE="3"><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>
</TABLE>
<BR>
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<TD WIDTH=5%> </TD>
<TD WIDTH=95%>
<FONT SIZE="3"><B>Business</B>
The Company designs, manufactures and markets consumer products, including Breathe Right®nasal
strips and FiberChoice®tablets. The Company’s products are sold over-the-counter
in retail outlets, including mass merchant, drug, grocery and club stores. The Company
primarily uses international distributors to market Breathe Right nasal strips outside
the U.S.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%> </TD>
<TD WIDTH=95%>
<FONT SIZE="3"><B>Revenue
Recognition</B> Revenue from sales is recognized at the time products are shipped.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE="3"><B>Accounting Estimates</B>
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE="3"><B>Fair Value
of Financial Instruments</B> All financial instruments are carried at amounts that
approximate fair value.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P> <B>Cash Equivalents </B> Cash
equivalents consist primarily of money market funds.</P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><B>Inventories</B> Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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.</FONT></TD>
</TR>
</TABLE>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%> </TD>
<TD WIDTH=95%>
<FONT SIZE="3"><B>Foreign
Sales</B> Foreign sales are made primarily in U.S. dollars.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P ALIGN="CENTER">F-6</P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><B>Advertising </B> The Company capitalizes the production costs of advertising and expenses
these costs the first time the advertising runs.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><B>Net Income Per Share </B> Basic net income (loss) per share and diluted net income
(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.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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).</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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 (as amended by SFAS
No. 137 with respect to the effective date and SFAS No. 138 with respect to
certain interpretations). SFAS No. 133 establishes new standards for recognizing
all derivatives as either assets or liabilities, and measuring those instruments
at fair value. The Company adopted the new standard on January 1, 2001. Adoption
of this standard had no impact of the Company’s financial position or
results of operations.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>In December 1999, the Securities and Exchange Commission (“SEC”) staff
issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB 101”). SAB 101 summarizes certain SEC staff
views in applying accounting principals generally accepted in the United States
of America to revenue recognition in financials. SAB 101 was adopted by the
Company in the fourth quarter of 2000 and had no impact on the results of
operations.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>In 2000, the Emerging Issues Task Force (“EITF”) reached a consensus on
Issue No. 00-14, “Accounting for Certain Sales Incentives”. This EITF
requires companies to present in their statements of operations, certain sales
incentives as sales allowances, resulting in a reduction of net sales. The
Company currently records sales incentives covered by this EITF as operating
expenses. The Company will be required to adopt this EITF beginning with the
quarter ending June 30. 2001. If the Company would have applied the presentation
set forth in this issue in 2000, 1999 and 1998, net sales would have been
reduced by $1,527,000, $3,126,000 and $1,263,000, respectively. Operating
expenses would have also been reduced by the same amounts in the corresponding
years. This issue does not impact operating income (loss) for any of these
years.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P ALIGN="CENTER">F-7</P>
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<P><FONT SIZE=3><B>(2) Marketable Securities </B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>Marketable securities, including estimated fair value based on quoted market prices or
valuation models, are summarized as follows (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE="1">
December 31
-------------------------------------
2000 1999
------------------- ----------------
Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------
Cash equivalents $ 2,166 $ 2,166 $ 659 $ 659
Certificates of deposit 0 0 5,500 5,493
Corporate bonds 24,308 24,413 24,088 23,879
U.S. Government obligations 2,670 2,665 8,070 7,967
- ---------------------------------------------------------------------------
Total marketable securities $29,144 $29,244 $38,317 $37,998
==========================================================================
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Maturities of marketable
securities at December 31, 2000 are as follows (in thousands):</P>
<PRE><FONT SIZE="1"> Cost Fair Value
- ----------------------------------------------------------------
Due within one year $ 15,750 $ 15,733
Due after one year through three years 13,394 13,511
- ----------------------------------------------------------------
Total marketable securities $ 29,144 $ 29,244
================================================================
</FONT></PRE>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>There were realized losses of $51,000 during 2000, realized gains of $243,000 during
1999 and no realized gains or losses in 1998.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P><FONT SIZE=3><B>(3) Advertising</B> </FONT></P>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>At December 31, 2000 and 1999, $1,924,000 and $1,762,000, respectively, of
advertising costs were reported as assets. Advertising expense was $36,221,000
in 2000, $18,024,000 in 1999, and $15,431,000 in 1998.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P><FONT SIZE=3><B>(4) Details of Selected Balance Sheet Accounts</B> </FONT></P>
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<P> Details of selected balance sheet
accounts are as follows (in thousands):</P>
<PRE><FONT SIZE="1"> 2000 1999 1998
- -----------------------------------------------------------------------
Allowance for doubtful accounts:
Balance beginning of year $ 280 $ 210 $ 210
Plus provision for doubtful accounts 26 96 43
Less charge offs 6 26 43
- -----------------------------------------------------------------------
Balance end of year $ 300 $ 280 $ 210
=======================================================================
December 31
-------------------
2000 1999
- ---------------------------------------------------------------------------------
Inventories:
Finished goods $ 2,139 $ 2,935
Raw materials and component parts 2,613 1,970
- ---------------------------------------------------------------------------------
Total inventories $ 4,752 $ 4,905
=================================================================================
Property and equipment:
Production equipment $ 556 $ 408
Office equipment and information systems 3,623 3,330
Leasehold improvements 1,022 0
- ---------------------------------------------------------------------------------
5,201 3,738
Less accumulated depreciation 2,000 1,728
- ---------------------------------------------------------------------------------
Property and equipment, net $ 3,201 $ 2,010
=================================================================================
Product rights:
Product rights $ 2,548 $ 2,407
Less accumulated amortization 1,319 1,016
- ---------------------------------------------------------------------------------
Product rights, net $ 1,229 $ 1,391
=================================================================================
Accrued expenses:
Promotions and allowances $ 3,085 $ 3,106
Royalties and commissions 954 678
Salaries, incentives and paid time off 2,000 991
Packaging transition 0 1,426
Other 212 130
- ---------------------------------------------------------------------------------
Total accrued expenses $ 6,251 $ 6,331
=================================================================================
</FONT></PRE>
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<P ALIGN="CENTER">F-8</P>
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<A NAME="A083"></A>
<P><FONT SIZE=3><B>(5) Stockholders’Equity</B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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 3,650,000 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 options
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, 2000.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P> Stock option activity under these
plans is summarized as follows:</P>
<PRE><FONT SIZE="1"> Weighted-average Shares
Exercise Price Shares Available
Per Share Outstanding For Grant
- ------------------------------------------------------------------------
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
New 2000 Plan 700,000
Granted 4.01 358,400 (358,400)
Exercised 4.18 (69,690) 0
Canceled 5.18 (168,100) 168,100
- ------------------------------------------------------------------------
Balance at December 31, 2000 $ 4.33 1,892,000 574,450
========================================================================
</FONT></PRE>
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<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>Information on outstanding and currently exercisable options by price range as of December
31, 2000, is summarized as follows:</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE="1">
Weighted-average Weighted-average Exercisable Weighted-average
Price Range Total Number Remaining Life Exercise Number of Exercise
Per Share of Shares (Years) Price Shares Price
- -----------------------------------------------------------------------------------------------
$ 2.13 - 2.81 257,900 7.9 $ 2.78 100,700 $ 2.73
3.10 - 4.00 722,800 6.5 3.56 390,400 3.23
4.13 - 5.00 328,600 7.7 4.65 199,932 4.74
5.44 - 5.94 482,700 5.1 5.49 418,700 5.49
7.25 100,000 6.6 7.25 97,500 7.25
--------- ---------
1,892,000 1,207,232
========= =========
</FONT></PRE>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>At December 31, 2000, the weighted-average remaining contractual life of
outstanding options was 6.6 years. At December 31, 2000, 1999 and 1998,
currently exercisable options aggregated 1,207,232, 1,091,156 and 1,051,800
shares of common stock, respectively and the weighted-average exercise price of
those options was $4.55, $4.73 and $4.62, respectively.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>The per share weighted-average fair value of stock options granted during 2000, 1999
and 1998 is estimated as $2.60, $1.98 and $3.20, 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 6.50% in 2000, 6.00%
in 1999 and 6.25% in 1998; and an expected life of 6 years.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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 $900,000, or
$.06 per share in 2000, $950,000, or $.06 per share in 1999 and $1,300,000, or
$.07 per share in 1998.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><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, 2000 have purchased 188,507
shares.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><B>Warrants
</B>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 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 in 2000 and for a period of five
years. Of these warrants, 31,667 hares are currently exercisable.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P ALIGN="CENTER">F-9</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 41, F-page: 9" -->
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3><B>Preferred
Stock </B>At December 31, 2000, 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>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>(6) Income Taxes</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Income tax expense (benefit)
for the three years ended December 31, 2000, is as follows (in thousands):</P>
<PRE><FONT SIZE="1"> Current Deferred Total
- ------------------------------------------------------------------------------
2000:
Federal $ 0 $ 0 $ 0
State 0 0 0
- ------------------------------------------------------------------------------
Income tax expense (benefit) $ 0 $ 0 $ 0
==============================================================================
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
==============================================================================
</FONT></PRE>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">F-10</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 42, F-page: 10" -->
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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>
</TABLE>
<BR>
<PRE><FONT SIZE="1">
2000 1999 1998
- -----------------------------------------------------------------------------
Computed tax expense (benefit) $(5,481) $(5,550) $1,222
State taxes, net of federal benefit (554) (431) 64
Tax exempt interest 0 (178) (789)
Change in deferred tax valuation allowance 6,018 3,932 0
Other 17 126 13
- -----------------------------------------------------------------------------
Actual tax expense (benefit) $ 0 $(2,101) $ 510
=============================================================================
</FONT></PRE>
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<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities for 2000 and 1999 are
presented below (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE="1"> December 31
---------------------------
2000 1999
- ----------------------------------------------------------------------------------
Deferred tax assets:
Inventory items $ 795 $ 677
Accounts receivable allowance 111 104
Product rights 246 181
Accrued expenses 1,580 1,835
Net operating loss and credit carryforwards 7,445 1.124
Unrealized loss on marketable securities 0 122
- ----------------------------------------------------------------------------------
10,177 4,043
Less valuation allowance 9,950 3,932
- ----------------------------------------------------------------------------------
227 111
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains on marketable securities (35) 0
Property and equipment (192) (111)
- ----------------------------------------------------------------------------------
(227) (111)
- ----------------------------------------------------------------------------------
Net deferred tax assets $ 0 $ 0
==================================================================================
</FONT></PRE>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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, 2000.</FONT></TD>
</TR>
</TABLE>
<BR>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>As
of December 31, 2000, the Company has reported federal net operating loss
carryforwards of approximately $17,700,000. The federal net operating loss
carryforwards expire in 2019 and 2020. The Company also has approximately
$327,000 of credits for alternative minimum tax that have no expiration date.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>(7) Sales</B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>The
Company had one significant customer who accounted for approximately 19%, 24%
and 20% of net sales in 2000, 1999 and 1998, respectively. Accounts receivable
from this customer as of December 31, 2000 and 1999 were $2,274,000 and
$4,330,000, respectively. Net sales by geographic area are as follows (in
thousands):</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE="1">
2000 1999 1998
- ------------------------------------------------------------------------
Domestic $ 62,735 $ 45,062 $ 51,855
International 6,157 988 1,768
- ------------------------------------------------------------------------
Net sales $ 68,892 $ 46,050 $ 53,623
========================================================================
</FONT></PRE>
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<P ALIGN="CENTER">F-11</P>
<!-- *************************************************************************** -->
<!-- MARKER LABEL="sheet: 42A, F-page: 11" -->
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<P><FONT SIZE=3><B>(8) Contract Termination Fee</B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>On
September 30, 1999, the Company and the 3M Company (“3M”) amended an
exclusive international distribution agreement in a manner that allowed the
Company to regain control of the marketing, sales and distribution of Breathe
Right nasal strips in international markets. In exchange for a one-time contract
termination fee of $6,345,000 paid in 1999, the international distribution
agreement with 3M terminated on June 30, 2000.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P><FONT SIZE=3><B>(9) License Agreements</B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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 $1,330,000 each year until patents for the products
expire. Royalty expense was approximately $2,692,000 in 2000, $1,477,000 in 1999
and $1,509,000 in 1998.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>(10) Operating Leases</B> </FONT></P>
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<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>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,
2000 are as follows (in thousands):</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE="1">
Year ending December 31, Amount
- ---------------------------------------------------------------
2001 $ 718
2002 732
2003 742
2004 727
2005 740
Later years 3,859
- ---------------------------------------------------------------
Future minimum lease payments $ 7,518
===============================================================
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> Total rental expense for
operating leases was $559,000 in 2000, $555,000 in 1999, and $564,000 in 1998.</P>
<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->
<P><FONT SIZE=3><B>(11) Net Income (Loss) Per Share</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P> A reconciliation of basic and
diluted weighted average common shares outstanding is as follows (in thousands):</P>
<PRE><FONT SIZE="1">
2000 1999 1998
- ----------------------------------------------------------------------------------------
Weighted average common shares outstanding 14,372 15,435 18,079
Assumed conversion of stock options 0 0 170
- ----------------------------------------------------------------------------------------
Average common and assumed conversion shares 14,372 15,435 18,249
========================================================================================
</FONT></PRE>
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<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=3></FONT></TD>
<TD WIDTH=95%><FONT SIZE=3>Options
and warrants to purchase 1,967,000 shares of common stock with a range of
exercise prices from $2.13 to $8.00 per share were outstanding during 2000 but
were not included in the computation of 2000 diluted earnings per share because
the effect would be anti-dilutive. The options expire from 2001 to 2010.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER">F-12</P>
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>cns010440_ex10-10.txt
<DESCRIPTION>EXHIBIT 10.10 TRADEMARK LICENSE AGREEMENT
<TEXT>
CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 24b-2.
EXHIBIT 10.10
TRADEMARK LICENSE AGREEMENT
BETWEEN
THE PROCTER & GAMBLE COMPANY
AND
CNS INC.
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TABLE OF CONTENTS
PAGE
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1. LICENSE....................................................................1
(a) Manufacturing.........................................................2
(b) Labeling and Packaging................................................2
(c) Sale..................................................................2
(d) Use of the Licensed Marks.............................................2
(e) Use of P&G's Name.....................................................2
2. CNS' OBLIGATIONS...........................................................3
(a) Warranties...........................................................3
(b) Compliance with Laws.................................................3
(c) Import/Export........................................................3
(d) Samples..............................................................4
(e) Artwork..............................................................4
(f) Copy Review..........................................................5
(g) Product Preview Meetings.............................................5
(h) Improper Use.........................................................6
(i) Development of Product...............................................6
(j) Prohibition on Sales.................................................6
(k) Other Approvals......................................................7
3. CNS' COVENANTS.............................................................7
(a) Authorization........................................................7
(b) Conflicts............................................................7
(c) Plant(s) Where Product is Manufactured...............................7
(d) Quality Control Sampling.............................................7
(e) Sub-Standard Product.................................................8
(f) Non-Competition......................................................8
4. P&G'S RIGHTS & OBLIGATIONS.................................................9
(a) Ownership of Licensed Marks..........................................9
(b) Cooperation.........................................................10
(c) Actions.............................................................10
(d) P&G Materials.......................................................11
(e) Use of Names........................................................11
(f) Limitations.........................................................12
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5. P&G'S COVENANTS...........................................................12
(a) Authorization.......................................................12
(b) Conflicts...........................................................12
(c) Enforceable License.................................................12
(d) Non-Competition.....................................................12
6. INDEMNIFICATION AND INSURANCE.............................................13
(a) Indemnification of P&G..............................................13
(b) Insurance...........................................................14
(c) Indemnification of CNS..............................................15
(d) Promotions..........................................................15
7. LICENSE FEES..............................................................15
(a) Calculation of Royalties............................................15
(b) Minimum Royalties...................................................16
(c) Reports.............................................................16
(d) Payment Terms.......................................................16
(e) Tax Withholding.....................................................16
8. CNS' RECORDS..............................................................17
(a) Records.............................................................17
(b) Audit Right.........................................................17
(c) Corrections.........................................................18
9. PROMOTION.................................................................18
10. TERM AND TERMINATION.....................................................19
(a) Extension and Non-Renewal...........................................19
(b) Termination by P&G..................................................19
(c) Termination for CNS Bankruptcy......................................20
(d) Termination by CNS..................................................20
(e) Change of Control...................................................21
(f) Consequences of Expiration and Termination..........................21
11. CONFIDENTIALITY..........................................................22
(a) P&G Trade Secrets...................................................22
(b) CNS Trade Secrets...................................................22
(c) Nondisclosure.......................................................23
(d) Press Releases......................................................23
12. MARKING..................................................................23
13. FORCE MAJEURE............................................................24
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14. MISCELLANEOUS............................................................24
(a) First Line Goods....................................................24
(b) Use of Mark as Names................................................24
(c) Notice..............................................................25
(d) Relationship Between the Parties....................................25
(e) Entire Agreement....................................................26
(f) Interpretation......................................................26
(g) Waiver..............................................................26
(h) Dispute Resolution..................................................26
(i) Assignment..........................................................26
(j) Other Licenses......................................................27
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TRADEMARK LICENSE AGREEMENT
THIS AGREEMENT (the "Agreement") is made effective as of the ______ day
of _____________, 2000 by and between The Procter & Gamble Company, an Ohio
Corporation with a place of business at One P&G Plaza, Cincinnati, Ohio 45202
and its affiliates and subsidiaries (collectively, "P&G"), and CNS Inc., a
Delaware corporation with a place of business at 4400 West 78th Street,
Minneapolis, MN 55435, ("CNS"). WHEREAS, P&G has the right to use and to license
others to use the VICKS(R) trademark and the triangle design trademark which are
well-known and famous marks owned and used by P&G in association with its
advertising and marketing of cough and cold products; and WHEREAS, CNS
recognizes the benefits to be derived from utilizing the VICKS(R) trademark and
the triangle design trademark and desires to utilize said trademarks upon and in
connection with the manufacture, sale, and distribution of Breathe Right(R)
nasal strips; NOW, THEREFORE, the parties agree as follows:
1. LICENSE.
Subject to the terms of this Agreement, P&G hereby grants to CNS a
non-transferable and exclusive license to use the Licensed Marks listed on
Schedule 1 (the "Licensed Marks"), on the Product listed on Schedule 2 (the
"Product"), in the countries listed in Schedule 3 (the "Area") and subject to
the restrictions outlined in Schedule 4. Schedules 1, 2, 3, 4 and 5 may be
amended at any time upon agreement by the parties in writing. Notwithstanding
anything in Schedules 1, 2, 3 or 4 to the contrary, P&G has the right to not
approve the launch of any Product in any country for the reasons pursuant to the
process set forth in Section 3 hereto and, if P&G does not approve any launch,
then CNS shall not launch such Product as set forth in Section 3 hereof. Unless
otherwise agreed to in writing by the parties, CNS shall have the right to do
the following:
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(a) Manufacturing. To manufacture (or have manufactured by a contract
manufacturer), in a manner and quality that is consistent with Product specimens
approved by
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P&G prior to the date of this Agreement, the Product for distribution and sale
under the grant given in 1(c).
(b) Labeling and Packaging. To label and package Product manufactured
under the grant given in Section 1(a), using labeling and packaging that is
consistent in form and quality with labeling and packaging specimens approved by
P&G prior to the date of this Agreement, for distribution and sale under the
grant given in Section 1(c).
(c) Sale. To distribute and sell the Product manufactured, labeled and
packaged under the grants in Sections 1 (a) and (b) solely within the Area. CNS
shall use commercially reasonable efforts to maximize sales of the Product in
the Area, consistent with the terms and conditions of this Agreement. It is
acknowledged that CNS will roll out the Product in phases over time.
(d) Use of the Licensed Marks. To use the Licensed Marks in such form
and manner as approved by P&G, which may include displaying the Licensed Marks
on CNS vehicles, stationery, advertising and promotional materials used in
connection with the sale of the Product, subject to compliance with all other
provisions set forth herein.
(e) Use of P&G Name. To use the words "The Vicks(R)trademark is used
under license from The Procter & Gamble Company, Cincinnati, Ohio" or such other
entity as P&G shall designate, or the equivalent of such language approved by
P&G on labels or packaging for Product manufactured and packed under the grants
in Sections 1 (a) and (b).
2. CNS OBLIGATIONS.
(a) Warranties. CNS warrants that the Product shall be free of
impurities or defects and will be produced, packaged and distributed in
compliance with all applicable laws and regulations of the country or countries
in which the Product is sold or distributed. CNS hereby agrees to use best
efforts to ensure that each shipment or other delivery of the Product now or
hereafter made by CNS shall, as of the date of such shipment or other delivery,
conform to all the above requirements. CNS warrants that the manufacture, use,
sale, offer for sale, or importation of the Product will not infringe the rights
of third parties, including (without limitation) patent, trademark and
copyrights. CNS expressly disclaims any implied warranties, including the
implied warranties of merchantability and fitness for a particular purpose.
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(b) Compliance with Laws. CNS warrants that the Product will conform to
all hazardous substance laws, consumer product safety laws, trade laws and any
other applicable laws of the country or countries in which the Product is sold
or distributed. CNS hereby agrees to use best efforts to ensure that each
shipment or other delivery of the Product now or hereafter made by CNS shall, as
of the date of such shipment or other delivery, conform to all the above
requirements. CNS warrants that it will obtain all necessary health licenses or
other regulatory approvals for the Product in each country or countries.
(c) Import/Export. If the Product is to be imported into any region or
country for sale, CNS agrees that CNS or a CNS distributor shall be the importer
of record and shall pay all duties and information costs in connection with the
importation of the Product into such region or country. CNS shall be liable for
all customs duties accruing at the time of such importation or at any time
thereafter and that P&G shall not appear as importer nor as the "account party"
on any documents submitted for purposes of customs procedures. Neither CNS nor
any agent of CNS shall submit any documents of any kind to any customs agency or
authority that reflect that the Product in question are to be imported for the
account of P&G without the prior written consent of P&G.
(d) Samples. Prior to the first shipment by CNS or a contract
manufacturer of the Product to a distributor, licensee or customer in each
country in the Area, and at least once each calendar year thereafter during the
Term, CNS shall provide to P&G the reasonable number of pre-production samples
requested (only once prior to first shipment) and the reasonable number of
production samples of such Product requested. Each of the foregoing items shall
be sent to the person and location designated by P&G's Marketing Director, North
America, Respiratory. P&G shall examine any such samples of the Product pursuant
to the foregoing to determine the nature and quality of the Product. P&G
designee shall review and respond in writing with regard to its approval (needed
for initial samples only) or non-approval of such samples within ten (10) of
P&G's business days after receipt of such samples from CNS. Neither CNS nor any
contract manufacturer shall make any first shipment of Product to a distributor,
licensee or customer in a region or a country in the Area unless and until CNS
has received P&G's written approval of the production samples of the Product for
such country. CNS shall immediately cease any and all
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shipments of Product by CNS or by a contract manufacturer to distributors,
licensees and/or customers in any region or country if CNS receives P&G written
disapproval of the provided production samples of such Product. In view of the
substantial tooling and other costs which will be incurred by CNS prior to its
delivery to P&G of the representative production samples, P&G agrees that it
will not unreasonably withhold its approval of such samples. CNS shall not ship
Product which has not been approved by P&G to trade customers.
(e) Artwork. Prior to the first public release of any artwork or other
materials which incorporate or otherwise include the Licensed Marks, or which
otherwise relate to the Product, in any country in the Area, CNS shall provide
to P&G the reasonable number of copies of the rough artwork requested and the
reasonable number of copies of the final artwork for each such piece of material
(together with English translations if needed) requested. Each of the foregoing
items shall be sent to the person and location designated by P&G's Marketing
Director, North America, Respiratory. P&G shall examine any such materials
received from CNS pursuant to the foregoing. P&G's designee shall review and
respond in writing with regard to its approval or non-approval of such materials
within ten (10) of P&G's business days after receipt of such materials from CNS.
Such approval will not be unreasonably withheld. CNS shall not make any first
release of such material in a region or country in the Area unless and until CNS
has received P&G's written approval of the final artwork for such material. If
either party fails to respond in writing in ten (10) days in accordance with the
above, such party will pay any late charges arising from the delay that may be
incurred by the submitting party.
(f) Copy Review. Both parties shall submit all printed materials,
advertising and promotional copy (and English translations thereof) (including
but not limited to audio and video materials) pertaining to Product and
Promotion outlined in Section 9 to the other party for written approval prior to
any release of such materials to the general public. Each of the foregoing items
shall be sent to the person and location designated by each party. Each party's
designee shall review and respond in writing with regard to its approval or
non-approval of such materials within ten (10) business days after receipt of
such materials from the other party. Approval of the submitted materials will
not be unreasonably withheld. If either party fails to respond in
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writing in ten (10) days in accordance with the above, such party will pay any
late charges arising from the delay that may be incurred by the submitting
party.
(g) Product Preview Meetings. In order to facilitate review and
approval of samples, artwork and copy, CNS and P&G shall meet at least once per
year to review plans for the next year. Such review shall include, but shall not
be limited to, new registrations and/or changes to existing registrations, new
product launches, product and packaging changes and planned copy that is related
to the Product. CNS shall propose the timing for these meetings and shall
coordinate them with P&G's Marketing Director, North America, Respiratory or
his/her designee.
(h) Improper Use. Notwithstanding anything herein to the contrary, if
at any time CNS is using the Licensed Marks on the Product, or on labels or tags
or in advertising in any country in the Area in a manner not consistent with
this Agreement, or if the standard of quality of the Products in any country in
the Area does not conform to the standards set by P&G or is not of a quality at
least equal to similar "first line" products manufactured by CNS, then P&G may
give CNS written notice to that effect, identifying in such notice the situation
to which it objects. CNS shall have fifteen (15) days after receipt of any such
notice to notify P&G of the means by which CNS intends to correct the situation
to which P&G has objected, and, notwithstanding Sections 1 or 10 thereof, if CNS
fails to complete such corrective action within a reasonable time, then P&G may
by further written notice to CNS cancel this Agreement forthwith with respect to
the country(ies) affected. If P&G so cancels, then CNS shall immediately
discontinue use of the Licensed Marks in such country(ies) and shall not
thereafter adopt any conflicting or confusingly similar mark or symbol for use
on any goods. CNS shall bear all costs of any corrective action.
(i) Development of Product. Subject to the right of approval by P&G
under Paragraph 1(a) and the other rights to P&G under this Agreement, CNS shall
have sole responsibility for research, development and design of the Product(s)
sold under this Agreement.
(j) Prohibition on Sales. The parties hereto shall cooperate to avoid
and resolve conflicts. If P&G is prohibited from selling any goods under the
Licensed Marks in any country because CNS is selling the Product, then P&G shall
give CNS at least 180 days notice of P&G's
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desire to sell goods in such country. Upon receipt of such notice, CNS shall
cease selling the Product in such country as soon as is reasonably commercially
possible, but in no event later than 180 days from the date of such notice, and
shall take all steps necessary to enable P&G to sell goods under the Licensed
Marks in that country. Subject to the preceding, P&G shall use commercially
reasonable efforts to cooperate with CNS in a phase out plan to sell out
finished goods of the Product and any unique materials specifically identified
to the manufacture of the Product for such country.
(k) Other Approvals. In addition, CNS shall submit the Product to a
testing laboratory identified by P&G for tests reasonably requested by P&G. P&G
may withhold final approval of the Product pending P&G's reasonable satisfaction
with said test results, such approval not to be unreasonably withheld. All costs
of such testing will be borne by CNS.
3. CNS COVENANTS
With regard to its actions hereunder, CNS expressly covenants as
follows:
(a) Authorization. CNS is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Delaware and is
duly authorized to do business therein, with full corporate power to enter into
this Agreement.
(b) Conflicts. To the knowledge of CNS, the execution and delivery of
this Agreement does not violate any law, rule or regulation or order, judgment,
or decree within the Area binding on either party and will not result in a
breach of any contract, agreement or other instrument to which either CNS is a
party.
(c) Plant(s) Where Product is Manufactured. CNS and its contract
manufacturer(s) (if any) shall maintain and operate a plant or plants with
manufacturing and packaging equipment adequate to produce and supply Product in
quantities adequate to meet reasonably anticipated consumer demand. CNS agrees
that in the manufacturing, packaging, distributing and selling of Product, it
shall, and CNS will use best efforts to determine that all contract
manufacturers it utilizes shall, comply with all applicable laws, regulations
and ordinances pertaining to the operation of its plants and will maintain such
plant(s) at all times in a clean, wholesome and sanitary condition consistent
with the laws of the country or countries in which the plants are located.
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(d) Quality Control Sampling. P&G representatives shall be permitted to
enter and inspect, at reasonable times during business hours and with at least
forty-eight (48) hours' prior notice, CNS's plants and warehouses where Product
is being manufactured or stored and the plants and warehouses of CNS's contract
manufacturer(s) (if any) where Product is being manufactured or stored.
(e) Sub-Standard Product.
(i) CNS covenants, warrants and guarantees that none of the
Product will be in violation of the drug, medical device or other laws of the
United States or any applicable country, and that the Product will not be
produced or shipped in violation of any applicable laws of the United States or
other country; provided, however, that CNS does not covenant, warrant or
guarantee against the Product becoming violative within the meaning of the
applicable drug, medical device, health or consumer product safety laws after
shipment by reason of causes beyond CNS's control.
(ii) If CNS learns that it has manufactured or has in its
possession or control or has shipped or sold Product which is in violation of
drug, medical device, health or other applicable laws, then CNS agrees to notify
P&G of such fact promptly and in writing. Upon notice to P&G from CNS, or upon
notice given by P&G to CNS of the existence of this Substandard Product, CNS
will promptly take whatever action is reasonably necessary to correct this
situation. If requested by P&G, CNS shall, solely at CNS's expense, promptly
retrieve from CNS's warehouse or plant and from all trade customers all such
Substandard Product. CNS must seek and receive P&G consent as to its proposed
handling of the retrieved Substandard Product. In the event of any consumer
recall, however or by whomever the recall is initiated, CNS shall, solely at
CNS's expense, promptly retrieve all such Substandard Product and CNS must seek
and receive P&G's consent as to its proposed handling of the retrieved
Substandard Product.
(f) Non-Competition. During the Term of this Agreement and in the event
that P&G has Terminated this Agreement or if CNS has determined not to renew
this Agreement upon the Expiration of its Term, then for [* * *] after such
Termination or Expiration of this Agreement CNS shall not manufacture,
distribute or sell, directly or indirectly (whether for its own account or as
agent for any other party), within the Area, any products marketed for
cough/cold symptom
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relief that are substantially similar, in the reasonable opinion of P&G, to the
Product, if such products are produced by CNS under license from another
manufacturer or distributor of cough/cold products, for example, but not limited
to, manufacturers/distributors of Tylenol, Robitussin, Contac, Sudafed, Comtrex,
Dristan, Alka Seltzer, Drixoral, Bayer, Tavist, Dimetapp, Benedryl, Benalyn,
Ricola, Ludens, Nice, Halls, Sucrets or TheraPatch. However, the preceding
provisions of this paragraph shall not apply to prevent CNS from continuing to
distribute or sell any product which, on the date of this Agreement, it is then
selling or distributing. For clarification, the above non-competition provision
does not apply if CNS Terminates the Agreement or if P&G determines not to renew
this Agreement upon the Expiration of its Term.
During the Term of this Agreement, CNS will not manufacture, distribute
or sell, directly, within the Area, its own products for cough/cold symptom
relief that are substantially similar to the Product. Notwithstanding the above,
CNS may manufacture, distribute or sell, directly, within the Area, its own
products for cough/cold symptom relief that are not substantially similar to the
Product. In addition, upon any Termination of Expiration of this Agreement, CNS
may manufacture, distribute or sell, directly, within the Area, its own products
for cough/cold symptom relief that are substantially similar to the Product.
4. P&G RIGHTS & OBLIGATIONS
(a) Ownership of Licensed Marks. CNS agrees and acknowledges that all
use of the Licensed Marks by CNS will inure to the benefit of P&G for purposes
of trademark registration and establishment of trademark rights. CNS will at any
time, whether during or after the term of this Agreement, execute any documents
reasonably required by P&G to confirm P&G ownership rights. Rights in the
Licensed Marks other than those specifically granted in this Agreement are
reserved by P&G for its own use and benefit. Rights to the Product (including
without limitation design rights and other intellectual property rights), other
than those specifically granted to P&G, are retained by CNS for its own use.
P&G warrants to CNS that P&G is the owner of all rights, titles and
interests in and to the Licensed Marks with respect to cough and cold products
in the Area (except for those regions and/or countries where P&G does not market
or sell cough/cold products). Sales by CNS shall be deemed to have been made by
P&G for purposes of trademark registration and all uses of the
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Licensed Marks by CNS shall inure to the benefit of P&G for purposes of
trademark registration and establishment of trademark rights.
(b) Cooperation. CNS will cooperate with P&G in the execution, filing
and prosecution of any trademark applications relating to the Product that P&G
may desire to file at its own expense, and for that purpose CNS will supply to
P&G from time to time such samples, containers, labels and similar material as
may reasonably be required.
(c) Actions. CNS hereby agrees that it will not acquire any copyright,
trademark, or other right in the Licensed Marks. CNS agrees that it will not
contest or assist any other party in contesting the validity of or P&G's
ownership of the Licensed Marks. CNS agrees to give P&G prompt notice of any
apparent infringement of the Licensed Marks which comes to the attention of CNS.
When requested by CNS, P&G agrees to file applications to register the Licensed
Marks for use with the Product in any region or country where required.
(i) P&G, at its sole cost and expense and in its own name, may
in its sole discretion prosecute and/or defend any action or proceeding which
P&G deems necessary or desirable to protect the Licensed Marks including but not
limited to actions or proceedings involving infringement of the Licensed Marks.
CNS shall cooperate with P&G in any such action or proceeding and upon written
request by P&G, shall join P&G in any such action or proceeding at P&G sole
cost. CNS may prosecute and defend at its sole cost and expense and in its own
name any action or proceeding to protect its own designs, styles, trademarks and
other intellectual property rights.
(ii) CNS shall not commence any action or proceeding alleging
infringement of the Licensed Marks without the prior written consent of P&G. Any
and all damages recovered in any action or proceeding commenced by P&G shall
belong solely and exclusively to P&G, but P&G shall have no liability to CNS or
to any other person for any damages awarded or recovered against CNS or such
other person, including but not limited to any action or proceeding alleging any
violation of any antitrust, trade regulation or similar statute, or unfair
competition, unless arising out of breach by P&G of its warranties and covenants
hereunder.
(iii) CNS shall indemnify and hold harmless P&G from any claim
of trademark infringement, unfair competition, passing off, etc. arising from
CNS use of the Licensed Marks
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on the Product. All Costs associated with such a claim shall be exclusively CNS
although P&G will cooperate as reasonably necessary.
(iv) CNS shall be responsible for submitting this Agreement to
the respective trademark office or authorities in the country or countries which
require it as proof of use of the Licensed Marks.
(d) P&G Materials. P&G shall have the right, without payment or
obligation to CNS, to produce and distribute catalogs, promotional brochures or
inserts, point of sale displays or other advertising matter displaying the
Product in conjunction with other products of P&G and/or others subject to the
other provisions of this Agreement and subject to the written approval of CNS.
(e) Use of Names. Both CNS and P&G shall have the right, but not the
obligation, to use the name of the other party in programs without any payment
or obligation to the other party whatsoever subject to the other provisions of
this Agreement. P&G and CNS agree that such publicity will be in good taste in
accordance with industry standards.
(f) Limitations. P&G specifically makes no representations or
warranties with respect to the availability and/or registrability of the
Licensed Marks for the Product to be marketed or sold in the Area, but P&G shall
use commercially reasonable efforts to obtain rights to the Licensed Marks for
the Product in the Area, including registration of the Licensed Marks where
necessary.
5. P&G COVENANTS
With regard to its actions hereunder, P&G expressly covenants as
follows:
(a) Authorization. P&G is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Ohio and is duly
authorized to do business therein, with full corporate power to enter into this
Agreement.
(b) Conflicts. To the knowledge of P&G, the execution and delivery of
this Agreement does not violate any law, rule or regulation or order, judgment,
or decree within the Area binding on either party and will not result in a
breach of any contract, agreement or other instrument to which either P&G is a
party. P&G is under a contractual obligation to offer a right
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of first refusal for use of the Licensed Marks on healthcare appliances or
devices associated with the field of cough/cold; such right of first refusal has
been offered and not exercised.
(c) Enforceable License. To the knowledge of P&G, this is a valid and
enforceable License Agreement.
(d) Non-Competition. During the Term of this Agreement and in the event
that CNS has Terminated this Agreement or if P&G has determined not to renew
this Agreement upon the Expiration of its Term, then for [ * * * ] after
such Termination or Expiration of the Term of this Agreement P&G shall not use,
or offer or grant to any other party any right to use the Licensed Marks on any
other item or good which is substantially similar to the Product. For
clarification, the above noncompetition provision does not apply if P&G
Terminates the Agreement or if CNS determines not to renew this Agreement upon
the Expiration of its Term.
6. INDEMNIFICATION AND INSURANCE
(a) Indemnification of P&G. CNS shall indemnify and save harmless P&G,
Its subordinates and affiliated companies, and any of their agents, servants,
officers, directors and employees from and against any liability, claim,
administrative action, cause of action, suit, damages, and expenses (including
reasonable attorney fees and costs), including but not limited to any damages
for personal injuries, including death, and property damage, which:
(i) result from Product which is sold, shipped, manufactured
or distributed in violation of any applicable law; or
(ii) result from any disputes with the trade resulting from
CNS dealings or relations therewith; or
(iii) result from any advertising, promotion, or other actions
or inactions by CNS in furtherance of its rights under this Agreement; or
(iv) are due to CNS breach of any warranty, covenant or
agreement by CNS contained herein; or
(v) result from any consumer's use or possession of the
Product; or
(vi) arise from or by reason of any acts, whether of omission
or commission, that may be committed by CNS or any of its servants, agents,
employees, sub licensees, distributors or customers in connection with CNS
performance under this Agreement, or which
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arise from or by reason of the importation, manufacture, sale and/or other
transfer or disposition by CNS of the Product. P&G and its affiliated companies
and their agents, officers, directors and employees shall have no liability
whatsoever to CNS or any other firm, corporation, organization or person for or
on account of any injury, loss, damage of any kind or nature, cost or expense
incurred by or imposed upon CNS or any other firm, corporation, organization or
person arising out of or in connection with or resulting from CNS performance of
this Agreement, including, without limitation, (a) the production, use, sale,
transfer or other disposition of any Product; or (b) any labeling, packaging,
advertising or promotion activities with respect to any of the foregoing; or
(vii) result from any governmental action, I.E., federal,
state or local.
(b) Insurance. In furtherance of CNS covenants contained in the
preceding subparagraph, CNS agrees to carry product liability insurance with
respect to the Product with a limit of liability of at least Five Million US
Dollars (US $5,000,000) per occurrence and this insurance policy shall endorse
P&G as an additional insured party. Such insurance may be obtained in
conjunction with a policy of product liability insurance which covers goods
other than the Product, and shall provide for at least thirty (30) days prior
written notice to P&G of the cancellation or material modification thereof. CNS
shall deliver to P&G a certificate evidencing the existence of such insurance
policies within thirty (30) days of signing this Agreement.
CNS agrees and covenants to maintain such insurance, including the
endorsement of P&G as an additional insured party, in full force and effect from
the effective date of this Agreement until three (3) years after the eventual
Expiration or Termination of any license hereunder. CNS may not remove P&G as an
additional insured party from CNS insurance policy without written consent from
P&G. All costs associated with CNS insurance policy, including the endorsement
of P&G as an additional insured party, will be borne by CNS.
(c) Indemnification of CNS. P&G shall indemnify and save harmless CNS,
its affiliated companies and any of their agents, servants, officers, directors
and employees from and against any liability, claim, administrative action,
cause of action, suit, damages and expenses (including reasonable attorney fees
and costs), including but not limited to any damages for personal injuries,
including death, and property damage, which are due to P&G breach of any
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warranty, covenant or agreement by P&G contained herein or which arise from P&G
production, use, sale or other disposition of its own products or any labeling,
packaging, advertising or promotion activities of its own products in connection
with or arising from any promotional activities outlined herein. Notwithstanding
the above, CNS obligations of indemnification for its Product under section 6(a)
shall apply to any sample Product that may be provided pursuant to any
promotional agreements contained herein, unless such loss or damage is caused by
the action or inaction of P&G.
(d) Promotions. For clarification, the aforementioned indemnification
provisions shall extend to any promotional efforts or activities conducted by
either party pursuant to Section 9 and any Scheduled promotional activities.
7. LICENSE FEES
(a) Calculation of Royalties. CNS agrees to pay to P&G royalties as
shown in Schedule 5, such payment to be in United States dollars determined by
the quarterly average exchange rate for the previous quarter as published by the
International Monetary Fund in International Financial Statistics (or nearest
equivalent). As used herein, Net Sales means gross sales, less discounts,
standard promotional allowances, returns and credits specific to the Product
less overseas freight and duties paid by CNS and billed to the customer. As used
herein, the term standard promotional allowances means costs incurred for
promotional events which: (i) provide payment to the trade for specific trade
performance; (ii) pay for display materials or wall components; or (iii) grant
temporary price reductions.
(b) Minimum Royalties. CNS agrees to pay minimum royalties for each
region as set forth in Schedule 6. Minimum royalty payments, if applicable,
shall be made in the final quarter of each calendar year.
(c) Reports. On or before the thirtieth (30th) day following the end of
each calendar quarter during the Term, CNS shall furnish to P&G complete and
accurate statements certified to be accurate by an officer of CNS showing, for
each country in which CNS distributed and/or sold the Product during the
preceding calendar quarter, the description and number of units of the Product
sold, the gross sales price, net sales price of the Product covered by this
Agreement and the royalty due under this Agreement. Such statement shall be
furnished to P&G whether or not
14
<PAGE>
any of the Product was sold during the preceding calendar quarter. The statement
should be sent to The Procter & Gamble Company, Attention: Finance Manager,
Personal Health Care, One Procter & Gamble Plaza, Cincinnati, OH 45202.
(d) Payment Terms. All royalty amounts in this Agreement are stated in
United States dollars, and all royalty statements shall be made in United States
dollars. There shall be no deductions for the transfer of funds or royalties or
the conversion of currency into United States dollars. Payments should be sent
quarterly via wire transfer to an account specified by P&G on or before the 30th
day following the end of each calendar quarter during the Term. The receipt or
acceptance by P&G of any of the statements furnished pursuant to this Agreement
or of any royalties paid hereunder (or the cashing of any royalty checks paid
hereunder) shall not preclude P&G from questioning the accuracy, completeness or
sufficiency thereof at any time, and in the event that any inconsistencies or
mistakes are discovered in such statements or payments, they shall immediately
be rectified and the appropriate payment made by CNS.
(e) Tax Withholding. CNS shall be responsible for the payment of any
foreign taxes, fees or assessments with regard to the Product sold by CNS or by
an Affiliate or Subcontractor of CNS. If taxes or other fees are required to be
withheld on any payments due P&G, CNS shall pay such tax or similar fee on
behalf of P&G with a corresponding reduction in royalties due P&G. If CNS does
not withhold such taxes or other fees and P&G is subsequently found liable for
payment of such taxes or other fees by any governmental jurisdiction, CNS will
reimburse P&G for any amounts P&G is liable to pay. To the extent a withholding
tax or other fee is deducted with respect to any payment between CNS and P&G,
the amount of tax or other fee withheld shall be for the account of P&G. CNS
will provide to P&G certified copies of all receipts from any governmental or
taxing authority evidencing payment of such taxes and will assist P&G in
claiming relief from double taxation.
8. CNS RECORDS
(a) Records. CNS shall keep and maintain at its regular place of
business complete books and records of all business transacted by CNS in
connection with the Product, including but not limited to books and records
relating to shipments, orders, and sales of the Product. Such
15
<PAGE>
records shall be retained by CNS for at least five (5) years following the year
to which they pertain.
(b) Audit Right. P&G, or its duly authorized agents or representatives,
shall have the right to inspect said books and records at CNS premises during
regular business hours, provided that P&G shall give to CNS at least ten (10)
days' advance written notice of its intention to do so. CNS shall pay to P&G the
amount of any underpayment of royalties with interest within fifteen (15)
business days after the determination of the amount of such underpayment. CNS
shall credit the amount of any overpayment of royalties made by CNS to the next
royalty payment due after the determination of the amount of such overpayment.
In the event of any dispute between the parties as to the amount of any
underpayment or overpayment of royalties, the parties shall select an
independent third party auditor who shall inspect the parties' books and records
relating to any alleged underpayment or overpayment of royalties and whose
determination with respect hereto shall be determinative and final.
(c) Corrections. If the auditor selected pursuant to Section 8(b) above
determines that there was a net underpayment or overpayment of royalties, then
CNS shall either pay to P&G the amount of any such underpayment or shall credit
the amount of any such overpayment as set forth in 8(b) above. If such auditor
accepts P&G calculations of royalties due and owing, then CNS shall bear the
costs and fees of such auditor; if such auditor accepts CNS calculations of
royalties due and owing, then P&G shall bear the costs and fees of such auditor.
If such auditor does not accept either party's calculations, then the parties'
shall share equally the costs and fees of such auditor.
9. PROMOTION
Because the Product carries the Licensed Marks, P&G agrees to treat the
Product as a member of the Vicks(R) family of products. P&G will use
commercially reasonable efforts to include the Product in trade and consumer
communications where the Vicks(R) family of products is featured. P&G agrees to
expend efforts similar to the efforts P&G has taken on other products licensed
under the Vicks(R) trademark. In regions where such activities are possible,
examples of such efforts may include, but are not limited to:
16
<PAGE>
(a) Trade communications such as annual respiratory/cough-cold retail
sales presentations, planograms, end-aisle display recommendations and suggested
shelving structure, and retail buyer, pharmacy and physician education
advertising.
(b) Consumer communications such as TV, radio and print advertising
when the Vicks(R) family is featured and website inclusion with a link to
BreatheRight.com. From time to time the parties may choose to collaborate on
additional joint Promotional events. The parties will coordinate the execution
and cost to each party of the Promotion on a case-by-case basis. Both P&G and
CNS must provide their approval of any such Promotion before it is commenced,
such approval not to be unreasonably withheld. Both parties shall conduct any
promotion described herein in conformity with all federal, state and local
statutes and regulations as such laws are interpreted and enforced as of the
date any promotion detailed above is first introduced to the public. Both
parties shall file all bonds, guarantees, and/or duties that may be required and
shall obtain all necessary federal, state, and local authorizations and/or
approvals that may be required to conduct the promotion described herein. An
agreed upon promotion for the United States is set forth in Schedule 7.
10. TERM AND TERMINATION
The term of this Agreement (the "Term") shall commence on the date of this
Agreement and shall Expire, unless otherwise Terminated earlier pursuant hereto,
at the end of the Initial Term (as defined herein) or, if the Term has been
extended beyond the end of the Initial Term, at the end of the last extension
period. As used herein, the Initial Term means the period of three (3) years
from the date of this Agreement.
(a) Extension and Non-Renewal. On each anniversary of the date of this
Agreement, the Term shall be automatically extended for a period of one (1)
year, so that the remainder of the Term shall be three (3) years from such
anniversary date (unless the Term is otherwise terminated earlier pursuant
hereto). At any time, either party may give the other written notice hereunder
that it does not wish to extend the Term pursuant hereto. If either party gives
such notice to the other, then this Agreement shall not be further extended and
at the conclusion of the remaining period of time will be deemed Expired.
17
<PAGE>
(b) Termination by P&G. If any one or more of the following events
occurs, and CNS fails to remedy such condition within thirty (30) days after
receipt of written notice to CNS from P&G of such condition, then P&G may
terminate this Agreement by written notice:
(i) If CNS shall commit any material breach of any obligation,
warranty, covenant or agreement contained herein; or
(ii) if CNS ceases to do business; or
(iii) if CNS ceases to sell the Product for [* * *]
consecutive months; or
(iv) if CNS shall not have begun the bona fide national sale
and distribution of the Product in at least [* * *] of the Area by January 1,
2001; or
(v) if CNS fails to make any payments required by the
Agreement on the date specified unless such failure is inadvertent or
unavoidable; or
(vi) if CNS knowingly makes any false report under paragraph
7(c); or
(vii) if CNS fails to sell at least [* * *] package units of
Product worldwide in any calendar year beginning January 1, 2001.
(c) Termination for CNS Bankruptcy. This Agreement and all the rights
of CNS hereunder shall forthwith terminate automatically if a bankruptcy
petition is filed against CNS, if CNS becomes insolvent or goes into
receivership, or if CNS makes an assignment for the benefit of creditors, or
files a petition for a reorganization or rearrangement under the Bankruptcy
Code.
(d) Termination by CNS. If any of the following conditions occurs, and
P&G shall fail to remedy such condition within thirty (30) days after written
notice to P&G by CNS of such condition, CNS may terminate this Agreement by
written notice:
(i) If P&G shall commit any breach of any obligation,
warranty, covenant or agreement contained herein; or
(ii) If P&G ceases to do business.
(e) Change of Control. Either party may terminate this Agreement at any
time upon six (6) months written notice if there shall be, directly or
indirectly, a change in the ownership or control of the other party and/or the
other party's business relating to the Product; provided, however, that P&G
shall consider a request by CNS to consent to such change in ownership or
control; such consent shall not be unreasonably withheld.
18
<PAGE>
(f) Consequences of Expiration and Termination. Upon any Expiration or
Termination of this Agreement:
(i) Except as permitted under paragraph 10(f)(iv), CNS shall
not use any of the written, printed, or graphic material on the package carton
or inserts for any purpose without first obtaining the written consent of P&G,
which consent may be withheld at P&G sole discretion;
(ii) Unless otherwise notified by P&G, CNS will immediately
discontinue use of the Licensed Marks and shall not manufacture or import, nor
sell, distribute or otherwise transfer, nor permit to be manufactured or
imported, nor sold, distributed or otherwise transferred, the Product or other
items bearing the Licensed Marks, except as permitted under paragraph 10(f)(iv);
(iii) CNS shall use its best efforts to execute any and all
documents necessary to terminate of record any of CNS rights hereunder or to
transfer such rights to P&G or P&G designee, which documents shall be prepared
by P&G at its expense;
(iv) CNS shall immediately destroy, and return to P&G
according to P&G directions, all material associated with any Promotion as
contemplated in Section 9 that has not already been affixed to or inserted into
the Product packaging and P&G shall have the option of buying existing packaged
Product at CNS cost. If P&G does not exercise this option and the Agreement has
Expired or has been Terminated, then CNS may sell its existing inventory of
packaged Product at a discount off CNS best published price for a period not to
exceed twelve (12) months after the Expiration or Termination of this Agreement.
11. CONFIDENTIALITY
(a) P&G Trade Secrets. The parties agree that any of P&G trade secrets
which may be disclosed to or acquired by CNS pursuant to this Agreement are to
be used solely in connection with CNS performance under the terms of this
Agreement and are not to be disclosed to any persons other than employees or
agents of CNS. CNS shall use the same standard of care protecting against
publication or dissemination of P&G trade secrets by CNS and its directors,
officers, employees and agents as CNS uses with respect to information as to its
own business which it desires not to have published or disseminated and will so
inform and direct its directors,
19
<PAGE>
officers, employees and agents receiving such trade secrets. Any memoranda or
papers containing trade secrets of P&G which CNS may receive in connection
herewith are to be returned at P&G request. However, the above requirement shall
not apply to information which is, or subsequently may become, within the public
domain or the knowledge of the general public through no fault of CNS. CNS
obligations and duties hereunder shall survive for five years after Termination
or Expiration of this Agreement.
(b) CNS Trade Secrets. The parties agree that any of CNS trade secrets
which may be disclosed to or acquired by P&G pursuant to this Agreement are to
be used solely in connection with P&G performance under the terms of this
Agreement and are not to be disclosed to any persons other than employees or
agents of P&G. P&G will use the same standard of care protecting against
publication or dissemination of CNS trade secrets by P&G and its directors,
officers, employees and agents as P&G uses with respect to information as to its
own business which it desires not to have published or disseminated and will so
inform and direct its directors, officers, employees and agents receiving such
trade secrets. Any memoranda or papers containing trade secrets of CNS which P&G
may receive in connection herewith are to be returned at CNS request. However,
the above requirement shall not apply to information which is, or subsequently
may become, within the public domain or the knowledge of the general public
through no fault of P&G. P&G obligations and duties hereunder shall survive for
five years after Termination or Expiration of this Agreement.
(c) Nondisclosure. CNS and P&G agree not to divulge, permit or cause
their officers, directors, employees or agents to divulge this document or the
specific details of this Agreement except to their representatives and attorneys
in the course of any legal proceeding to which either of the parties hereto is a
party for the purpose of securing compliance with this Agreement.
Notwithstanding the above, either party may disclose the existence of this
Trademark License Agreement and the names of the Licensed Marks and Product that
are the subject of said Agreement. Upon Termination or Expiration of this
Agreement, at P&G request, CNS shall return within thirty (30) days to P&G all
materials furnished by P&G to CNS in connection with the program and at CNS
request, P&G shall return within thirty (30) days to CNS all materials furnished
by CNS to P&G in connection with the program.
20
<PAGE>
(d) Press Releases. Neither party shall make any press release with
respect to this Agreement or any matter arising from this agreement without
first obtaining the other party's prior written approval, such approval shall
not be unreasonably withheld. Such press releases shall be submitted to the
person designated by each party. Each party's designee shall review and respond
in writing with regard to its approval or non-approval of such materials within
three (3) business days after receipt of such materials from the other party.
Approval of the submitted materials will not be unreasonably withheld.
12. MARKING
CNS shall affix permanently to the Product or its container the legend "The
Vicks(R) trademark is used under license from The Procter & Gamble Company,
Cincinnati, Ohio" or such other entity as P&G shall designate, or the equivalent
such language approved by P&G.
13. FORCE MAJEURE
Neither P&G nor CNS shall be liable to the other for any failure to comply with
any terms of the Agreement to the extent any such failure is caused directly or
indirectly by fire, strike, union disturbance, injunction or other labor
problems, war (whether or not declared), riots, insurrection, government
restrictions or other government acts, or other causes beyond the control of or
without fault on the part of either P&G or CNS. However, CNS shall continue to
be obligated to pay P&G when due any and all amounts which it shall have duly
become obligated to pay in accordance with the terms of this Agreement. Upon the
occurrence of any event of the type referred to in this Section, the party
affected thereby shall give prompt notice thereof to the other party, together
with a description of such event and the duration for which such party expects
its ability to comply with the provisions of this Agreement to be affected
thereby. The party affected shall thereafter devote reasonable efforts to remedy
to the extent possible the condition giving rise to such event and to resume
performance of its obligations hereunder as promptly as possible.
14. MISCELLANEOUS
(a) First-Line Goods. It is the essence of this Agreement that only
first-line goods shall be sold by CNS under the Licensed Marks. No factory
damaged, seconds, or goods not of first quality shall be sold by CNS pursuant to
this Agreement without first removing or
21
<PAGE>
obliterating any and all labels, tags, decals, or other material (including
promotional inserts and trademark imprints) bearing the Licensed Marks.
(b) Use of Mark as Names. CNS will not use the Licensed Marks as all or
a portion of a corporate name or as all or a portion of any trade name or other
designation used by it to identify its business. CNS employees will not
represent themselves as being representatives of or otherwise employed by P&G.
(c) Notice. Any notice, inquiries, or other communication in connection
with this Agreement shall be in writing and sent by certified mail, return
receipt requested, postage prepaid and addressed to the respective parties as
follows:
To CNS: CNS Incorporated
4400 West 78th Street
Minneapolis, Minnesota 55435
Attn: Vice President Business Development
Copy to: Patrick Delaney
Lindquist & Vennum
4200 IDS Center
Minneapolis, Minnesota 55402
To P&G: The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, Ohio 45202
Attn: Marketing Director, North America,
Respiratory
Copy to: The Procter & Gamble Company
Legal Division
One Procter & Gamble Plaza
Cincinnati, Ohio 45202
Attn: Associate General Counsel, Health Care
or such other addresses as shall be designated by written notice.
(d) Relationship Between the Parties. This Agreement does not
constitute CNS as the agent or legal representative of P&G or P&G as the agent
or legal representative of CNS for any purpose whatsoever. CNS is not granted
any right or authority to assume or to create any obligation or responsibility,
expressed or implied, on behalf of or in the name of P&G or to bind P&G in any
manner or thing whatsoever; nor is P&G granted any right or authority to assume
or
22
<PAGE>
create any obligation or responsibility, expressed or implied, on behalf of or
in the name of CNS or to bind CNS in any manner or thing whatsoever. No joint
venture or partnership between CNS and P&G is intended or shall be inferred.
(e) Entire Agreement. This writing contains the entire agreement
between the Parties with respect to the subject matter hereof. This Agreement
supersedes any prior verbal or written agreements with CNS. This Agreement
between the parties may not be altered except by an instrument in writing signed
by authorized representatives of the parties.
(f) Interpretation. Any provision of this Agreement which shall be, or
shall be determined to be, invalid shall be ineffective, but such invalidity
shall not affect the remaining provisions hereof. The titles to sections hereof
are for convenience only and have no substantive effect.
(g) Waiver. If either party shall at any time waive any of its rights
under this Agreement or the performance by the other party of any of its
obligations hereunder, such waiver shall not be construed as a continuing waiver
of the same rights or obligations or a waiver of any other rights or
obligations.
(h) Dispute Resolution. If P&G or CNS shall commence any action or
proceeding against the other by reason of any breach or claimed breach of the
performance of any of the terms and conditions of this Agreement, or to seek a
judicial declaration of rights hereunder, the prevailing party in such action or
proceeding shall be entitled to reasonable attorney fees to be fixed by the
trial court. Any legal action or proceeding of any sort commenced or instituted
against either party (or its assignee in any of the countries in the Area) by or
on behalf of either party shall be brought in a court of competent jurisdiction
in the State of Ohio. In any legal action or proceeding brought in which any
right(s) arising from this Agreement shall be issued, the law applicable thereto
shall be the law of the State of Ohio.
(i) Assignment. This Agreement is entered into because of P&G reliance
upon the knowledge, experience, skill and integrity of CNS and is personal to
CNS. This Agreement, the License and any rights hereunder granted to CNS and/or
any duties to be performed by CNS hereunder may not be assigned, transferred,
hypothecated, sub-licensed, encumbered or otherwise disposed of without first
obtaining the consent in writing of P&G. If P&G shall grant
23
<PAGE>
such consent, any and all future assignments, transfers, hypothecations,
sublicenses, encumberments or other disposals of any new party's rights and/or
duties under this Agreement shall not occur without written consent from P&G,
which consent may be withheld in P&G sole discretion. P&G reserves the right to
assign this Agreement to any third party whether or not affiliated with P&G.
Notwithstanding the foregoing, transfer of CNS rights and duties in the case of
a change of control shall be governed by paragraph 10(e).
(j) Other Licenses. CNS understands that this License may not
constitute all the consents or licenses required in order to manufacture,
import, and/or sell the Product, and expressly covenants to obtain all other
such licenses or consents that may be so required. IN WITNESS WHEREOF, the
parties hereto have duly executed this Agreement.
For The Procter & Gamble Company For CNS Incorporated
/s/ Thomas C. Blinn /s/ Daniel Cohen
- -------------------------------------- ---------------------------------------
Title: V.P. Personal Health Care Title: CEO
-------------------------------- ---------------------------------
Date: 3-1-00 Date: 2-28-00
--------------------------------- ----------------------------------
P&G approvals:
Form: /s/ Paul Franz
-----------------------------
Counsel
Finance:
------------------------------
Execution: /s/ Richard A. Armstrong
----------------------------
Associate Director for Heathcare Alliances
24
<PAGE>
SCHEDULE 1
Vicks(R)
Vicks triangle design mark
25
<PAGE>
SCHEDULE 2
Breathe Right(R) mentholated vapor nasal strips
26
<PAGE>
SCHEDULE 3
REGIONS COUNTRIES
North America United States
Canada
Latin America Argentina
Brazil
Chile
27
<PAGE>
SCHEDULE 4
In all regions/countries of the world the Licensed Mark "Vicks" must be used on
all packages with the well known triangle design Licensed Mark and may not be
used as the primary brand name.
28
<PAGE>
SCHEDULE 5
COUNTRY ROYALTY AS % OF CNS
NET SALES OF PRODUCTS
WHICH INCLUDE THE LICENSED MARKS
United States [* * *]
Canada [* * *]
Argentina [* * *]
Brazil [* * *]
Chile [* * *]
29
<PAGE>
SCHEDULE 6
REGION MINIMUM ROYALTY OBLIGATION
- ------ --------------------------
North America [* * *] per calendar year in which
Product is offered for sale for at least
[* * *] months
Any Region Outside North America
Introductory Year 1 [* * *] per Introductory calendar year
in which Product is offered for sale
for fewer than [* * *] months
Calendar Year 2 [* * *] per calendar year in which
Product is offered for sale for at least
[* * *] months
Calendar years 3 and beyond [* * *] per calendar year in which
Product is offered for sale for at least
[* * *] months
30
<PAGE>
SCHEDULE 7
P&G and CNS agree to jointly collaborate on the following marketing effort
(hereinafter the "Promotion") within the United States for the 2000/2001 Rollout
year for the Product:
1. SAMPLING.
(a) P&G agrees to distribute samples of the Product on or in packages of
specified Sample Vehicles. P&G agrees to make available a combination
of the following products to carry the Product samples: Vicks(R)Sinex,
Vicks(R)4 oz. Children's NyQuil(R)and Vicks(R) twin 10 oz. NyQuil(R),
in the quantities and for the sampling costs listed in Table 1 for the
samples of the Product to be carried on or in. CNS agrees to notify P&G
in writing no later than February 28, 2000 of the number of each
quantity of Sample Vehicles listed that CNS would like to specify for
the sampling program. The combination and quantity of products
specified by CNS are herein called "Sample Vehicles."
(b) As part of this sampling effort, CNS will supply wrapped sample units
of two strips of the Product to P&G at [* * *] to P&G in an amount
equal to the number of Sample Vehicles specified by CNS. P&G will
attach or in-pack samples of the Product to P&G Sample Vehicles and
will distribute the samples of the Product with the Sample Vehicles at
the sole expense of CNS according to costs set forth in Table 1. The
costs in Table 1 include the cost of stickering the Sample Vehicles.
Depending on the quantity of Sample Vehicles ordered by CNS, and
depending on P&G's internal timing constraints, P&G will use reasonable
efforts to change package artwork for Sample Vehicles in order to avoid
the necessity of utilizing a sticker on the Sample Vehicles that have
the samples of the Product. If P&G is able to change the Sample
Vehicles package artwork, it shall do so at P&G's sole expense and the
costs listed in Table 1 may be reduced by the cost of stickering. All
sales of Sample Vehicles (including samples) are for P&G's account.
(c) The samples of the Product with the Sample Vehicles will be timed to
ship during the P&G July 3, 2000 to January 31, 2001 cough-cold
packaging period. P&G will use
31
<PAGE>
reasonable efforts to facilitate key account merchandising and trade
ads featuring the samples of the Product with the Sample Vehicles.
TABLE 1
VICKS(R) PRODUCT SAMPLING COST NUMBER
PER UNIT AVAILABLE
(DOLLARS) (MILLION UNITS)
- --------------------------------------------------------------------------------
SINEX (SKU'S) [* * *]
open box + sticker* [* * *]
- --------------------------------------------------------------------------------
4 OZ. CHILDREN'S NYQUIL [* * *]
shrink to side + sticker* [* * *]
- --------------------------------------------------------------------------------
10 OZ. NYQUIL TWIN PACK [* * *]
inset + sticker* [* * *]
- --------------------------------------------------------------------------------
*costs may be reduced by the cost of stickering pursuant to section 1(b) above.
2. PROMOTION.
CNS agrees to place a front-page, full-page, free standing coupon
insert ("FSCI") for January 28, 2001 for the Product. CNS agrees to
bear the cost of this placement. CNS cost of placing this ad would be
[* * *]. Upon CNS providing P&G with reasonable documentation of
running the FSCI, P&G will grant CNS a credit of [* * *] (one half the
amount of CNS placement costs of the FSCI) against royalties payable
under Section 7 hereof. CNS will produce the artwork for this FSCI. CNS
will submit such artwork to P&G for approval pursuant to Section 2(f)
of the Agreement. CNS will bear the redemption and other administrative
costs of the CNS coupon.
3. ADVERTISING.
(a) CNS will support the launch of the Product with national TV
advertising during the cough-cold season (Q4 2000-Q1 2001) at
its own expense. This advertising will feature the Product and
will include a visual of the package and the Licensed Marks.
(b) In addition to promotional efforts outlined in Section 9 of
the Agreement, P&G agrees to include an advertisement on the
Product in its Pharmacy Digest mailing which is mailed to
pharmacists. P&G agrees to explore the option of placing a
32
<PAGE>
sample of the Product in the Pharmacy Digest mailing. If
logistically feasible, and upon CNS approval, P&G will include
a sample of the Product in Pharmacy Digest mailing at CNS sole
expense.
4. SALES COORDINATION. P&G and CNS will use reasonable efforts to
coordinate sales information and materials to support the launch of the
Product by sharing with each other 1-2 page sell sheets and fact sheets
about the Product and Sample Vehicles respectively. These materials
will educate each company's sales force on the basics of the Product
and the Vicks family of products and prepare them for retailer
questions. Notwithstanding the above, should either party's sales
personnel receive questions about the other party's products, each
party agrees that such sales personnel will use reasonable efforts to
take action to refer the retailer's question to the other party's
appropriate sales representative.
33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>cns010440_ex10-11.txt
<DESCRIPTION>EXHIBIT 10.11 DISTRIBUTOR AGREEMENT
<TEXT>
CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 24b-2.
EXHIBIT 10.11
DISTRIBUTOR AGREEMENT
BETWEEN
CNS, INC.
AND
EISAI CO., LTD.
<PAGE>
TABLE OF CONTENTS Page
----------------- ----
ARTICLE I - DEFINITIONS........................................................1
1.1 Party...........................................................1
1.2 Products........................................................1
1.3 Term of this Agreement..........................................2
1.4 Territory.......................................................2
1.5 Trademarks......................................................2
1.6 Year............................................................2
ARTICLE II - DISTRIBUTION AND OTHER RESPONSIBILITIES...........................2
2.1 Appointment.....................................................2
2.2 Acceptance, Activity, and Compensation..........................2
2.3 Facilities and Capability.......................................3
2.4 Promotion.......................................................3
2.5 Market Information..............................................3
2.6 Business Planning and Review....................................4
2.7 Not an Agent....................................................4
2.8 Conflict of Interest............................................5
2.9 Expenses........................................................5
2.10 Goodwill........................................................5
2.11 Nondisclosure...................................................5
2.12 Performance Objectives..........................................6
2.13 Other Responsibilities of EISAI.................................6
ARTICLE III - PURCHASE AND SUPPLY OF PRODUCTS..................................6
3.1 Purchase and Supply.............................................6
3.2 Prices, Terms, and Conditions...................................6
3.3 Inventories:....................................................6
ARTICLE IV - TRADEMARKS........................................................7
4.1 Trademarks......................................................7
4.2 Infringement....................................................8
ARTICLE V - TERM AND TERMINATION...............................................8
5.1 Duration........................................................8
5.2 Termination by Either Party.....................................8
5.3 Termination by CNS..............................................9
5.4 Reasonable Notice:..............................................9
5.5 Effect of Termination or Expiration.............................9
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ARTICLE VI - INDEMNIFICATION..................................................10
6.1 Indemnification by CNS.........................................10
6.2 Indemnification by EISAI.......................................10
6.3 Qualifications.................................................10
ARTICLE VII - MISCELLANEOUS PROVISIONS........................................10
7.1 Notice:........................................................10
7.2 Validity:......................................................11
7.3 Compliance with Law; Governing Law; Disputes...................11
7.4 Assignment.....................................................12
7.5 Non-waiver.....................................................12
7.7 Headings.......................................................12
7.8 Entire Agreement...............................................12
Schedule A - Products and Territory...................................14
Schedule B - Trademarks...............................................15
Schedule C - Performance Objectives...................................16
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CNS DISTRIBUTOR AGREEMENT
EISAI CO., LTD.
Agreement made effective as of the 1st day of August, 2000 (the
"Effective Date") by and between CNS, Inc., a corporation whose principal
offices are located 7615 Smetana Lane, Eden Prairie, Minnesota 55344 USA
(hereinafter referred to as "CNS") and EISAI Co., Ltd., a Japanese company whose
principal offices are located at 4-6-10 Koishikawa, Bunkyo-ku, Tokyo 112-8088
Japan (hereinafter referred to as "EISAI").
WHEREAS, CNS wishes to arrange for the promotion, sale and distribution
of the Products (hereinafter defined) in the Territory (hereinafter defined) on
the terms and conditions set forth below; and
WHEREAS, EISAI wishes to become a distributor of the Products for CNS in
the Territory and represents that it possesses qualified personnel and
sufficient financial and physical resources to promote fully CNS's Products in
the Territory.
NOW, THEREFORE, in consideration of the above and of the mutual promises
set forth below, the parties hereby agree as follows:
ARTICLE I - DEFINITIONS
In this Agreement each of the terms listed below has the meaning
indicated. Words incorporating the singular shall also include the plural and
vice versa where context requires.
1.1 PARTY: CNS or EISAI as the case may be, when used in the singular,
and both CNS and EISAI when used in the plural.
1.2 PRODUCTS: CNS's tan and clear Breath Right(R) nasal strips, in
finished, packaged form, and any other Products defined in Schedule A, attached
hereto, as such Schedule A may be updated from time to time by agreement of the
Parties; provided, however, that (a) CNS may elect not to offer all of its
products to EISAI for distribution under this Agreement; (b) CNS may
unilaterally delete from the list of Products at any time, upon one hundred and
eighty (180) days'
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notice to EISAI, those products which CNS no longer offers generally for sale to
distributors in the same form or with the same specifications; and (c) CNS may
delete any Products from the list of Products at any time, for any reason, upon
one hundred twenty (120) days' notice thereof to EISAI, with the agreement of
EISAI or if CNS offers a comparable replacement for the Product to be deleted
from the list. The quality agreement which contains the specifications, handling
instructions, special precautions and other information relating to the Products
shall be separately agreed by CNS, EISAI and HERUSU.
1.3 TERM OF THIS AGREEMENT: That period from the Effective Date until
the expiration or termination of this Agreement as provided herein, including
any extension or renewal.
1.4 TERRITORY: All areas and territories of Japan.
1.5 TRADEMARKS: Trademarks as shown on Schedule B of this Agreement
attached hereto and made a part hereof, and including any other trademarks,
trade names and designs that EISAI knows or are associated with the Products,
whether registered or unregistered. CNS may from time to time add trademarks to
the list on Schedule B through simple notice thereof to EISAI or by unilaterally
providing to EISAI a new Schedule B.
1.6 YEAR: The first Year of this Agreement shall be the period from
August 1, 2000, to March 31, 2001. Thereafter, Years of this Agreement shall be
the twelve (12) month periods commending on April 1 and ending on the following
March 31.
ARTICLE II - DISTRIBUTION AND OTHER RESPONSIBILITIES
2.1 Appointment: CNS hereby appoints EISAI as its exclusive distributor
for the Territory with the right to appoint sub-distributors and agrees that CNS
will not appoint or sell the Products to another distributor in the Territory,
except to HERUSU as supplier to EISAI, so long as EISAI is not in breach of any
terms or provisions of this Agreement subject to Clause 5.2, 5.3 and 5.4 herein.
CNS will attempt to ensure EISAI's exclusivity for sale of Products in the
Territory, but in cases where CNS is prevented by law from restricting sales by
CNS's other distributors or representatives out of their respective territories
into the Territory, CNS assumes no responsibility for such sales. Without paying
any fees or incurring any similar liabilities or obligations, CNS shall exert
reasonable efforts to arrange a smooth transition of information and business to
EISAI from CNS's previous distributor for the Territory.
2.2 Acceptance, Activity, and Compensation: EISAI hereby accepts the
appointment and agrees that it will diligently promote, sell, and distribute the
Products in the Territory in accordance with the terms and conditions of this
Agreement. Eisai shall also provide all customary distributor services,
including without limitation delivery, distribution, stock counts and inventory
control, regulatory responsibilities, order taking, invoicing, collection,
credit risk,
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sales promotion, merchandising, free goods, trade discounts, rebates and
year-end bonuses, and reporting on and analysis of competitive activities and
products. Eisai further agrees to perform other related activities described
herein, including but not limited to those referenced in Section 2.13 below.
Among other obligations, EISAI agrees to purchase Products exclusively from
HERUSU for the Territory. EISAI shall not itself or through an affiliated party
solicit orders for Products from customers outside the Territory or sell
Products to customers outside the Territory. The sole compensation to EISAI for
its sales, marketing, information, enhancement of goodwill, and other aspects of
distribution pursuant to this Agreement but not as indemnification as provided
in Sections 4.2 and 6.1 below shall be its profit on the resale of the Products
in the Territory, and such profit shall be deemed to include all termination
obligations and other payments which CNS might, but for this provision, have had
to pay EISAI under the Agency law or applicable Laws in the Territory
("Compensation for Termination").
2.3 Facilities and Capability: EISAI shall maintain a suitable place of
business and adequate facilities to enable it to perform its obligations under
this Agreement. EISAI shall not establish or maintain an office or warehouse
outside the Territory in connection with the sale of the Products outside the
Territory. EISAI represents that it already possesses sufficient facilities and
employs sufficient personnel to perform its responsibilities under this
Agreement, that it does not need to expand or to hire additional people in order
to represent and distribute the Products as provided herein.
2.4 Promotion:
2.4.1 EISAI shall use its best efforts to acquire
sub-distributors that EISAI deems reasonably acceptable to CNS and
otherwise to expand the market for the Products in the Territory and
carry out a merchandising policy designed to preserve the goodwill that
is currently associated with the name of CNS and with the Products.
2.4.2 EISAI shall provide advice and assistance to CNS in CNS's
efforts to advertise the Products to consumers in the Territory, such
advice and assistance to include but not be limited to the placement of
advertising; provided, however, that CNS shall bear the expense of all
such consumer advertisement.
2.4.3 CNS shall supply EISAI with samples of package design and
promotional and sales materials from the U.S. market for adaptation to
the market of the Territory at the expense of EISAI. All promotion and
packaging materials or programs that relate to the Products and that are
developed by or for EISAI shall be submitted to CNS for approval prior
to the distribution, use or implementation thereof.
2.4.4 EISAI shall be responsible for the development and
implementation of all sales promotions, including but not limited to
special trade
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discounts, and other trade incentives. Any direct or indirect expenses
associated with such sales promotions shall be the sole responsibility
of EISAI.
2.5 Market Information: If so required by CNS, EISAI shall remain fully
knowledgeable about the market for the Products in the Territory and shall keep
CNS fully informed with respect thereto, and shall advise CNS of any changes in
applicable laws and regulations pertaining to the quality and marketability of
the Products in the Territory.
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2.6 Business Planning and Review:
2.6.1 After the second Year of this Agreement, EISAI shall
supply to CNS at least two (2) months before the end of each Year during
the term hereof an annual business plan for promotion and sale of the
Products in the Territory ("Business Plan"). The Business Plan presented
by EISAI shall include such matters as targeted levels for CNS's
advertising spending in the Territory, supply of free samples to be
distributed to consumer at the cost of CNS ("Consumer Samples"), and the
supply of ten (10) strip samples to be distributed to customer at the
cost of EISAI ("Customer Sample"). CNS and EISAI shall consult and
decide on the Business Plan. In the event that the parties can not reach
an agreement on such Business Plan prior to the commencement of the
Year, final decisions on consumer activities shall be vested in CNS and
final decisions on customer activities shall be vested in EISAI.
2.6.2 EISAI shall furnish quarterly to CNS, upon CNS's request,
such other periodic forecasts, budgets, promotional schedules, and
recommendations for the Territory as CNS may reasonably request and
shall confer with CNS quarterly to provide an update and progress report
with respect to the Business Plan.
2.6.3 In addition to the quarterly updates provided for in
Section 2.6.2, during the Term of this Agreement, EISAI shall submit to
CNS good faith twelve-month forecasts of quantities to be supplied by
HERUSU by the end of January each year and monthly sales reports
transmitted no later than ten (10) business days after the end of each
month, including at least (1) Product sales by type and number of
Product units sold; (b) a comparison of current sales against the sales
forecast; and (c) inventory on hand at the end of such month, as well as
other information and reports in such form as agreed by the Parties or
as CNS may reasonably request for the purpose of keeping CNS advised of
the current competitive conditions in the Territory and the progress of
EISAI in promoting and selling the Products, including but not limited
to wholesaler information such as names, addresses, purchase volumes,
phone and fax numbers, upon request by CNS.
2.6.4 For efficient ordering and execution of volume sales as
forecast in this Agreement, EISAI shall provide promptly to HERUSU Co.,
Ltd., ("HERUSU") copies of all forecasts that EISAI supplies to CNS.
2.7 NOT AN AGENT: At all times during the term of this Agreement, EISAI
shall act as an independent contractor. Neither the making of this Agreement nor
the performance of any of the provisions hereof shall be construed to constitute
EISAI as an agent or legal representative of CNS for any purpose; nor shall this
Agreement be deemed to establish a joint venture or partnership. Each purchase
of the Products by EISAI from CNS pursuant to this Agreement, each sale of the
Products made by EISAI and each agreement or commitment made by EISAI to any
person, firm or corporation with respect thereto shall be made by EISAI for its
own account
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as principal and at its own expense. EISAI will have no authority to represent
CNS in the Territory or elsewhere as agent nor to bind CNS by any conduct,
representations, or understanding concern CNS or the Products. The Parties agree
that they do not intend to create and do not hereby create a franchise
relationship under the laws of any jurisdiction.
2.8 Conflict of Interest: During the term of this Agreement, EISAI shall
not, directly or indirectly, manufacture, distribute or sell products in the
Territory which in CNS's reasonable judgment are similar to or might compete or
interfere with the sale of the Products except the products which EISAI sells
prior to the launch of the Products. In the event that the parties agree to add
a new product to Schedule A, EISAI shall inform CNS if EISAI has any similar
product currently on sale which may compete with the CNS product to be added to
Schedule A. Eisai shall so inform CNS early in the course of discussions and
before the Parties agree to add the product to Schedule A.
2.9 Expenses: Except as provided elsewhere in this agreement or as the
Parties may otherwise expressly agree in writing from time to time, EISAI shall
bear the costs and expenses for the performance of EISAI's obligation hereunder,
including, but not limited to, bad debt expenses, inventory losses, commissions,
taxes, and promotion to the distribution network. In no event shall CNS be
liable for any such costs and expenses therefor incurred by EISAI unless CNS has
specifically agreed in writing, in advance, to pay such expenses.
2.10 Goodwill: EISAI shall use its best efforts to preserve and enhance
the goodwill of the Products and the Trademarks. The Parties agree that all
goodwill associated with the Products and the Trademarks in the Territory shall
accrue solely to the benefit of CNS.
2.11 Nondisclosure: The Parties agree that, to the extent that the
confidentiality agreement in force between them as of May 19, 2000, may be
limited, invalidated, or terminated, and the following terms and conditions
shall apply to the confidential information disclosed by the Parties
("Confidential Information").
2.11.1 The party which receives the Confidential Information
("Receiving Party") shall not disclose to any third party any
Confidential Information relating to business or methods of carrying on
business or any other information it receives from the Party which
discloses Confidential Information ("Disclosing Party") without prior
written consent of the Disclosing Party. Receiving Party shall return
all such information to Disclosing Party upon termination or expiration
of this Agreement. Except as indicated in Section 2.11.2, information
that shall be considered to be confidential is all information
concerning the Products, future unpublished product tests and
specifications, future product plans, marketing and sales information,
technical dossiers, product drawings, customer names, customer
addresses, customer order history, and other customer data and
information that the Receiving Party should reasonably understand to be
confidential; however, in the case of termination of this Agreement,
information relating to customer names, addresses, and order history
directly or indirectly supplied by Eisai to CNS shall
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be excluded from this confidentiality obligation for the purpose of
disclosure to EISAI's successor.
2.11.2 Information is not considered as confidential if a) it
becomes public through no fault of the Receiving Party; b) the Receiving
Party develops the information independently prior to the receipt of
such information; c) the Receiving Party has already possessed the
information at the time of receiving it; d) the Receiving Party receives
the information from a third party without restriction and without
breach of any confidentiality agreement.
2.12 Performance Objectives: Performance Objectives for the initial two
Years of this Agreement are as specified in Schedule C. For each Year thereafter
during the Term of this Agreement, the Parties shall agree in writing on
Performance Objectives, as an update to Schedule C, at least two (2) months
before the end of the current Year. Performance Objectives shall be updated as a
part of the business plan referenced in Section 2.6.1 and shall include sales
objectives of EISAI, volume of Customer Samples, trade promotion spending by
EISAI, CNS's volume of Consumer Samples of Products, and CNS's advertising
spending.
2.13 Other Responsibilities of EISAI: EISAI agrees to perform certain
additional duties specific to EISAI and/or the Territory, which duties are
detailed in Schedule D and are considered by the Parties to be material to this
Agreement.
ARTICLE III - PURCHASE AND SUPPLY OF PRODUCTS
3.1 Purchase and Supply: EISAI shall purchase for its own account and in
its own name exclusively from HERUSU, such quantities of the Products as may be
deemed necessary or desirable to meet fully and promptly all demand therefor
from the customers in the Territory and to market the Products effectively in
the Territory, subject to the terms and conditions herein. EISAI shall give to
CNS and to HERUSU as much advance notice of supply requirements for the Products
as reasonably practicable and shall observe the combined lead times specified by
CNS and HERUSU. However, EISAI shall be released from this obligation during the
three (3) months period prior to any termination.
3.2 Prices, Terms, and Conditions: EISAI shall purchase Products, only
from HERUSU, at the prices and on the terms and conditions agreed between EISAI
and HERUSU.
3.3 Inventories: EISAI shall establish and maintain at all times at
least sufficient inventory of the Products to supply, fully and promptly, all
demand for the Products by the customers in the Territory for one month. Such
demand will be measured at any time by the greater of (a) the most recent
month's sales and (b) EISAI's sales projections that include the next month.
However, EISAI shall be released from this obligation during the three (3)
months period prior to any termination.
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3.4 Warranties and Claims:
3.4.1 Warranties: CNS warrants the Products only as specified in
a warranty provided by CNS on the packaging of the Products or packed
with the Products. The Parties recognize that a substitute warranty may
be provided by HERUSU on the packaging of the Products or packed with
the products. The Parties agree that any and all warranty-related claims
concerning the Products must be presented by EISAI to HERUSU, rather
than CNS, for action.
3.4.2 Claims: EISAI shall as a courtesy notify CNS immediately
of any likelihood of claim under the foregoing warranty and shall give
such notification to CNS at substantially the same time as EISAI
notified HERUSU of the likelihood of claim. EISAI shall also inform CNS
immediately of any likelihood of claim from any consumer or consumers
with regard to any of the Products. The Parties shall provide each other
all reasonable assistance and cooperation with regard to any such claim
by consumers. Indemnification with respect to such claims shall be
conducted as provided in Section 6.3 below.
3.4.3 Disclaimer of Liability: The warranty referred to in
Clause 3.4.1 is the only warranty or representation made by CNS with
respect to the Products. ALL OTHER EXPRESSED AND IMPLIED WARRANTIES ARE
SPECIFICALLY DISCLAIMED, INCLUDING THOSE OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. IN NO CASE WILL CNS BE LIABLE FOR SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES EVEN IF CNS HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
ARTICLE IV - TRADEMARKS
4.1 Trademarks: CNS has registered or otherwise gained rights in the
Territory with respect to some or all of the Trademarks referenced in Schedule
B. CNS hereby licenses EISAI to use the Trademarks, free of charge, only during
the term of this Agreement, only as provided herein and only in connection with
EISAI's sale of the Products, to indicate the source of such Products. EISAI
shall have no rights under this Agreement in or to the Trademarks, and shall not
during or after the term of this Agreement represent that it is the owner of the
Trademarks, whether or not such Trademarks are registered nor shall EISAI
dispute the validity of the Trademarks during or after the Term of this
Agreement.
4.1.1 EISAI shall sell the Products only (a) with labeling and
packaging of which the format and type have been supplied or approved by
CNS and (b) under the Trademarks specified or approved by CNS.
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4.1.2 EISAI shall not at any time register or cause to be
registered in its name or in the name of another, nor use or employ
during or after the term of this Agreement, any of the Trademarks or any
trade name or design resembling or similar to any of the Trademarks.
4.1.3 EISAI agrees that upon termination or expiration of this
Agreement EISAI will discontinue forthwith all use of the Trademarks,
subject to Section 5.5 herein and shall not thereafter directly or
indirectly sell or distribute any products bearing trademarks, names, or
designs confusingly similar to the Trademarks or otherwise use trade
names or designs confusingly similar to the Trademarks.
4.2 Infringement: EISAI shall, for the benefit of CNS, undertake to
monitor the infringement of the Trademarks in the Territory. EISAI shall
promptly send a report to CNS in the event EISAI should become aware of any
infringement or threatened infringement by a third party of the Trademarks or
any patents of CNS in the Territory. CNS shall promptly take all necessary steps
to remove or prevent such infringement and EISAI shall fully cooperate with CNS
upon request. EISAI shall not pay, settle, or otherwise compromise or conclude
any action or claim based on or involving any of the Trademarks or any patents
without the prior written approval of CNS.
ARTICLE V - TERM AND TERMINATION
5.1 Duration: This Agreement shall become effective as of the Effective
Date, shall continue in effect until March 31, 2003, and shall be automatically
renewed thereafter for successive two-year terms, unless either Party gives
notice to the other at least one hundred and eighty (180) days before the end of
the then current term, indicating such Party's intent not to renew unless
renewal is enforced under other provisions of this Agreement. Terms and
conditions shall remain unchanged upon renewal.
5.2 Termination by Either Party: Notwithstanding any other provisions of
this Agreement, either Party, at its option, may terminate this Agreement
immediately upon written notice to the other Party in the event that the
repackaging agreement between CNS and HERUSU for the Territory terminates or
upon written notice hereunder that the other Party to this Agreement:
5.2.1 commences or has commenced against it any proceeding in
bankruptcy, insolvency, dissolution, composition, or reorganization
pursuant to bankruptcy or similar laws, or makes an assignment for the
benefit of its creditors;
5.2.2 becomes insolvent or unable to pay its debts when due or
admits its inability to pay its debts;
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5.2.3 is in material breach or material default in the
performance of any of the provisions of this Agreement; provided that
such breach or default has not been remedied within such thirty (30)
days;
5.2.4 receives notice that all or any substantial portion of its
capital stock or assets will be expropriated by any governmental
authority; or
5.2.5 is acquired by, merges with, or comes under the control of
another company, person or firm. In this context, control means that
fifty percent (50%) or more of the securities representing voting
control of the other party comes under the control of third party,
another company, person or firm.
5.3 Termination by CNS: Notwithstanding anything to the contrary above,
CNS may also terminate this Agreement effective immediately upon written notice
to EISAI if EISAI sells Products to other countries without CNS's prior written
authorization.
5.4 Reasonable Notice: The parties recognize and agree that the
termination notice periods provided in this Sections 5.2 and 5.3 are reasonable
under the circumstances, and they agree not to assert otherwise at any time.
5.5 Effect of Termination or Expiration: In the event of termination or
expiration of this Agreement EISAI shall immediately cease acquiring and
distributing the Products, except that EISAI shall have the right during the
three (3) months immediately following termination to sell off its inventory of
the Products in compliance with good business practices, and the Parties agree
further that:
5.5.1 Such termination shall not prejudice the rights and
obligations of CNS and EISAI accrued up to and including the date of
such termination.
5.5.2. Provisions of Sections 2.11, 3.4, 5.5, 5.5.3, 7.2, and
7.3 shall survive termination of this Agreement.
5.5.3 In the event of any expiration, termination or non-renewal
of this Agreement pursuant to the terms hereof, except as provided in
Article 6, EISAI shall not be entitled to any compensation, damages,
payment for goodwill that has been established, severance pay,
Compensation for Termination, or any other amount for any other cause,
by reason of the termination of the relationship between CNS and EISAI,
or the expiration, termination, or non-renewal of this Agreement or any
rights hereunder, despite any applicable law within or without the
Territory to the contrary.
5.5.4 In the event of termination or non-renewal of this
Agreement, EISAI shall return to CNS all unused promotional or other
materials relating to the sale of the Products and any and all other
property of CNS in the possession or control of EISAI.
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5.5.5 In the event of termination or non-renewal of this
Agreement, EISAI shall, upon request of CNS, assist CNS in the transfer
of the distribution business of the Products to CNS's designee.
ARTICLE VI - INDEMNIFICATION
6.1 Indemnification by CNS: Subject to provisions of Section 6.3 below,
CNS shall indemnify and hold EISAI harmless from and against any losses,
obligations, liabilities, costs and expenses, including legal and other fees,
due to any claim of a third party arising from the act of omission or negligence
of CNS or its employees and agents in connection with its obligations hereunder.
6.2 Indemnification by EISAI: Subject to provisions of Section 6.3
below, EISAI shall indemnify and hold CNS harmless from and against any losses,
obligations, liabilities, costs and expenses, including legal and other fees,
due to any claim of a third party arising from the act or omission or negligence
of EISAI or its employees and agents in connection with its obligations
hereunder.
6.3 Qualifications: To qualify for indemnification with respect to any
claim as provided in Section 6.1 or 6.2 above, the Party seeking indemnification
(the "Requesting Party') must (a) give the other Party (the "Indemnifying
Party") prompt notice of the claim with regard to which indemnification is being
sought (the "Claim"); (b) allow the Indemnifying Party, upon reasonable notice
to the Requesting Party and at the Indemnifying Party's option, to conduct or
participate in the defense, negotiation, and settlement of the Claim, at the
expense of the Indemnifying Party; (c) render all reasonable assistance to the
Indemnifying Party in the defense, negotiation, or settlement of the Claim; and
(d) refrain from settling or compromising the Claim or the position or defense
of the Indemnifying Party without prior written consent of the Indemnifying
Party, which consent the Indemnifying Party shall not unreasonably deny or
delay. The parties agree that any portion of the losses, obligations,
liabilities, costs and expenses referred to in Section 6.1 or 6.2 above that is
attributable to a willful or negligent act or failure to act, on the part of the
Requesting Party or any of its employees or agents is excluded from the
indemnification provided herein.
ARTICLE VII - MISCELLANEOUS PROVISIONS
7.1 Notice: Any notice required or permitted to be given under this
Agreement shall be deemed to have been duly given if hand delivered or delivered
by facsimile, registered mail, or commercial messenger service to the address
listed at the beginning of this Agreement for the Party to be notified. If a
Party gives notice according to this Section 7.1, updating and amending that
Party's address, then the address required for such notification by the other
Party shall be the
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address as so updated or amended. All notices are effective upon receipt or
rejection by the Party to be notified.
7.2 Validity: In the event that a provision of this Agreement is held
invalid by a court of competent jurisdiction, the remaining provisions shall
nonetheless be enforced in accordance with their terms. Further, in the event
that any provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to make the
provision enforceable according to applicable law and shall be enforced as
amended.
7.3 Compliance with Law; Governing Law; Disputes:
7.3.1 Compliance: EISAI shall comply with all applicable
statutes, regulations, and ordinances and other laws.
7.3.2 Governing Law: This Agreement shall be deemed to have been
made in the State of Minnesota, USA, and shall be governed by and
interpreted in accordance with the laws of the State of Minnesota,
without regard to the rules of any jurisdiction with respect to
conflicts of laws.
7.3.3 Arbitration: In the event of any disputes arising in
connection with this Agreement, both Parties agree to make every effort
to resolve the disputes amicably between themselves. Any disputes not so
settled shall be finally settled by binding arbitration under the
arbitration rules of the American Arbitration Association ("AAA"), with
the following stipulations: (a) the language of the arbitration shall be
English; provided, however, that documents in other languages shall be
permitted as exhibits if mutually acceptable English translations are
supplied by the offering party at its expense; (b) there shall be three
(3) arbitrators, CNS shall appoint one of such arbitrators and EISAI
shall appoint one of such arbitrators. Another arbitrator shall be
appointed jointly by the Parties or, should they be unable to agree on a
single arbitrator within thirty (30) days after notification by one
Party to the other and to the AAA of invocation of provisions of this
Section 7.3 to commence arbitration, then the arbitrator shall be the
arbitrator chosen by the AAA under its rules; (c) the arbitrator is
authorized to grant any relief appropriate under the applicable law,
including without limitation declaratory relief and/or specific
performance, and is further authorized and encouraged to award costs and
fees in accordance with his or her assessment of the relative equities
and validity and reliability of claims and defenses in the controversy,
but is not empowered to award punitive damages against either Party.
Both Parties consent to the jurisdiction of any court for enforcement of
any arbitral award issued hereunder. During the pendency of any
arbitration or court action initiated by EISAI against CNS in connection
with this Agreement, EISAI's exclusivity with respect to sales in the
Territory is suspended, and CNS may sell Products into the Territory
either directly or through distributors or agents located inside or
outside the Territory. The place of arbitration shall be Minneapolis,
Minnesota, USA.
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7.4 Assignment: This Agreement shall be binding upon and shall inure to
the benefit of the Parties hereto and their respective successors and assigns.
EISAI shall not directly or indirectly transfer, assign, or otherwise encumber
this Agreement without the prior written consent of CNS.
7.5 Non-waiver: The failure of either Party to terminate this Agreement
or exercise any of its other rights under this Agreement, even after breach of
this Agreement by the other Party or after such other Party's failure to comply
with any provision hereof, shall not be deemed a waiver of rights of termination
or any other rights, with regard to either the event or incident in question or
any future event or incident, whether similar or dissimilar.
7.6 Force Majeure: If the performance of any obligation under this
Agreement, other than payment of money, is prevented or delayed for any cause
beyond the reasonable control of the Party whose performance is prevented or
delayed, such Party shall be excused from performance so long as and to the
extent that such cause continues to prevent or delay performance; provided,
however, that such defaulting Party shall promptly notify the other Party of the
existence of such cause and shall at all times use its best efforts to resume
promptly and complete its performance.
7.7 Headings: The titles and headings used in this Agreement are solely
for convenience and are not to be used in the interpretation of any provisions
hereof.
7.8 Entire Agreement: This Agreement, together with its Schedules,
constitutes the entire Agreement between the Parties and supersedes any and all
prior and contemporaneous oral or written understandings between the Parties
relating to the subject matter hereof. No amendment is valid unless in writing
and signed by both Parties. Notwithstanding any translation hereof, the English
language version shall control.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized offices in two copies each of which shall be
deemed an original as of the Effective Date:
CNS, INC. EISAI CO., LTD.
/s/ Marti Morfitt /s/ Mitsuhiro Ebata
- ----------------------------------- ----------------------------------
Name: Marti Morfitt Name: Mitsuhiro Ebata
Title: President and COO CNS, Inc. Title: Cooperate Officer
Consumer Health Division
Eisai Co., Ltd.
13
<PAGE>
CNS DISTRIBUTOR AGREEMENT
EISAI CO., LTD.
SCHEDULE A - PRODUCTS AND TERRITORY
PRODUCTS:
From the Effective Date forward until otherwise agreed or terminated,
Breathe Right(R) nasal Strips, both tan and clear.
In and after the second Year of this Agreement,
Breathe Right(R) nasal strips for colds and for children.
The Parties shall exert their best efforts jointly to launch
these products in the market in the Territory in the second year
of this Agreement.
And other such products as may be added from time to time.
Unless otherwise expressly agreed in writing, the rights of EISAI do not include
or apply to any products of CNS not listed above.
14
<PAGE>
CNS DISTRIBUTOR AGREEMENT
EISAI CO., LTD.
SCHEDULE B - TRADEMARKS
Trademarks:
Breathe Right(R)
And other such trademarks as may be added from time to time.
15
<PAGE>
CNS DISTRIBUTOR AGREEMENT
EISAI CO., LTD.
SCHEDULE C - PERFORMANCE OBJECTIVES
EISAI and CNS shall agree on annual volume targets, support and business plans
that will be executed by CNS and EISAI as follows:
The volume targets shall not be construed as a commitment of minimum purchase or
sales quantity. Advertising spend and sample quantities shall not be construed
as commitments of CNS.
<TABLE>
<CAPTION>
- ------------------------------ ---------------- -----------------------------------------------------
6 months 12 months from April each year
- ------------------------------ ---------------- -----------------------------------------------------
Oct 00-Mar 01 2001 2002*** 2002*** 2004***
- ------------------------------ ---------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Volume* [* * *] [* * *] [* * *] [* * *] [* * *]
- -----------------------------------------------------------------------------------------------------
CNS Ad Spend [* * *] [* * *] [* * *] [* * *] [* * *] [* * *]
- -----------------------------------------------------------------------------------------------------
CNS Free Strips for [* * *] [* * *] [* * *] [* * *] [* * *]
Consumer Sample [* * *]
- -----------------------------------------------------------------------------------------------------
EISAI Trade Spend [* * *] [* * *] [* * *] [* * *] [* * *] [* * *]
- -----------------------------------------------------------------------------------------------------
EISAI Customer Sample [* * *] [* * *] [* * *]
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Products (unit boxes of 10 strips) [* * *], includes Eisai inventory
purchase in Year 1.
** Volume Target in year 2001 includes the sales of Breathe Right(R)
nasal strips for colds and for children.
*** All figures above for years 2002 to 2004 are suggestive only and are not
to be considered as agreed between the parties until the parties have
agreed to them in connection with the business plans for the respective
years.
CNS and EISAI shall review and agree on the amount of sales volume
target, CNS Ad Spend, Consumer Sample, Eisai Trade Spend and EISAI Customer
Sample for years 2002 to 2004 prior to the commencement of each year.
16
<PAGE>
CNS DISTRIBUTOR AGREEMENT
EISAI CO., LTD.
SCHEDULE D - ADDITIONAL DUTIES OF EISAI
In addition to the activities of EISAI as specified in this Agreement,
EISAI shall perform the duties outlined below:
(NONE SPECIFIED AT THE TIME OF EXECUTION OF THIS AGREEMENT)
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>cns010440_ex10-12.txt
<DESCRIPTION>EXHIBIT 10.12 AGREEMENT
<TEXT>
CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 24b-2.
EXHIBIT 10.12
AGREEMENT
This Agreement made effective the lst day of August, 2000 (hereinafter
called the "Effective Date"), by and between: CNS, INC., of 7615 Smetana Lane,
Eden Prairie, Minnesota 55344 U.S.A. (hereinafter called "CNS") and HERUSU, Co.,
Ltd., of 665 Kasikehongo, Matsuo- machi, Sanbu-gun, Chiba, Japan 289-1537
(hereinafter called "HERUSU").
WITNESSETH:
WHEREAS, CNS intends to market and distribute the Products (hereinafter
defined) in the Territory (hereinafter defined) and wishes to export Bulk
Products (hereinafter defined) to HERUSU for repackaging and supply to the CNS
distributor in the Territory (hereinafter referred to as "EISAI");
WHEREAS, HERUSU has the necessary facilities to repackage the Products
and is willing to import, repackage and sell the same to EISAI for marketing and
distribution in the Territory under terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. DEFINITIONS
(a) "Bulk Products" shall mean the bulk strips manufactured by CNS and ready
for repackaging.
(b) "Other Materials" shall mean packaging, labeling and other materials to
be used in the repackaging of the Products.
(c) "Party" means CNS or HERUSU, as the case may be, and "Parties" means
both CNS and HERUSU.
(d) "Products" shall mean tan and clear BREATHE RIGHT(R) nasal strips and
other products as may be agreed between the Parties from time to time in
writing, in finished form, appropriately packaged and labeled for the
Territory; provided, that (a) CNS may elect not to offer all of its
products to HERUSU; (b) CNS may unilaterally delete from the list of
Products at any time, upon one hundred and eighty (180) days' notice to
HERUSU,
<PAGE>
those products which CNS no longer offers generally to distributors in
the same form or with the same specifications; CNS may delete any
Product from the list of Products at any time, for any reason, upon one
hundred twenty (120) days' notice thereof to HERUSU, with the agreement
of HERUSU or if CNS offers a comparable replacement for the Product to
be deleted from the list.
(e) "Quality Agreement" shall mean the Agreement separately agreed to by the
parties which contains the Specifications (hereinafter defined),
handling instruction, special precautions and other information relating
to the Repackaging (hereinafter defined) of the Products. CNS and HERUSU
may, during the term of this Agreement, modify or supplement the Quality
Agreement by mutual agreement of the parties. The Parties (hereinafter
defined) acknowledge that the Quality Agreement shall be executed by
CNS, HERUSU and EISAI.
(f) "Repackaging" shall mean the act of repackaging and labeling the Bulk
Products appropriately for sale to EISAI, in compliance with the Quality
Agreement and local laws, regulations, and market requirements.
(g) "Specifications" shall mean specifications, descriptions of the Products
and Bulk Products, instructions, quality control and other information
relating to the Products as defined by CNS.
(h) "Territory" shall mean all areas and territories of Japan.
(i) "Trademarks" shall mean any trademark and/or trade name to be used in
the manufacture, repackaging, use and sale of the Products as listed in
Schedule 2 hereof.
(f) "Year" shall mean the period from August 1, 2000, to March 31, 2001 for
the first Year of this Agreement. Thereafter, Years of this Agreement
shall mean the twelve (12) month periods commencing on April 1 and
ending on the following March 31.
2. PURCHASE AND SUPPLY OF PRODUCTS
(a) HERUSU shall purchase all its requirements for the Bulk Products from
CNS. CNS shall exclusively supply the Bulk Products to HERUSU in the
Territory. HERUSU shall perform Repackaging of the Bulk Products and
sell the finished Products exclusively to EISAI in the Territory.
(b) CNS undertakes to supply HERUSU with such quantities of Bulk Products as
may be agreed upon by the parties to be necessary and desirable to meet
fully and promptly all demands from customers in the Territory as may be
informed to HERUSU by the EISAI from time to time.
2
<PAGE>
(c) Subject to the provisions of 2(b) above, HERUSU shall provide to CNS a
good faith written estimate of its requirements of the Bulk Products for
one (1) year, divided into monthly calendar periods two (2) months prior
to the commencement of such year. Further, HERUSU shall provide monthly
to CNS a three (3) months good faith written estimate of its
requirement. If any of HERUSU's purchase orders issued in accordance
with Section 4(a) for delivery in any month call for more than one
hundred and twenty five percent (125%) of HERUSU's most recent three (3)
months written estimate for that particular calendar month, CNS shall
not be obligated, but shall use its reasonable endeavors to meet such
order in full provided that CNS may extend the shipping date for such
exceeding order by such reasonable period of time as is necessary in the
circumstances.
(d) HERUSU shall promptly obtain customs clearances and other documentation
for the importation of the Bulk Products.
3. SPECIFICATIONS AND OTHER INFORMATION
(a) CNS and HERUSU shall enter into the Quality Agreement separately from
and after their execution of this Agreement.
(b) The Quality Agreement shall include, but not be limited to, the
following items:
(i) Standards applicable to the Products, printing, lot coding,
inventory method, repackaging methods and procedures, storage
conditions, and other matters necessary for the proper
Repackaging of the Products.
(ii) Matters requiring attention at the time of receiving, storing and
shipping the Bulk Products and/or the Products, transport
conditions and other matters essential to the Repackaging
environment.
(iii) Matters necessary for quality control including, but not limited
to, methods of selecting samples for inspection upon delivery of
the Products and methods for assessing results of inspections.
(c) In the event that it is necessary to amend the Specifications, the
parties shall discuss and agree on such amendments as appropriate and
signify in writing their acceptance of such amendments, in compliance
with Section 21 below.
(d) HERUSU shall not, without the prior written consent of CNS, make any
alterations or modifications in the Specifications of the Products or
the methods or procedures of Repackaging.
4. PURCHASE ORDERS
3
<PAGE>
(a) HERUSU shall place a written order for its requirement of the Bulk
Products not later than forty five (45) days prior to the required date
of delivery to HERUSU ("Purchase Order"). The Purchase Order shall
indicate the quantity, expected date of delivery, point of delivery and
other terms and conditions for such particular order. CNS shall, upon
receipt of HERUSU's Purchase Order, promptly issue a confirmation and
acceptance of such Purchase Order. No order submitted by HERUSU shall be
binding upon CNS unless confirmed and accepted by CNS. Confirmation and
acceptance shall not be unreasonably withheld by CNS. All confirmed
orders may not be canceled without the prior written consent of CNS.
(b) HERUSU shall work closely with EISAI in the Territory and shall always
order Bulk Products sufficiently in advance that the time permitted for
CNS's delivery under this Agreement allows HERUSU to meet the lead time
requirement for the transaction between HERUSU and EISAI.
(c) The terms and conditions of this Agreement shall prevail and control
over any conflicting terms and conditions used in the Purchase Order.
5. DELIVERY AND SHIPMENT
(a) Delivery terms for the Bulk Products include CNS's export standard
packing. Ownership and risk of loss of or damage to the Bulk Products
shall transfer from CNS to HERUSU upon landing of the Bulk Products in
Japan, before entering Customs.
(b) CNS shall send a sample of the Bulk Product manufactured prior to
shipment to HERUSU for HERUSU's inspection, and HERUSU shall inspect it
within seven (7) business days after the receipt of such sample. If in
HERUSUs inspection the sample of the Bulk Products to be shipped is
found to be defective or not conforming to the Specifications, HERUSU
shall immediately notify CNS and send to CNS such defective sample for
CNS's verification. CNS may thereupon either demonstrate to HERUSU that
the Bulk Product is acceptable or designate a different lot of Bulk
Products for shipment to HERUSU and send a sample of such different lot
to HERUSU, thereby re-commencing the process described in this
paragraph, including seven (7) business days limit for inspection by
CNS. CNS shall not ship the bulk Product to HERUSU until the sample from
the lot designated for shipment to HERUSU is confirmed acceptable by
HERUSU. HERUSU shall not unreasonably withhold, condition, or delay its
confirmation. Absence of HERUSU's rejection within any seven (7)
business days time limit provided in this Section shall be deemed
confirmation of HERUSU's acceptance of the relevant shipment of Bulk
Products, and such Bulk Products shall not be subject to further
inspection prior to shipment. In the event that the Bulk Product is
found to be defective, CNS and HERUSU shall discuss and agree on new
delivery date.
(c) Upon the arrival of each shipment of Bulk Products at the point of
delivery in Japan, and
4
<PAGE>
no later than seven (7) business days after such arrival, HERUSU or its
designee shall examine and inspect such shipment of the Bulk Products
for damage, defect or shortage. In the event that, upon HERUSU's timely
inspection, the Bulk Product supplied is found to be defective or does
not conform to Specifications, CNS agrees to replace such shipment
within forty-five (45) days, at CNS's cost. However, CNS shall be
entitled to verify such claimed defect or non-conformity of the
delivered Bulk Products prior to replacement. Defective or
non-conforming Bulk Products shall either be returned to CNS or disposed
of locally upon prior agreement between the parties.
6. REPACKAGING OF PRODUCTS
(a) HERUSU shall Repackage the Bulk Products in accordance with the Quality
Agreement and shall observe all Japanese laws and regulations pertinent
to such Repackaging. However, prior to the commencement of the first
Repackaging under this Agreement, and prior to the first Repackaging
after any change in the Repackaging process, HERUSU shall submit to CNS
the proposed package design of the Products for approval, consistent
with CNS's specifications, and shall thereafter submit to CNS by fax or
otherwise a legible copy of the test printed approved design as rendered
on the package by HERUSU's printer for CNS' approval prior to use. CNS
shall not unreasonably withhold any approval provided for in this
section.
(b) HERUSU shall be responsible for procuring all repackaging and labeling
materials to be used in the Repackaging of the Bulk Products. Prior to
the first usage and procurement of such repackaging and labeling
materials, and prior to the first usage and procurement of any
repackaging and labeling materials different from those approved before
by CNS, HERUSU shall submit to CNS the list of suppliers of such
repackaging and labeling materials for approval (which approval shall
not be unreasonably withheld). HERUSU shall ensure by contract or other
arrangement that CNS has the right to audit or inspect such suppliers
upon reasonable notice.
7. PRICE AND PAYMENTS
(a) The price of the Bulk Products shall be as listed in the attached
Schedule 1. From the Year 2001, such price(s) shall be fixed for a
period of one (1) Year or as otherwise stated in Schedule 1. Generally,
such price(s) shall be reviewed in good faith by the end of January each
year during the term of this Agreement. However, if neither party gives
written notice to the other to review such price(s) or to change such
price(s), the previously agreed upon price(s) shall continue in effect
for another one (1) year period. Provided, however, that upon mutual
consultations and agreement of the parties, such price(s) may be changed
at any time in consideration of changes in market and economic
conditions and such other factors affecting the business of the parties.
If the parties do not agree on pricing changes by the end of January in
any Year, or at the latest on the day before the beginning of the
following Year, the prices then in effect shall continue in
5
<PAGE>
effect for such following Year. The parties may then elect to make
other, compensating adjustment for such Year as may be permitted by the
terms of this Agreement
(b) All payments due under this Agreement are payable to CNS in U.S.
Dollars. Unless otherwise specified in this Agreement, all required
payments shall be due within ninety (90) days after issuance of the bill
of lading, provided that the invoice has been received within a
reasonable time thereafter, and shall be sent by telegraphic transfer to
a designated bank account of CNS.
(c) All freight, insurance, forwarding and handling charges, customs duties,
taxes, storage fees, and all other charges applicable to the Bulk
Products and/or the Products and all samples shall be the responsibility
of HERUSU. To the extent that the Parties consider practical, HERUSU
will pay actual freight and insurance charges directly. If for any
reason CNS should prepay reasonable freight and insurance charges,
HERUSU shall reimburse CNS for such charges immediately upon receipt of
an invoice for such charges, supported by evidence of payment by CNS.
8. DEVIATIONS AND CHANGE CONTROL
(a) If CNS desires to make any change in the raw materials (including change
of supplier or manufacturer of raw materials), manufacturing process, or
manufacturing facilities of the Products and/or the Bulk Products, CNS
shall notify HERUSU ninety (90) days prior to apply such change into
manufacturing of the Products to be delivered to HERUSU under this
Agreement
(b) If CNS notices, or has any reason to suspect, any abnormality in the
quality of the Products during manufacture or while in storage, CNS
shall immediately notify HERUSU to that effect so that the parties can
agree upon appropriate procedures and/or remedies.
9. CLAIMS
(a) In the event that HERUSU has any claim to be made with respect to the
quantity, condition, loss or damage of the strips (hereinafter referred
to as "Deficiency"), HERUSU shall notify CNS of any such claim within 7
days from the date HERUSU detects such deficiency and shall furnish CNS
with a copy of HERUSU's written inspection report made upon arrival of
the shipment in question and a description of any such defect or
non-conformity. No such claim may be asserted by HERUSU later than six
(6) months after delivery of the Products in question, "delivery" being
agreed by the parties to occur upon transfer of title of the Products
pursuant to this Agreement.
(b) No Bulk Products claimed to be defective may be returned to CNS or
scrapped by HERUSU without the prior written consent of CNS. CNS shall
bear the reasonable actual out-of-pocket costs of HERUSU for destruction
of Bulk Products following CNS's approval.
6
<PAGE>
10. HANDLING OF CONSUMER CLAIM
(a) The procedure for handling claims by consumer relating to the defective
Products shall be separately agreed to by the Parties in the Quality
Agreement.
(b) In the case of a claim by a consumer alleging personal injury, damage or
loss caused by the Products, HERUSU shall advise CNS immediately of such
claim, ascertaining all relevant and necessary facts to permit CNS to
conduct a prompt investigation. CNS shall initially advise HERUSU of its
position on such claim within seven (7) days after the receipt of
HERUSUs notice of claim and shall furnish to HERUSU a detailed report on
such claim within a reasonable time thereafter, considering the pendency
of the claim.
11. HANDLING OF PRODUCT RETURNS
CNS and HERUSU agree to share the cost of all product returns received
from EISAI in the Territory (hereinafter referred to as "Product Returns"). CNS
shall bear the cost of Bulk Strips and HERUSU shall bear the rest of the cost of
the Products returned by EISAI provided that the limit of CNS's liability in any
Year under this provision shall be the supply of replacement Bulk Product for
returned Products not suitable for resale, to a maximum of [* * *] of the gross
number of Products sold by CNS to HERUSU during such year; provided further,
however, that the cost of Product returns caused by a defect or non-conformity
shall be borne by the party hereto that is responsible for such defect or
non-conformity. "Not suitable for resale" means that the 10-strip box of the
Products has been opened or damaged by the customer or retailers.
12. INDEMNIFICATION
(a) Subject to provisions of Section 11(c) below, CNS shall indemnify and
hold HERUSU harmless from and against any losses, obligations,
liabilities, costs and expenses, including legal and other fees, due to
any claim of a third party arising from any defect in the Bulk Products,
or from any act or omission or negligence of CNS or its employees and
agents, in connection with its obligations under this Agreement.
(b) Subject to provisions of Section 11(c) below, HERUSU shall indemnify and
hold CNS harmless from and against any liability, claims, losses, legal
and other fees, costs or expenses, including legal and other fees, due
to any claim of a third party arising from any defect in the repackaging
of the Products or any acts or omission or negligence of HERUSU or its
employees and agents in connection with its obligations under this
Agreement.
(c) To qualify for indemnification with respect to any claim as provided in
Section 11(a) or
7
<PAGE>
11(b) above, the Party seeking indemnification (the "Requesting Party")
must (a) give the other Party (the "Indemnifying Party") prompt notice
of the claim with regard to which indemnification is being sought (the
"Claim"); (b) allow the Indemnifying Party, upon reasonable notice to
the Requesting Party and at the Indemnifying Party's option, to conduct
or participate in the defense, negotiation, and settlement of the Claim,
at the expense of the Indemnifying Party; (c) render all reasonable
assistance to the Indemnifying Party in the defense, negotiation, or
settlement, of the Claim; and (d) refrain from settling or compromising
the Claim or the position or defense of the Indemnifying Party without
prior written consent of the Indemnifying Party, which consent the
Indemnifying Party shall not unreasonably deny or delay. The parties
agree that any portion of the losses, obligations, liabilities, costs
and expenses referred to in Section 11(a) or 11(b) above that is
attributable to a willful or negligent act or failure to act, on the
part of the Requesting Party or any of its employees or agents is
excluded from the indemnification provided herein.
13. LEGAL RELATIONSHIP
For purposes of this Agreement, the parties herein are separate and
independent contractors. Nothing herein contained shall be construed or
deemed to create a principal- agent relationship or any form of
partnership or joint venture. Neither party has and shall not hold
itself as having any right, power, or authority to create any contract
or obligation in the name of or binding upon the other party unless such
contract or obligation is created with the prior written consent of the
other party.
14. REGISTRATION, LICENSES AND INFORMATION
(a) HERUSU shall be responsible for obtaining registration/ license for the
importation of the Bulk Products and Products into Japan and for the
sale of the Products, and provision of the Products to retailers and
consumers, in Japan. However, CNS shall assist HERUSU with the English
language versions of all relevant documentation necessary for such
registration/ license of the Products within Japan.
(b) Upon termination of this Agreement, HERUSU shall immediately, upon CNS's
request, transfer any or all such registrations or licenses to CNS or a
party designated by CNS for a reasonable actual out-of-pocket cost of
transfer. CNS shall reimburse such cost incurred by HERUSU within 30
days after the receipt of the invoice sent by HERUSU.
(c) CNS shall appoint a member of its staff whom HERUSU can immediately
contact for information and customer service as required.
15. TRADEMARKS
(a) CNS grants HERUSU the right to use Trademarks free of charge to
repackage and sell the
8
<PAGE>
Products in the Territory pursuant to this Agreement.
(b) HERUSU recognizes the validity and ownership by CNS of the Trademarks.
Therefore, HERUSU shall not, during the term of this Agreement or
thereafter, represent that it is the owner of any Trademark pertaining
to the Products nor shall it assert any right or interest in such
Trademark or of any joint trademarks of the Trademark anywhere in the
world. HERUSU shall not do or cause to be done any act or thing which
may impair the validity or ownership by CNS of the Trademark at any time
during and after the term of this Agreement.
(c) The Trademarks shall be used by HERUSU only with respect to the
repackaging and sale of the Products to EISAI in the Territory and in
strict conformity with the Specifications and instructions of CNS.
(d) CNS shall, to the best of its ability, protect the Trademark and shall
at its own expense prosecute infringers of such Trademark. CNS's
decision as to whether or not such action shall be taken shall be
accepted by HERUSU as final. HERUSU shall immediately bring to the
attention of CNS any improper or wrongful use in the Territory of CNS's
patents, trademarks, emblems, designs, models or other similar
industrial or commercial monopoly rights. Upon CNS's request and
expense, HERUSU shall assist CNS in taking all steps to defend the
rights of CNS with respect to the trademarks. In such a case, CNS shall
reimburse HERUSU its reasonable, actual, out-of-pocket expenses for such
assistance. However, HERUSU agrees not to initiate on its own motion or
in its own name any protective action or legal proceedings with respect
to the Trademarks or the Products without the prior written
authorization of CNS. Also, HERUSU shall act with care in its use of the
Trademarks so as not to compromise, reduce, or injure CNS's rights in
the Trademarks.
16. CONFIDENTIALITY
(a) CNS and HERUSU acknowledges that all information transmitted by one
party to the other under this Agreement, including but not limited to,
information relating to research, development, manufacturing, testing,
purchasing, accounting and marketing, are confidential (the
"Confidential Information"). The parties undertake to hold such
Confidential Information confidential and shall not disclose such
information to third parties unless otherwise agreed to in writing by
the parties to disclose such information. However, such obligation of
confidentiality and non-disclosure shall not apply to information that.
(i) is or becomes publicly available through no fault of the party
receiving the information;
(ii) is disclosed to the party receiving the information by a third
party entitled to disclose it;
9
<PAGE>
(iii) is already known to the party receiving the information as is
shown by prior written documentation; or
(iv) is developed independently by the party receiving the
information as is proven by proper evidence.
(b) The parties hereto undertakes to hold the Confidential Information in
confidence and shall use the same degree of care as if they are
protecting their own information. The party receiving the Confidential
Information shall use such information only for purposes of exercising
its rights and fulfilling its obligations under this Agreement. Further,
the parties agree not to use the other party's Confidential Information
for their own benefit or for the benefit of any third party.
(c) The parties hereto covenant and agree that they will limit the
disclosure of such Confidential Information only to their employees to
whom such disclosure is necessary and appropriate to permit the party
receiving the information to exercise its rights and carry out its
obligations under this Agreement. Notwithstanding the foregoing, each
party shall be free to disclose Confidential Information to: (i) an
appropriate governmental agency properly requiring such disclosure or in
order to comply with applicable law, and (ii) to its Affiliates and
consultants who are bound by the same conditions of confidentiality as
are undertaken by each party herein.
The obligations herein contained shall survive the termination of this
Agreement and shall continue for five (5) years after termination
hereof.
17. WARRANTIES
(a) CNS warrants that all Bulk Products shipped to HERUSU under this
Agreement have been manufactured in accordance with applicable laws and
regulations and are free from defects in materials and workmanship and
conform to the Specifications and quality control tests pertinent to
such Bulk Products. CNS further warrants that all documentation
(including records maintenance) relating to manufacturing and testing of
the Bulk Products was made in accordance with relevant laws, regulations
and the Specifications. THE FOREGOING ARE ALL OF CNS'S WARRANTIES. CNS
DOES NOT WARRANT THAT THE BULK PRODUCTS OR THE PRODUCTS ARE
MERCHANTABLE: NOR DOES CNS WARRANT THAT THE BULK PRODUCTS OR THE
PRODUCTS ARE FIT FOR ANY PARTICULAR PURPOSE.
(b) CNS'S LIABILITY WITH RESPECT TO ITS WARRANTIES FOR THE BULK PRODUCTS AND
THE PRODUCTS IS LIMITED IN THE AGGREGATE TO THE PAYMENTS OF SALES PRICES
CNS HAS RECEIVED UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTHS
PRIOR TO THE EVENT (OR FIRST EVENT, IF MORE THAN ONE EVENT IS ALLEGED)
GIVING RISE TO THE WARRANTY CLAIM. THE LIMITATION EXPRESSED IN THIS
PARAGRAPH
10
<PAGE>
DOES NOT APPLY TO INDEMNIFICATION BY CNS UNDER SECTION 11.
(c) EXCEPT AS EXPLICITLY PROVIDED IN THIS AGREEMENT, CNS SHALL NOT BE
RESPONSIBLE FOR ANY LOSS, DAMAGE, EXPENSES, CLAIMS, COSTS OR ANY ACTION
WHATSOEVER ARISING FROM THE SUPPLY OR SALE OF THE PRODUCTS BY HERUSU.
HERUSU SHALL NOT MAKE ANY REPRESENTATION TO THIS EFFECT WHATSOEVER ON
CNS'S BEHALF. IN NO EVENT SHALL CNS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT, THE
BULK PRODUCTS, OR THE PRODUCTS.
18. INSPECTIONS
(a) CNS or its authorized representative shall have the right to inspect
HERUSU's records and facilities relating to the Repackaging of the
Products, and HERUSU shall ensure that CNS has the right to inspect the
related records and facilities of HERUSU's subsidiaries and suppliers
used in connection with the Products, the Repackaging, or the Bulk
Products, and CNS shall conduct such inspection(s) in the presence of a
HERUSU representative during normal business hours. Such inspection(s)
shall be notified in writing to obtain an approval in advance, upon
reasonable notice (such approval not to be unreasonably withheld,
conditioned, or delayed). If, upon inspection, CNS finds that any
Products Repackaged by HERUSU or that any Repackaging process does not
conform to relevant laws, regulations or the standard rules and agreed
specifications on Quality Agreement, CNS shall notify HERUSU in writing
of such findings. HERUSU undertakes to correct such defect within thirty
(30) days upon receipt of notice from CNS.
(b) HERUSU or its authorized representative shall have the right to inspect
CNS's records and facilities relating to the Bulk Products. HERUSU shall
conduct such inspection(s) in the presence of a CNS representative
during normal business hours. Such inspections shall be notified in
writing to obtain an approval in advance, upon reasonable notice (such
approval not to be unreasonably withheld, conditioned, or delayed). If,
upon inspection, HERUSU finds that any Bulk Products or that any
manufacturing process does not conform to relevant laws, regulations or
the standard rules and agreed specifications on Quality Agreement,
HERUSU shall notify CNS in writing of such findings. CNS undertakes to
correct such defect within thirty (30) days upon receipt of notice from
HERUSU.
19. TERM AND TERMINATION
This Agreement shall become effective on the date first above written
and shall continue in full force and effect from August 1, 2000 to March
31, 2003, renewing automatically thereafter for consecutive two-year
periods unless either party gives notice to the other at least one
hundred eighty (180) days prior to the end of the then current term,
indicating
11
<PAGE>
such party's intent not to renew. However, in the event that one party
defaults in or breaches any of its obligations under this Agreement or
any provisions thereof, the other party shall have the right to
terminate this Agreement upon thirty (30) days written notice to the
party in default, provided that such default is not remedied within such
thirty (30) days. Furthermore, either party may terminate this
Agreement, immediately without notice, if one party becomes insolvent or
is adjudicated by a voluntary or involuntary bankruptcy or a
receivership of its assets or properties, and CNS may terminate this
Agreement upon notice to HERUSU in the event that the Distribution
Agreement between CNS and EISAI is terminated.
20. NON-ASSIGNABILITY
HERUSU shall not assign, transfer, sub-license or encumber any of its
rights and obligations under this Agreement without the prior written
consent of CNS. Notwithstanding this provision, HERUSU may assign or
delegate some or all of its rights and obligations under this Agreement
to any of its affiliates or subsidiaries, provided that HERUSU shall
remain primarily responsible for the performance of such obligations and
subject to an acceptable Agreement between the parties hereto. This
Agreement shall be binding and inure to the benefit of the successors
and assigns of CNS.
20. NOTICES
To be effective, all notices and statements to be given hereunder shall
be in writing and shall be sent at the respective addresses of the
parties as set forth below unless notification of a change of address is
given in writing pursuant to this notice provision:
If to CNS:
CNS, Inc.
7615 Smetana Lane
Eden Prairie MN 55344
USA
Attention: Ms. Marti Morfitt, President
If to HERUSU:
HERUSU Co., Ltd. Chiba Factory
665 Kasikehongo, Mastuo-machi, Sanbu-gun
Chiba, Japan 289-1537
Yosuke Murashima
Director, Manufacturing Department
All notices given pursuant to this Section 21 shall be deemed effective
upon receipt or rejection by the Party to be charged with notice.
12
<PAGE>
22. ENTIRE AGREEMENT
This Agreement comprises the entire agreement of the parties hereto and
supersedes all prior provisions, negotiations, agreements and
conunitments with respect thereto and shall not be released, discharged,
changed or modified in any manner except by instruments signed by the
duly authorized officers or representatives of each of the parties
hereto.
23. SEVERABILITY
If any provision of this Agreement is determined to be illegal, invalid
or otherwise unenforceable, then to the extent necessary to make such
provision and/or this Agreement legal, valid or otherwise enforceable,
such provision shall be limited, construed or severed and deleted from
this Agreement, and the remaining portion of such provision and the
remaining other provisions hereof shall survive, remain in full force
and effect and continue to be binding, and shall be interpreted to give
effect to the intention of the parties insofar as that is possible.
24. FORCE MAJEURE
Except for the obligation of HERUSU to make payment when due, neither
party shall be liable to the other for its failure to perform any of its
obligations under this Agreement for so long and to the extent that such
failure is due to causes beyond its reasonable control such as but not
limited to prohibition in exportation or importation, refusal to issue
export or import license, Acts of God, war, blockade, revolution,
insurrection, strike, lockout, civil commotion, riot, plague or other
epidemics, destruction of the Products by fire or flood or any other
cause beyond the reasonable control of either party. However, the
failure of either party to perform its obligations under this Agreement
due to the foregoing reasons or events shall be limited and/or suspended
only for a long as such reasons or events are existing. The performance
of either party's obligations shall resume as soon as these reasons or
events have been resolved or has ended; provided that for such reasons
or events which are remediable or preventable, the failure to perform
shall be excused only for as long as it is proven that the party so
affected has exerted an efforts to remedy or prevent such reasons or
events from occurring.
25. ARBITRATION
(a) Any disputes, controversies, difficulties or differences which may arise
out of or in relation to this Agreement shall be settled amicably
between the parties. However, in case of the failure to settle amicably
such disputes, controversies, difficulties or differences, the parties
hereto agree to settlement through arbitration in accordance with the
International Arbitration Rules of the American Arbitration Association
("AAA"). The arbitration shall be conducted by three (3) arbitrators.
CNS shall appoint one of such
13
<PAGE>
arbitrators and EISAI shall appoint one of such arbitrators. Another
arbitrator shall be chosen jointly by the parties or, if they fail to
agree within thirty (30) days after notice by one of the parties of
initiation of the arbitration, then such arbitrator shall be appointed
by the AAA in accordance with said Rules.
(b) The place of arbitration shall be Minneapolis, Minnesota, USA.
(c) The language of the arbitration shall be English. Documents in other
languages shall be permitted as exhibits but mutually acceptable English
translations shall be provided by the offering Party.
(d) The award may grant any relief appropriate under the applicable law,
including without Station declaratory relief and/or specific
performance. However, the Parties agree that notwithstanding the
applicable law, the arbitral tribunal shall not be empowered to award
punitive damages against either Party.
(e) Judgment on the award may be entered in any court having jurisdiction
over the award or any of the Parties or their assets.
26. COMPLIANCE WITH LAW: GOVERNING LAW
HERUSU shall comply with all applicable statutes, regulations,
ordinances and other laws. This Agreement shall be governed by and
interpreted in accordance with the Laws of the State of Minnesota,
without regard to the rules of any jurisdiction with respect to
conflicts of law.
27. HEADINGS
The titles, captions and headings used in this Agreement are for
convenience only and must not be used in any way to interpret, construe
or otherwise determine the meanings of any of the provisions or terms
thereof.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives.
CNS, Inc. HERUSU Co., Ltd.
/s/ Marti Morfitt /s/ Tadanari Hiraku
- ---------------------------------- ------------------------------------
Name: Marti Morfitt Name: Tadanari Hiraku
Title: President and COO Title: President
CNS, Inc. HERUSU CO., LTD.
Date: November 13, 2000 Date: November 10, 2000
15
<PAGE>
SCHEDULE 1
TO
AGREEMENT
BETWEEN
HERUSU CO., LTD., AND CNS, INC.
BULK PRODUCTS:
Initially, tan and clear Breathe Right(R) nasal strips.
Thereafter, additional products, as the Parties may agree upon in
writing.
PRICES:
For tan and clear Breathe Right(R) nasal strips, HERUSU shall pay the following
prices, which reflect the parties' recognition of the advertising investment in
the Market by CNS. The parties also recognize that CNS's advertising investment
will vary substantially from Year to Year and is not proportional to any change
in prices for the Bulk Products:
For the first three months from the date of the first order.
- --------------------------------------------------------------------------------
Exchange Rate Price per Strip
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
From the fourth month until August 1, 2001
- --------------------------------------------------------------------------------
Exchange Rate Price per Strip
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
[* * *] [* * *]
- --------------------------------------------------------------------------------
*The exchange rate used for calculation shall be the Mitsubishi Bank (Tokyo) TTS
rate on the order date by HERUSU.
16
<PAGE>
Before March 31, 2001, CNS and HERUSU shall review and agree on the price for
the period from August 1, 2001 to March 31, 2002.
CNS shall supply free samples of Products in quantities agreed with
EISAI. HERUSU shall pay only the transportation, taxes, insurance, import
duties, and other such costs for shipment and importation of such free samples
into Japan.
CNS shall supply in reasonable quantities agreed with EISAI Bulk
Products for EISAI to provide to customers and potential customers as boxed
samples, including two strip boxes of Products to be sold to customers such as
airlines or rail road companies which will purchase such Products not for resale
but for their customer service. The price to be paid by HERUSU for Bulk Products
intended for and limited to such resale is reduced to a standard US [* * *] per
strip, and HERUSU shall pay all other costs and charges related to such sales,
as provided above.
17
<PAGE>
SCHEDULE 2
TO
AGREEMENT
BETWEEN
HERUSU CO., LTD., AND CNS, INC.
Trademarks:
Breathe Right(R) and other trademarks, according to notice provided to
HERUSU from time to time by CNS either adding or subtracting trademarks from the
list of active trademarks subject to the provisions of this Agreement.
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>cns010440_ex10-21.txt
<DESCRIPTION>EXHIBIT 10.21 EXECUTIVE EMPLOYMENT AGREEMENT
<TEXT>
Exhibit 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of January 2, 2001 (the "Effective Date") between CNS,
INC. a Delaware corporation ("CNS") and Larry R. Muma ("Employee").
WHEREAS, CNS considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of CNS
and its shareholders; and
WHEREAS, Employee has made and is expected to continue to make, due to his
experience and knowledge, a significant contribution to the profitability,
growth and financial strength of CNS; and
WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of
a change in control may exist and that such possibility and the uncertainty and
questions which it may raise among management may result in the departure or
distraction of the performance of Employee's duties to the detriment of CNS and
its shareholders; and
WHEREAS, Employee is willing to continue his employment with CNS upon the
understanding that CNS will provide income security if Employee's employment is
terminated under certain terms and conditions;
WHEREAS, it is in the best interests of CNS and its stockholders to employ
Employee and to reinforce and encourage his continued attention and dedication
to his assigned duties without distraction and to ensure his continued
availability to CNS in the event of a Change in Control; and
WHEREAS, it is further in CNS's best interests to receive certain assurances
from Employee regarding CNS's confidentiality, competition and other proprietary
business concerns;
THEREFORE, in consideration of the foregoing and of this agreement, certain
change in control protection, continued employment and other benefits hereunder,
as well as other mutual covenants and obligations hereinafter set forth, CNS and
Employee agree as follows:
1. Employment. CNS agrees to continue to employ Employee as its VP,
Operations under the terms, conditions and benefits set forth herein
and Employee accepts continued employment with CNS on said terms,
conditions and benefits.
2. Term. The term of Employee's employment shall continue until terminated
pursuant to paragraph 6, 7, or 8 herein.
<PAGE>
Executive Employment Agreement
Page 2
3. Duties. In his position as VP, Operations, Employee will continue to
faithfully and diligently perform such executive management
responsibilities as may be assigned to him from time to time by the
Chief Executive Officer, President or Chairman of the Board of
Directors of CNS (the "Board"); devote his full time, energy and skill
to CNS's business, as is reasonably necessary to execute fully his
duties hereunder, except for vacations, absences made necessary because
of illness, and service on other corporate, civic, or charitable boards
or committees not significantly interfering with his duties hereunder;
and promote CNS's best interests. The principal place of employment and
the location of Employee's principal office and normal place of work
shall be in the Minneapolis, Minnesota metropolitan area. Employee will
be expected to travel to other locations, as necessary, in the
performance of his duties during the term of this Agreement. Employee
shall notify the President of any other paid position which he is
considering accepting, including but not limited to a board of
directors position, a position as an employee or an independent
consultant, or any position, whether or not for pay, which could
constitute a conflict of interest with CNS. The Employee agrees not to
accept any such position without the President of CNS's prior approval.
4. Compensation. For all services rendered by Employee, CNS shall pay
Employee the compensation described in Exhibit A, payable at such times
as salaried employees of CNS are customarily paid. The President of CNS
shall, from time to time during Employee's employment, review his
annual salary in connection with possible increases, giving
consideration to inflation factors, performance of Employee and CNS,
salaries paid for positions of similar responsibility for other
companies, and other relevant factors, and shall provide for such
increases when deemed appropriate. Employee shall in addition be
eligible to participate in the annual management incentive bonus
program, as approved by the Board of Directors. In the event of
termination of this Agreement by CNS without Good Cause, as defined in
paragraph 7 herein, the Board may, in good faith and in its sole
discretion, determine and cause to be paid a partial bonus based on
Employee's performance through the date of termination, and such
determination shall be final and binding.
5. Benefits. Employee shall be entitled to Paid Time Off consistent with
CNS policy and such insurance, 401(k) program and other benefits
available to all salaried employees of CNS, subject to any limitations
on such benefits to officers, directors or highly paid employees in
order that such benefit programs qualify under federal or state law for
favored tax or other treatment. Such benefit programs may be changed
from time to time by the Board. Employee shall also be entitled to
reimbursement of his reasonable and necessary expenses incurred in
connection with the performance of his duties hereunder.
6. Termination by Employee. Employee may resign his employment with CNS
effective upon 30 days' advance written notice to the President. If
Employee resigns under this
<PAGE>
Executive Employment Agreement
Page 3
paragraph, the President retains the right to terminate his employment,
effective upon written notice to Employee, at any time during the
30-day notice period, provided, however, that base salary and the
employer portion of his health insurance premiums will continue to be
paid by CNS for the duration of the 30-day notice period. In connection
with his termination, Employee will receive any accrued unused Paid
Time Off to which he is entitled.
7. Termination by CNS. CNS shall have the right to terminate Employee's
employment in any of the following ways:
a. CNS may, by written notice to Employee, terminate his
employment without Good Cause, in which event Employee will be
paid his base salary up to the date of termination. Employee
is also entitled to receive Salary Continuation for one year
from his termination date. "Salary Continuation" shall mean
payment by CNS of the Employee's base salary as of his
termination date, payable to Employee on the same schedule and
in the same amount as the payment of base salary prior to
termination of his employment, until such time as the full
Salary Continuation obligation shall be discharged, as
provided in this paragraph 7. During the period when Salary
Continuation is payable to Employee, CNS will also continue to
provide to Employee all group medical, dental and life plan
benefits provided to its other senior executives. Employee
shall also receive any accrued unused Paid Time Off to which
he is entitled. Receipt of Salary Continuation is subject to
Employee's compliance with his obligations under paragraphs 9,
10, 11 and 12 of this Agreement and his execution of a
standard release agreement which includes, in addition to
release of claims against CNS and related releasees, an
obligation not to speak negatively about or harm CNS,
confidentiality with respect to the termination process, and
cooperation with the transition of responsibilities. Payment
of the employer portion of Employee's group medical, dental
and life plan premiums under this paragraph and under
paragraphs 6 and 8 herein shall cease as of the date on which
Employee is covered under other such group plans if such
coverage occurs prior to termination of any salary
continuation periods set forth in said paragraphs.
b. CNS, by written notice to Employee, may terminate his
employment for Good Cause, as defined below. In the event of
termination under this subparagraph 7.b., Employee shall be
paid his base salary up to the date of termination. "Good
Cause" for the purpose of this Agreement shall mean one or
more of the following: (i) willful and premeditated failure or
refusal of Employee to render services to CNS in accordance
with his obligations under paragraph 3; (ii) the commission by
Employee of an act of fraud or embezzlement against CNS; (iii)
the commission by Employee of any other willful or reckless
act which injures CNS in a substantial or material way (it
being understood that mere negligence in
<PAGE>
Executive Employment Agreement
Page 4
performance of duties is not Good Cause under this Agreement);
(iv) the breach by Employee of any provision of this
Agreement; or (v) the commission of a substantial act of moral
turpitude by Employee which is deemed by CNS's Board to have a
material adverse effect on CNS; or (vi) unsatisfactory
performance after specific notice of performance deficiencies,
description of expectations and opportunity to cure.
c. CNS, by written notice to Employee, may terminate Employee's
employment under this Agreement if he becomes physically or
mentally disabled during the term so that he has not been able
to substantially perform, for a period of 120 consecutive
days, with reasonable accommodation, the usual duties assigned
to him hereunder ("Disability"). Upon such determination, CNS
shall pay to Employee his base salary up to the date of such
termination to the extent not covered by any disability plan.
d. This Agreement shall terminate upon the Employee's death
during its term, except that CNS shall pay to the legal
representative of Employee's estate all base salary due him up
to the date of his death.
8. Termination Following a Change in Control.
DEFINITION.
a. For purposes of this Agreement, "Change in Control" shall mean
the occurrence of one of the following events:
i. ACQUISITION OF 25% OF STOCK IN CNS
any "person" [as such term is used in Section 13(d)
and 4(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")], other than a trustee or
other fiduciary holding securities under an employee
benefit plan of CNS is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities
representing 25% or more of the combined voting power
of CNS's then outstanding securities;
ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT
APPROVED BY BOARD
during any period of two consecutive years (not
including any period ending prior to the effective
date of this Agreement), individuals who at the
beginning of such period constitute the Board of
Directors of CNS, and any new director [other than a
director designated by a person who has entered into
agreement with CNS to effect a transaction permitted
by Section 6(a)(I), (iii) or (iv)] whose election by
the Board of Directors of
<PAGE>
Executive Employment Agreement
Page 5
CNS or nomination for election by CNS's stockholders
was approved by vote of at least two-thirds of the
directors then still in office who either were
directors at the beginning of the period or whose
election or nomination for election was previously so
approved ("Continuing Directors"), cease for any
reason to constitute at least a majority of the Board
of Directors of CNS;
iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN
LESS THAN 50% OF SURVIVING COMPANY'S STOCK
the stockholders of CNS approve a merger or
consolidation of CNS with any other corporation,
other than (A) a merger or consolidation which would
result in the voting securities of CNS outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the merged or
consolidated entity) 50% or more of the combined
voting power of the voting securities of CNS or such
merged or consolidated entity outstanding immediately
after such merger or consolidation, or (B) a merger
or consolidation effected to implement a
recapitalization of CNS or similar transaction in
which no "person" acquires more than 25% of the
combined voting power of CNS's then outstanding
securities;
iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF
CNS STOCK MARKET VALUE
the stockholders of CNS approve a plan of complete
liquidation or a sale or disposition by CNS of all or
substantially all of CNS's assets. "The sale or
disposition by CNS of all or substantially all of
CNS's assets" shall mean a sale or other disposition
transaction or series of related transactions
involving assets of CNS or of any direct or indirect
subsidiary of CNS (including the stock of any direct
or indirect subsidiary of CNS) in which the value of
the assets or stock being sold or otherwise disposed
of (as measured by the purchase price being paid
therefor or by such other method as the Board of
Directors of CNS determines is appropriate in a case
where there is no readily ascertainable purchase
price) constitutes more than 50% of the fair market
value of CNS. For purposes of the preceding sentence,
the "fair market value of CNS" shall be the aggregate
market value of CNS's outstanding common stock (on a
fully diluted basis) plus the aggregate market value
of CNS's other outstanding equity securities. The
aggregate market value of CNS's common stock shall be
determined by multiplying the number of shares of CNS
common stock (on a fully diluted basis) outstanding
on the date of the execution and delivery of a
definitive agreement ("Transaction Date") with
respect to the sale or disposition by CNS of all or
substantially all of CNS's assets by the
<PAGE>
Executive Employment Agreement
Page 6
average closing price for CNS's common stock for the
ten trading days immediately preceding the
Transaction Date. The aggregate market value of any
other equity securities of CNS shall be determined in
a manner similar to that prescribed in the
immediately preceding sentence for determining the
aggregate market value of CNS's common stock or by
such other method as the Board of Directors of CNS
shall determine is appropriate; and
Employee agrees that, subject to the terms and conditions of
this Agreement, in the event of a Change in Control of CNS
occurring after the date hereof, Employee will remain in the
employ of CNS for a period of 30 days from the occurrence of
such Change in Control.
b. Applicability. In the event of a Change in Control, the terms
of this subparagraph 8.b shall be effective for a period of 24
months following the Change in Control. At the expiration of
such 24 month period this Agreement in its entirety shall be
terminated and be of no further effect. Employee shall be
entitled to receive the benefits set forth in subparagraph 8.f
if, within 24 months of such Change in Control, his employment
is terminated by CNS or its successor without Good Cause (as
defined in paragraph 7.a above), or by Employee for Good
Reason (as defined in subparagraph 8.b.i, below). Employee
shall, in return for the benefits provided under subparagraph
8.f., sign a standard release agreement with CNS, in which he
agrees to release any and all claims and causes of action
which he might have against CNS and in which he affirms and
acknowledges his obligations under paragraphs 9, 10, 11 and 12
of this Agreement.
i. Termination for Good Reason shall be effective
immediately upon written notice from the Employee to
the President. Good Reason shall exist if CNS has
materially breached any of the terms of this
Agreement; Employee is assigned duties which are
materially inconsistent with his position, duties,
responsibilities and status as VP, Operations; his
compensation, including any incentive compensation or
bonus plan, is reduced; or relocation of CNS would
require him to relocate his principal residence
outside reasonable commuting distance of the Twin
Cities Metropolitan area.
ii. Termination without Good Cause shall be effective
upon 30 days' advance notice by CNS to the Employee.
For purposes of this paragraph 8, Good Cause shall be
defined as in subparagraph 7.b.
c. Notice of Termination. Any purported termination of employment
under this paragraph 8 and also under paragraphs 6 and 7 shall
be communicated by written
<PAGE>
Executive Employment Agreement
Page 7
Notice of Termination to the other party hereto in accordance
with paragraph 20 hereunder. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which indicates
the specific termination provision in this Agreement relied
upon and which sets forth the facts and circumstances claimed
to provide a basis for termination of Employee's employment.
d. Date of Termination. For purposes of this paragraph 8 and also
paragraphs 6 and 7 of this Agreement, "Date of Termination"
shall mean:
i. if Employee's employment is terminated for
Disability, as defined in paragraph 7.c. hereunder,
30 days after Notice of Termination is given
(provided that Employee shall not have returned to
the full-time performance of Employee's duties during
such 30 day period); and
ii. if Employee's employment is terminated pursuant to a
provision contained in paragraph 6, 7 or 8 herein or
for any other reason (other than Disability), the
date specified in the Notice of Termination,
consistent with the provisions in said paragraphs.
e. Dispute of Termination. If, within ten days after any Notice
of Termination is given under this paragraph 8, the party
receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties,
or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been
perfected); provided, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given
in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, CNS shall
continue to pay Employee full compensation in effect when the
notice giving rise to the dispute was given (including, but
not limited to, base salary) and continue Employee as a
participant in all compensation, benefit and insurance plans
in which Employee was participating when the notice giving
rise to the dispute was given, to the extent permissible under
the terms of the applicable group plans and state and federal
law, until the dispute is finally resolved in accordance with
this subparagraph. Amounts paid under this subsection are in
addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts under
this Agreement.
<PAGE>
Executive Employment Agreement
Page 8
f. Compensation Upon Termination. Following a Change in Control,
as defined in subparagraph 8.a. above, to the extent provided
in subparagraph 8.b. above, Employee shall be entitled to the
following benefits in lieu of any benefits which would
otherwise be available to him upon termination under
paragraphs 6 or 7 hereunder:
i. CNS shall pay Employee through the Date of
Termination Employee's base salary at the rate in
effect at the time the Notice of Termination is given
and any other form or type of other compensation
otherwise payable for such period, including any
applicable incentive bonus, commensurate with his
performance and the performance of CNS.
ii. In lieu of any further salary payments for periods
subsequent to the Date of Termination, CNS shall pay
a severance payment (the "Severance Payment") equal
to 24 months of Employee's Compensation as defined
below based on the average monthly Compensation paid
to Employee during the 24 month period ending
immediately prior to the Date of Termination (without
giving effect to any reduction in such Compensation
which would constitute a breach of this Agreement).
If the Employee has not been employed by CNS for 24
months as of the Date of Termination, average monthly
Compensation shall be the Employee's average monthly
Compensation for the number of months during which
the Employee has been employed at CNS. For purposes
of this subparagraph, Compensation shall mean and
include every type and form of compensation paid to
Employee by CNS (or any corporation ("Affiliate")
affiliated with CNS within the meaning of Section
1504 of the Internal Revenue Code of 1986, as may be
amended from time to time (the "Code")) and included
in Employee's gross income for federal income tax
purposes, but excluding compensation income arising
from (1) hiring bonuses and (2) compensation income
recognized as a result of the exercise of stock
options or sale of the stock so acquired. All of
Employee's contributions to any qualified plan
pursuant to Section 401(k) of the Code or any
flexible benefit plan pursuant to Section 125 of the
Code shall be deemed to be included in gross income
for federal tax purposes for purposes of this
subparagraph. The Severance Payment shall be made in
a single lump sum within 60 days after the Date of
Termination.
iii. For 18 months following the Employee's Date of
Termination, CNS shall arrange to provide, at its
sole expense, Employee with group medical, dental and
life plan benefits substantially similar to those
which Employee was receiving or entitled to receive
immediately prior to the Notice of Termination. The
cost of providing such benefits shall be in addition
to
<PAGE>
Executive Employment Agreement
Page 9
(and shall not reduce) the Severance Payment.
Benefits otherwise receivable by Employee pursuant to
this paragraph (iii) shall be reduced to the extent
comparable benefits are actually received by Employee
during such period from any third party, and any such
benefits actually received by Employee shall be
reported to CNS.
iv. CNS shall also pay to Employee all legal fees and
expenses incurred by Employee as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this paragraph).
v. The Severance Payment shall be reduced and offset by
the amount of any other payment received or to be
received by Employee in connection with his
termination of employment pursuant to any policies of
CNS.
vi. If a determination is made by legislation,
regulations, rulings directed to CNS or Employee, or
court decision that the aggregate amount of any
payment made to Employee hereunder, or pursuant to
any plan, program or policy of CNS in connection
with, on account of, or as a result of, a Change of
Control constitutes an "excess parachute payment" as
defined in Section 280G of the Code subject to the
excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, Employee shall be
entitled to receive from CNS, in addition to any
other amounts payable hereunder, an amount which
shall be equal to such excise tax, plus, on a net
after-tax basis, an amount equal to the aggregate
amount of any interest, penalties, fines or additions
to any tax, including income tax, which are imposed
in connection with the imposition of such excise tax.
Such amount shall be payable to Employee as soon as
may be practicable after such final determination is
made. Employee and CNS shall mutually and reasonably
determine whether or not such determination has
occurred or whether any appeal to such determination
should be made.
vii. Employee shall be entitled to receive all benefits
payable to Employee under the CNS, Inc. Profit
Sharing Plan and Trust or any successor of such Plan
and Trust and any other plan or agreement relating to
retirement benefits, and, in addition, if Employee is
not fully vested in his account balance under such
Plan, a single lump sum payment in cash from CNS
representing the nonvested portion of his account,
which shall be in addition to, and not reduced by,
any other amounts payable to Employee under this
paragraph 8.
<PAGE>
Executive Employment Agreement
Page 10
viii. Employee shall not be required to mitigate the amount
of any payment provided for in this paragraph 8 by
seeking other employment or otherwise, nor shall the
amount of any payment or benefit provided for in this
paragraph 8 be reduced by any compensation earned by
Employee as the result of employment by another
employer or by retirement benefits after the Date of
Termination, or otherwise except as specifically
provided in this paragraph 8.
ix. In order to assure the performance of CNS or its
successor of its obligations under this paragraph,
CNS may deposit in trust an amount equal to the
maximum payment that will be due Employee under the
terms hereof. Under a written trust instrument, the
Trustee shall be instructed to pay to Employee (or
Employee's legal representative, as the case may be)
the amount to which Employee shall be entitled under
the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be
repaid to CNS. If CNS deposits funds in trust,
payment shall be made no later than the occurrence of
a Change in Control. If and to the extent there are
not amounts in trust sufficient to pay Employee under
this Agreement, CNS shall remain liable for any and
all payments due to Employee. In accordance with the
terms of such trust, at all times during the term of
this Agreement, Employee shall have no rights, other
than as an unsecured general creditor of CNS, to any
amounts held in trust and all trust assets shall be
general assets of CNS and subject to the claims of
creditors of CNS. Failure of CNS to establish or
fully fund such trust shall not be deemed a
revocation or termination of this Agreement by CNS.
x. As a condition of receiving the Severance Payment and
other benefits provided in this subparagraph 8.f and
in subparagraph 8.g, Employee shall be required to
sign a standard release agreement with CNS in which
he agrees to release any and all claims and causes of
action which he might have against CNS and in which
he affirms and acknowledges his obligations under
paragraphs 9, 10, 11 and 12 of this Agreement.
g. Stock Options. Employee shall, immediately upon a Change in
Control, vest in all stock options which have been granted to
him and he shall be entitled to exercise all rights and to
receive all benefits accruing to him under any and all CNS
stock purchase and stock option plans or programs, including
the CNS, Inc. 1994 Amended Stock Plan, or any successor to any
such plan or program, which shall be in addition to and not
reduced by any other amounts payable to Employee under this
paragraph 8.
<PAGE>
Executive Employment Agreement
Page 11
9. Confidential Information. All knowledge and information not already
available to the public which Employee may acquire or has acquired with
respect to product development, improvements, modifications,
discoveries, designs, methods, systems, computer software, programs,
codes and documentation, research, designs, formulas, instructions,
methods, inventions, trade secrets, services or other private or
confidential matters of CNS (such as those concerning sales, costs,
profits, organizations, customer lists, pricing methods, etc.), or of
any third party which CNS is obligated to keep confidential, shall be
regarded by Employee as strictly confidential and shall not be used by
Employee directly or indirectly or disclosed to any persons,
corporations or firms. All of the foregoing knowledge and information
are collectively termed "Confidential Information" herein. Employee's
obligations under this paragraph will not apply to any information
which (a) is or becomes known to the general public under circumstances
involving no breach by Employee of the terms of this paragraph, (b) is
generally disclosed to third parties by CNS as a continuing practice
without restriction on such third parties, (c) is approved for release
by written authorization of CNS's Board, or (d) Employee is obligated
by law to disclose.
10. Disclosure and Transfer of Product Developments, etc.
a. Employee will make full and prompt disclosure to CNS or all
product developments, improvements, modifications,
discoveries, computer software, programs, codes and
documentation, research, designs, formulas, configurations,
instructions, methods and inventions (all of which are
collectively termed "Developments" herein), whether patentable
or not, made, discovered, conceived or first reduced to
practice by Employee or under his direction during his
employment, alone or with others, whether or not made or
conceived during normal working hours or on the premises of
CNS which relate in any material way to the business or to
research or development work of CNS. Employee confirms by his
acceptance of this Agreement that CNS owns and shall own all
of the Developments.
b. Employee also agrees on behalf of himself and his heirs and
legal representatives that he will promptly communicate,
disclose and transfer to CNS, free of encumbrances and
restrictions, all of his right, title and interest in the
Developments covered by subparagraph 10.a. and any patents or
patent applications covering such Developments and to execute
and deliver such assignments, patents and applications, and
any other documents as CNS may direct, and to cooperate fully
with CNS to enable it to secure any patents or otherwise
protect such Developments in any and all countries. Employee
shall assign to CNS any and all copyrights and reproduction
rights to all material prepared by Employee in connection with
his employment.
<PAGE>
Executive Employment Agreement
Page 12
c. Notwithstanding subparagraphs 10.a. and b., however, this
paragraph 10 shall not apply to Developments for which no
equipment, supplies, facility or trade secret information of
CNS was used and which was developed entirely on the
Employee's own time, and (1) which do not relate (a) directly
to the business of CNS or (b) to CNS's actual or demonstrably
anticipated research or development, or (2) which does not
result from any work performed by Employee for CNS.
This will confirm that Employee's obligations to CNS under paragraphs
9, 10 and 11 will continue after the termination of Employee's
employment.
11. Non-Competition. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly engage in, enter into or participate in the business of CNS
or in any business or commercial activity which does or is reasonably
likely to compete with or adversely affect the Business or products of
CNS, either as an individual for Employee's own account, as a partner
or a joint venturer, or as an officer, director, consultant or holder
of more than five percent (5%) of the entity interest in, any other
person, firm, partnership or corporation, or an employee, agent or
salesman for any person. In addition, during such period Employee shall
not: avail himself of any advantages or acquaintances he has made with
any person who has, within the twelve (12) month period ended on the
date of termination of his employment, been a customer of CNS or its
affiliates, and which would, directly or indirectly, materially divert
business from or materially and adversely affect the Business of CNS;
interfere with the contractual relations between CNS and any of its
employees; or employ or cause to be employed in any capacity or retain
or cause to be retained as a consultant any person who was employed in
any capacity by CNS during the twelve (12) month period ended on the
date of termination of Employee's employment.
For purposes of this Agreement, the "Business of CNS" or "Business"
means and includes the business of the manufacture, production, sale,
marketing and distribution of the Breathe Right strip and any other
products currently offered or currently under development by CNS or
offered or currently under development by CNS during one (1) year prior
to the date of termination of Employee's employment.
Inasmuch as the activities of CNS are conducted on an international
basis, the restrictions of this paragraph 11 shall apply throughout the
United States, Canada, Japan and Europe.
12. Non-Solicitation. During the term of Employee's employment by CNS and
for twelve (12) months thereafter, Employee shall not directly or
indirectly solicit any current or prospective CNS customer, broker,
vendor or distributor for the purpose of providing products or services
for or on behalf of said customer, broker, vendor or distributor which
are competitive with the products or services being provided by CNS,
which are in the development stages of being competitive with the
products or services being provided by
<PAGE>
Executive Employment Agreement
Page 13
CNS, or which would in any way cause said customer, broker, vendor or
distributor to discontinue or reduce its business relationship with
CNS. Current CNS customers, brokers, vendors or distributors include
those customer, brokers, vendors or distributors with whom CNS has had
a business relationship at any time within one year immediately
preceding Employee's termination date. Prospective CNS customers,
brokers, vendors and distributors include those with whom (a) a CNS
representative has been in direct personal contact and (b) CNS has a
reasonable opportunity of entering into a business relationship within
six months following Employee's termination date. Employee also agrees
that during his employment in the one year period following his
employment, he will not directly or indirectly solicit any CNS
employees to terminate his or her employment with CNS. This Employee
non-solicitation obligation applies to Employees of CNS during
Employee's employment and as of his termination date.
13. Remedies. Employee acknowledges that the restrictions set forth in
paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect
legitimate business interests of CNS. It is understood that if Employee
violates his obligations under any of these paragraphs, CNS would
suffer irreparable harm for which a recovery of money damages would be
an incomplete and inadequate remedy. It is therefore agreed that CNS,
in addition to any remedies at law, shall be entitled, as a matter of
right, in any court of competent jurisdiction, to a mandatory
injunction restraining Employee pending litigation, as well as upon
final determination thereof, from violating this Agreement. In
addition, CNS will discontinue payment to Employee of any Severance or
Salary Continuation Payments, benefits or bonus which he may be
entitled to receive or is receiving under paragraphs 6, 7 or 8
hereunder or otherwise, in the event of his violation of any of his
obligations under this Agreement. In the event of cessation of payments
and benefits, Employee's release of his claims against CNS shall remain
valid and fully enforceable in consideration of the benefits which
Employee received prior to set breach.
14. Severability. The parties intend that the covenants and agreements
contained herein shall be deemed to be a series of separate covenants
and agreements, one for each and every state of the United States and
political subdivision outside the United States where the business
described is conducted. If, in any judicial proceeding, a court shall
refuse to enforce any of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated
from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining covenants to
be enforced in such proceeding. Further, in the event that any
provision is held to be overbroad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to applicable law and enforced
as amended
<PAGE>
Executive Employment Agreement
Page 14
15. Binding Effect.
a. CNS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets as defined in
subparagraph 8.a of CNS to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that CNS would be required to perform it if no such
succession had taken place, in which case, the term "CNS" as
used in this Agreement shall instead refer to CNS' successor.
Failure of CNS to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle Employee to compensation
from CNS in the same amount and on the same terms as he would
be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes
of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
b. This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
successors, heirs, and designated beneficiaries. If Employee
should die while any amount would still be payable to Employee
hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Employee's designated
beneficiaries, or, if there is no such designated beneficiary,
to Employee's estate.
16. Entire Agreement. From and after the date of this Agreement the terms
and provisions of this Agreement constitute the entire agreement
between the parties and this Agreement supersedes any previous oral or
written communications, representations, or agreements with respect to
any subject, including the subject matter of compensation, bonus,
participation and profit sharing and termination compensation.
17. Waiver and Interpretation. The waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by the breaching
party. No waiver shall be valid unless in writing and signed by the
party providing such waiver. If any provision of this Agreement is held
by any court to be unenforceable, then such provision shall be deemed
to be eliminated from the Agreement to permit enforceability of the
remaining provisions. If any provision is held to be overbroad, such
provision shall be amended to narrow its application to the extent
necessary for enforceability. For purposes of the release agreement
which Employee shall be required to execute as a condition of receiving
any payments and benefits hereunder, "CNS", as referred to in this
Agreement, shall include CNS and all its
<PAGE>
Executive Employment Agreement
Page 15
affiliates, shareholders, officers, directors, employees, agents,
attorneys, insurers and indemnitors.
18. Applicable Law. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Minnesota. The
parties consent to the personal jurisdiction of the State of Minnesota,
waive any argument that such a forum is not convenient, and agree that
any litigation relating to this Agreement shall be venued in
Minneapolis, Minnesota.
19. Tax Withholding. CNS may withhold from any payment of benefits under
this Agreement (and forward to the appropriate taxing authority) any
taxes required to be withheld under applicable law.
20. Notice. Any notice required or desired to be given under this Agreement
shall be deemed given if in writing sent by certified mail to his
residence in the case of Employee, or to its principal office in the
case of CNS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first set forth above.
CNS, INC.
By /s/ Daniel E. Cohen
-------------------------------------
Its CEO
---------------------------------
EMPLOYEE
/s/ Larry R. Muma
----------------------------------------
Larry R. Muma
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
EXHIBIT A
NAME: Larry R. Muma
DATE: January 2, 2001
POSITION: VP, Operations
DEPARTMENT: Operations
BASE SALARY: $182,000
MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold
30 at Plan
60 at Maximum
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>cns010440_ex23-1.txt
<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 18, 2001, relating to the consolidated balance
sheets of CNS, Inc. and subsidiaries as of December 31, 2000, and 1999, 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, 2000, which report is included in the
December 31, 2000, annual report on Form 10-K of CNS, Inc.
/s/ KPMG LLP
Minneapolis, Minnesota
March 26, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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