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Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<SEC-DOCUMENT>0000897101-02-000189.txt : 20020415
<SEC-HEADER>0000897101-02-000189.hdr.sgml : 20020415
ACCESSION NUMBER: 0000897101-02-000189
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020327
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: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-16612
FILM NUMBER: 02589147
BUSINESS ADDRESS:
STREET 1: PO BOX 39802
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55439
BUSINESS PHONE: 6128206696
MAIL ADDRESS:
STREET 1: PO BOX 39802
STREET 2: PO BOX 39802
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55439
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>cns021471_10k.htm
<DESCRIPTION>CNS, INC. FORM 10-K 12/31/2001
<TEXT>
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<HEAD>
<TITLE>CNS, Inc. Form 10-K 12-31-2001
</TITLE>
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<P ALIGN="CENTER"><B>UNITED STATES<BR> SECURITIES AND EXCHANGE COMMISSION <BR>Washington, D.C.
20549</B></P>
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<P ALIGN="CENTER"><B>FORM 10-K</B></P>
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<TD WIDTH=15%> </TD>
<TD WIDTH=85%><FONT SIZE=2>
(MARK
ONE)</FONT></TD>
</TR>
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<BR>
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<P ALIGN="CENTER"><B>|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<BR>
EXCHANGE ACT OF 1934</B></P>
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<P ALIGN="CENTER"><FONT size=2>For the fiscal year ended December 31, 2001</font></P>
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<P ALIGN="CENTER"><B>OR</B></P>
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<P ALIGN="CENTER"><B>|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE<BR>
SECURITIES EXCHANGE ACT OF 1934</B></P>
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<P ALIGN="CENTER"><FONT size=2>For the Transition period from _________ to __________</font></P>
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<P ALIGN="CENTER"><B>COMMISSION FILE NUMBER: 0-16612</B></P>
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<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B><BR> (Exact name of registrant as specified in its
charter)</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" ALIGN="CENTER" WIDTH="70%">
<TR VALIGN="BOTTOM">
<TD WIDTH="52%" ALIGN="CENTER"><U>Delaware</U></TD>
<TD WIDTH="47%" ALIGN="CENTER"><U>41-1580270</U></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"><FONT SIZE="2"><B>P.O. Box 39802 <BR>Minneapolis, MN 55439</B> <BR>(Address of principal
executive offices and zip code)</FONT></P>
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<P><FONT SIZE=2>Registrant's telephone number, including area code: (952) 229-1500 </FONT></P>
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<P><FONT SIZE=2>Securities registered pursuant to section 12(b) of the Act: None </FONT></P>
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<P><FONT SIZE=2>Securities registered pursuant to section 12(g) of the Act: </FONT></P>
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<TD WIDTH=15%> </TD>
<TD WIDTH=85%><FONT SIZE="2"><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=2>Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES <U> X </U>
No <U> </U> </FONT></P>
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<P><FONT SIZE=2>Indicate by check mark if disclosure of delinquent filers
pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_| </FONT></P>
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<P><FONT SIZE=2>As of March 18, 2002, assuming as market value the price of
$6.15 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 $58,000,000. </FONT></P>
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<P><FONT SIZE=2>As of March 18, 2002, the Company had outstanding 13,530,065
shares of Common Stock of $.01 par value per share. </FONT></P>
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<P><FONT SIZE=2>Documents Incorporated by Reference: Portions of the
Company’s Proxy Statement for its Annual Meeting of Stockholders to be held
on May 15, 2002, are incorporated by reference into Part III of this Form 10-K. </FONT></P>
<BR><BR><BR>
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<H1 ALIGN=CENTER><FONT SIZE=2>TABLE OF CONTENTS</FONT></H1>
<PRE><FONT SIZE=-1>
<B><U>Page</U></B>
<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............................... 28
Item 8. Financial Statements and Supplementary Data.............................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 28
<B><U>PART III</U></B>
Item 10. Directors and Executive Officers of the Registrant....................................... 29
Item 11. Executive Compensation................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 30
Item 13. Certain Relationships and Related Transactions........................................... 30
<B><U>PART IV</U></B>
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................................... 31
</pre>
<pre>
SIGNATURES........................................................................................ 32
EXHIBIT INDEX..................................................................................... 34
FINANCIAL STATEMENTS.............................................................................. F-1
</FONT></PRE>
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<P ALIGN="CENTER"><FONT size=2>2</font></P>
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<H2><FONT SIZE="2"><U>Forward-Looking Statements</U></FONT></H2>
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<P><font size=2> Certain
statements contained in this Annual Report on Form 10-K and other written and
oral statements made from time to time by the Company do not relate strictly to
historical or current facts but provide current expectations or forecasts of
future events. As such, they are considered “forward-looking
statements” under the Private Securities Litigation Reform Act of 1995 and
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those presently anticipated or projected. Such
forward-looking statements can be identified by the use of terminology such as
“may,” “will,” “expect,” “plan,”
“intend,” “anticipate,” “estimate,” or
“continue” or similar words or expressions. It is not possible to
foresee or identify all factors affecting the Company’s forward-looking
statements and investors therefore should not consider any list of factors to be
an exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions. Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to, the
following factors: (i) the Company’s revenue and profitability is reliant
on sales of Breathe Right® nasal strips; (ii) the Company currently has a
seasonal pattern of sales that is typically higher in the first and fourth
quarters of each calendar year due to increased nasal strip usage during the
cough/cold season and its revenues and earnings may be impacted by the<B>
</B>severity of such season; (iii) 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; (iv) 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”); (v)
the Company has faced and will continue to face challenges in successfully
developing and introducing new products; (vi) the Company operates in
competitive markets where recent and potential entrants into the nasal dilator
segment pose competitive challenges (see Item 1, “Competition”); (vii)
the Company is dependent upon contract manufacturers for the production of
substantially all of its products; and (viii) 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 (see
Item 1, “Manufacturing and Operations”).</font></P>
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<H1 ALIGN=CENTER><FONT SIZE=2>PART I</FONT></H1>
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<H2><FONT SIZE="2"><U>Item 1. BUSINESS</U></FONT></H2>
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<H2><FONT SIZE=2>General</FONT></H2>
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<P><font size=2> CNS, Inc. (the
“Company”) is in the business of developing and marketing consumer
health care products, including the Breathe Right® nasal strip and the
FiberChoice® chewable fiber tablet. The Company focuses on products that
address important consumer needs within the aging well/self care market,
including better breathing and digestive health.</font></P>
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<P><font size=2> The
Company’s principal product, 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. Breathe Right nasal strips for
colds with mentholated vapors were introduced in selected overseas markets in
2001.</font></P>
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<P><font size=2> The Company
further extended the Breathe Right brand in 2001 through product licensing. The
Company entered into an agreement to license the Breathe Right name for a new
line of premium air filters for home furnace and air conditioning systems. In
addition to expanding the Breathe Right brand and introducing</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>3</font></P>
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<P><FONT SIZE=2>other new products, the Company is exploring possibilities for
acquiring new consumer health care products that have established consumer
brands, particularly those that complement the Company’s drug-free, better
breathing platform. The Company is also considering opportunities for licensing
new products and technologies. </FONT></P>
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<P><font size=2> 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<SUP>TM</SUP>
equine nasal strip. Invented by two veterinarians, the FLAIR equine nasal strip
is a patented, drug-free product that enables horses to breathe more easily
during strenuous exercise.</font></P>
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<P><font size=2> During 2001, the
Company completed a restructuring and organizational realignment plan. The
Company eliminated 20 positions across all areas for a 25% work force reduction.
These actions enable the Company to focus its resources on better leveraging the
success of the Breathe Right brand, both in the United States and abroad,
operate the FiberChoice business more flexibly and efficiently, and reduce the
Company’s investment in new products and business development.</font></P>
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<H2><FONT SIZE=2>Management</FONT></H2>
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<P><font size=2> 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.</font></P>
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<P><font size=2> <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 carry 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 in the United States 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. In
connection with the fall 2002 cough/cold season, the Company intends to launch a
new product that has been under development–Breathe Right Snore Relief<SUP>TM</SUP>
throat spray. This product will leverage the Company’s existing position in
the better breathing/snoring product category and complement existing Breathe
Right offerings.</font></P>
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<P><font size=2> <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.</font></P>
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<P><font size=2> <B><I>International
Team</I>.</B> The Company began shipping Breathe Right nasal strips to new
distributor partners in Europe, Australia and Japan during 2000. Breathe Right
nasal strips for colds with mentholated vapors were introduced in selected
overseas markets in 2001. 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.”</font></P>
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<P><font size=2> <B><I>FLAIR
Team.</I></B><I></I> The Company introduced the FLAIR equine nasal strip during
1999. The Company’s FLAIR Product Team is responsible for the strategic
development and management of the FLAIR equine nasal</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>4</font></P>
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<P><FONT SIZE=2>strip business. In March of 2002, the Company established an exclusive,
worldwide distribution relationship for its FLAIR equine nasal strip product with Merial
Limited, an affiliate of Merck & Co., Inc. </FONT></P>
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<P><font size=2> <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 development,
acquisition or licensing of promising consumer health care products,
particularly those that complement the Company’s drug-free, better
breathing platform. 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 established product
lines.</font></P>
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<H2><FONT SIZE=2>Products</FONT></H2>
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<P><font size=2> <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 strips come in tan, clear, mentholated
and stars-for-kid’s varieties.</font></P>
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<P><font size=2> The Breathe
Right nasal strip includes two embedded plastic strips. When folded down onto
the sides of the nose, the Breathe Right nasal strip lifts the side walls of the
nose outward to open the nasal passages. The product improves nasal breathing
upon application and does not include any medication, thereby avoiding any
medicinal side effects. The Breathe Right nasal strip is offered in 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.</font></P>
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<P><font size=2> 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 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. The Company
believes that its mentholated nasal strip product has increased 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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 to extend the product line. For example, the
Company intends to launch a new product in connection with the fall 2002 cough/cold season
– Breathe Right Snore Relief throat spray.
The throat spray addresses a different cause of snoring than nasal strips and
lubricates and soothes dry throats while a natural astringent firms loose
tissues to reduce the vibrations that produce snoring. This product will
leverage the Company’s existing position in the better breathing/snoring
product category and complement existing Breathe Right product offerings.</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>5</font></P>
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<P><font size=2> <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. In 2002, the Company expects to make the
product also available in 36-count bottles.</font></P>
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<P><font size=2> <B><I>FLAIR
Equine Nasal Strips</I>.</B> The FLAIR equine nasal strip is a product for
horses that capitalizes on the Company’s current nasal strip technology.
Invented by two veterinarians, the FLAIR equine nasal strip is a patented,
drug-free product that enables horses to breathe more easily during strenuous
exercise. Results from 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.</font></P>
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<P><font size=2> The FLAIR equine
nasal strip was introduced for the first time during the Breeder’s Cup in
November of 1999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR
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 has not and is not expected to materially contribute to the
Company’s revenues. The Company has recently established an exclusive
distribution relationship with Merial Limited, an affiliate of Merck & Co.,
Inc., under which Merial has assumed all direct sales and marketing activities
for the FLAIR equine nasal strip business.</font></P>
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<H2><FONT SIZE=2>Markets</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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. The
Company intends to expand the Breathe Right brand in 2002 in connection with the fall
cough/cold season with the introduction of its Breathe Right Snore Relief throat
spray product.</font></P>
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<P><font size=2> Air impedance in
the nose accounts for approximately one-half of the total airway resistance
involved in the respiratory system (i.e., one-half of the energy required for
breathing). If the effort to breathe through the nose during sleep is excessive,
the person will resort to mouth breathing, promoting snoring, dry mouth, sore
throat and mini-awakenings which disrupt sleep. In addition, nasal breathing
difficulties during sleep are often caused by nasal congestion found in people
who have a common cold, allergies and sinusitis and by those who experience
nasal obstruction due to a deviated nasal septum. The Company believes that
people with chronic conditions such as snoring or allergies or with structural
problems such as deviated septa may be more predisposed to use Breathe Right
products on a regular or daily basis, while seasonal sufferers are likely to use
Breathe Right products as needed. These conditions are aggravated when people
have nasal congestion, thus increasing the opportunity for 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.</font></P>
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<P><font size=2> In 1999, the
Company began to emphasize the Breathe Right nasal strip position as a product
that provides instant, drug-free relief for those suffering from nasal
congestion and other symptoms due to the common cold, allergies and sinusitis.
The Company’s advertising currently emphasizes the ability of Breathe Right
nasal strips to provide immediate relief from nasal congestion due to colds.</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>6</font></P>
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<P><font size=2> The
Company’s marketing efforts capitalize on the benefits of Breathe Right
products to consumers in various, and often overlapping, consumer market
segments:</font></P>
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<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. 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 children’s sizes, with a brightly colored
“stars” strip and a Kid Strip with Vicks mentholated vapors.</FONT></TD>
</TR>
</TABLE>
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<I><U>Snoring Relief</U>.</I> Based on results from clinical trials, Breathe
Right products were effective in reducing snoring loudness in approximately 85%
of the participants. 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>
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<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>
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<I><U>Athletic Market</U></I><U></U>. The Company believes that the Breathe
Right nasal strip makes 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 leads to greater awareness of the product and
the Breathe Right brand.</FONT></TD>
</TR>
</TABLE>
<BR>
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<P><font size=2> <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 turned 55 was in 2001. This generation is
generally more active and demanding than their parents. These consumers search
for solutions that do not hamper their active lifestyles. The Company believes
that its FiberChoice chewable fiber tablet represents such a solution in that it
provides an effective, convenient and good-tasting alternative for supplementing
dietary fiber intake. The tablets can be taken anytime and anywhere, with or
without water.</font></P>
<BR><BR><BR>
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<P><font size=2> <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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The FLAIR equine
nasal strip could be used any time a horse is engaged in strenuous exercise. The
Company estimates that in the U.S. there are approximately 1.3 million
individual horse starts in racing competitions and over 1 million individual
horse starts in non-racing competitions. Horses can benefit from the use of the
FLAIR equine nasal strip in training as well as competition.</font></P>
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<H2><FONT SIZE=2>Business Strategies</FONT></H2>
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<P><font size=2> 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 with an emphasis
on drug-free, better breathing such as the Company’s Breathe Right Snore
Relief throat spray.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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 increase its emphasis on positioning the Breathe Right nasal strip as a
product that provides instant, drug-free relief for those suffering from nasal
congestion and other symptoms due to the common cold, allergies and sinusitis.
The Company’s new advertising introduced the Breathe Right nasal strip 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. In 2001, the Company separately advertised Breathe Right nasal
strips as a product that provides drug-free relief from nasal congestion and
snoring.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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. In 2001, the Company entered into an agreement to license the Breathe
Right name for a new line of premium air filters for home furnace and air
conditioning systems that target allergy sufferers. The Company intends to
launch a new product in connection with the fall 2002 cough/cold season–Breathe Right
Snore Relief throat spray. This product will leverage the Company’s
existing position in the better breathing/snoring product category and
complement existing Breathe Right offerings.</font></P>
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<P><font size=2> <B><I>Expanding
Company Presence in International Markets</I>.</B> The Company believes that
there is a significant market potential for its products outside the United
States. The Company is devoting significant resources to the development of its
international business. 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
in 2000 and in Hong Kong in 2001. The Company is considering additional
distributors and representatives for distribution of its nasal strip products in
international markets. During 2001, the Company launched its Breathe Right nasal
strips with mentholated vapors in international markets in conjunction with each
market’s cough/cold season. The Company believes that the network that it</font></P>
<BR><BR><BR>
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<P><FONT SIZE=2>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." </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <B><I>Acquiring,
Developing and Marketing New Products.</I></B><I></I> The Company plans to take
advantage of its position as the drug-free, better breathing company and its
marketing and distribution strengths by acquiring, developing or licensing the
rights to new products that it believes have merit and by bringing 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 product lines that have
an established base of consumer acceptance.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Marketing Strategies</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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 advertising to market its products. The Company’s advertising
focuses on the Breathe Right brand benefits of providing instant, drug-free
relief from nasal congestion and snoring. The Company also uses product
promotion programs, such as sampling, coupons and public relations activities to
encourage product trial and repeat purchases. Introduction of the new Breathe
Right nasal strips for colds with Vicks mentholated vapors has aided in
expanding the Company’s penetration into this significant market. In 2001,
the Company implemented its first on-line consumer promotion, the
“Nosebowl.com sweepstakes”, and offered a trip for eight people to
Super Bowl XXXVI. The promotion included an “Our Nose
Bowl<SUP>TM</SUP>” on-line game show where consumers could learn how
Breathe Right nasal strips could help them. Marketing communications are
generally designed to promote trial of Breathe Right brand products by
increasing consumer awareness of the benefits of each product.</font></P>
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<P><font size=2> Marketing
efforts for Breathe Right nasal strips as an aid in the prevention of snoring
also included 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.</font></P>
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<P><font size=2> Because the
Breathe Right nasal strip is sold as a consumer product, sales of the product
will depend in part upon the degree to which the consumer is aware of the
product and is satisfied with its use, which also influences repeat usage and
word of mouth referrals. The most recent research data collected by a nationally
recognized consumer market research firm indicated that approximately 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><font size=2> <B><I>FiberChoice
Chewable Fiber Tablets</I>.</B> The Company’s marketing efforts for the
launch of FiberChoice chewable fiber tablets concentrated on advertising through
television and magazines to consumers who are 55 or more years old. In addition,
the Company distributed samples of the product and coupons to current users of
bulk fiber products. The Company also used direct response television as a
sampling vehicle. In these advertisements, consumers were invited to call a
toll-free number to receive a free 10-count sample of FiberChoice fiber tablets.
During the second half of 2001, the Company significantly reduced the level of
spending on a national marketing strategy for FiberChoice fiber tablets in favor
of more focused, regional efforts. The Company intends to test new marketing
programs first regionally and, if effective, thereafter extend such programs to
a national level.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <B><I>FLAIR Equine Nasal
Strips</I>.</B> The Company's marketing communications for FLAIR equine nasal strips has focused
on the health benefits of using the product identified in clinical studies. FLAIR equine
nasal</FONT></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>9</font></P>
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<P><FONT SIZE=2>strips remain a developing business, but are not expected to
have a material impact on the Company’s revenues. In March of 2002, the
Company entered into a distribution relationship with Merial Limited, an affiliate
of Merck & Co., Inc. Under that arrangement, Merial has the exclusive right
to market and distribute the Company’s FLAIR equine nasal strips throughout
the world. </FONT></P>
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<H2><FONT SIZE=2>New Products Strategy</FONT></H2>
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<P><font size=2> 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, particularly those that complement the
Company’s drug-free, better breathing platform. 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 also seeks to extend
the Breathe Right brand awareness through licensing to other better breathing
products in new categories. In 2001, the Company entered into an arrangement to
license the Breathe Right name for a new line of premium air filters for home
furnace and air conditioning systems that target allergy sufferers. The Company
intends to launch a new product in connection with the fall 2002 cough/cold season that has
been under development–Breathe Right Snore Relief throat spray. This
product will leverage the Company’s existing position in the better
breathing/snoring product category and complement existing Breathe Right
offerings.</font></P>
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<P><font size=2> Most, if not
all, of the Company’s current products are regulated to varying degrees by
the FDA and other regulatory bodies. See Item 1, “Government
Regulation.” Products that the Company may acquire or develop in the future
could also be subject to a variety of regulatory requirements. Some products
will require extensive clinical studies and regulatory approvals prior to
marketing and sale. There can be no assurance that any required regulatory
approvals will be obtained or that the Company will market or sell any of these
products.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Domestic Distribution</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Breathe
Right nasal strip is typically positioned in the cough, cold and allergy
sections of stores because it provides benefits similar to those obtained with
other decongestant products. The Breathe Right saline nasal spray is also
usually positioned in the same section of the store as the Breathe Right nasal
strip since the products are typically used by those suffering from congestion,
allergies and colds. FiberChoice chewable tablets are positioned in the bulk
fiber and laxative sections of stores.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The
Company’s retail customers include national chains of mass merchants, drug
stores and grocery stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens,
RiteAid, CVS, and Albertson’s and warehouse clubs such as Sam’s Club
and Price Costco, as well as regional and independent stores in the same store
categories. In 2001, one retail chain accounted for approximately 21% of sales.
The loss of this customer or</font></P>
<BR><BR><BR>
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<P><FONT SIZE=2>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. </FONT></P>
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<P><font size=2> The FLAIR equine
nasal strip has been historically sold by the Company primarily to trainers and
owners in the horse racing industry through tack shops, equine catalogs,
veterinarians and equine supply stores. In March of 2002, the Company
established an exclusive distribution relationship for its FLAIR equine nasal
strip product with Merial Limited, an affiliate of Merck & Co., Inc. Pursuant
to that arrangement, Merial has assumed all direct sales and marketing
activities for the product.</font></P>
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<H2><FONT SIZE=2>International Distribution</FONT></H2>
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<P><font size=2> 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. The Company
believed that international markets required an increased level of focus,
advertising and promotion to reach their potential. On September 30, 1999, the
Company and 3M agreed to terminate the existing distribution agreement in a
manner that enabled the Company to take a direct and immediate role in the sale,
marketing and distribution of its nasal strip products in international markets.
As part of the agreement, 3M also agreed not to sell any nasal dilator devices
for a period of two years, which period ends on June 30, 2002.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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, Hong Kong 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.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Manufacturing and Operations</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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 provide full turnkey service and
ship product to the Company that is completely packaged ready to be sold to
retailers or provide semi-finished goods to the Company that require final
packaging.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Each of the
manufacturers makes Breathe Right nasals strips 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 inspect the contract manufacturers
in order to observe processes and procedures in an attempt to ensure compliance
with FDA Good Manufacturing Practice Standards. Finished goods are also
inspected to ensure that they meet quality requirements. 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.</font></P>
<BR><BR><BR>
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<P><font size=2> To ensure
consistent quality and supply, the Company has multi-year contracts with
converters that purchase most of the major components for the Breathe Right
nasal strips directly from 3M. In 2001, the Company entered into a multi-year
contract with 3M that provides for consistent supply, adherence to
specifications and pricing. Although similar materials are currently available
from other suppliers, the Company has historically utilized 3M components in its
products. Although the Company believes that this relationship will not be
disrupted or terminated, the inability to obtain sufficient quantities of these
components or the need to develop alternative sources in a timely and
cost-effective manner could adversely affect the Company’s operations until
new sources of these components become available, if at all.</font></P>
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<H2><FONT SIZE=2>Competition</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <B><I>Breathe
Right Nasal Strips</I>.</B> 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 of these strategies and other steps taken by
the Company, the Breathe Right nasal strip has maintained approximately 90% of
the nasal dilator market despite the entry of other competitors into the market
place.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The patents
owned and 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 its patent rights covering the Breathe Right
nasal strip and has engaged in significant litigation to protect its patent
rights. See Item 1, “Patents, Trademarks and Proprietary Rights.”</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> There can be no
assurance that potential competitors will not be able to develop nasal dilation
products which circumvent the Company’s patents. In addition, external
nasal dilator products compete in the consumer markets with decongestant and
sinus relief products and snoring remedies in many international markets where
the Company does not yet have, and may not in the future have, patent protection
on the Breathe Right nasal strip.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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.</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>12</font></P>
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<H2><FONT SIZE=2>Government Regulation</FONT></H2>
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<P><font size=2> As a
manufacturer and marketer of medical devices, the Company is subject to
regulation by, among other governmental entities, the FDA and the corresponding
agencies of the states and foreign countries in which the Company sells its
products. The Company must comply with a variety of regulations, including the
FDA’s Good Manufacturing Practice regulations, and is subject to periodic
inspections by the FDA and applicable state and foreign agencies. If the FDA
believes that its regulations have not been fulfilled, it may implement
extensive enforcement powers, including the ability to ban products from the
market, prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations. The Company believes that it is currently in
compliance with applicable FDA regulations.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> FDA regulations
classify medical devices into three categories that determine the degree of
regulatory control to which the manufacturer of the device is subject. In
general, Class I devices involve compliance with labeling and record keeping
requirements and are subject to other general controls. Class II devices are
subject to performance standards in addition to general controls. Class III
devices are those devices, usually invasive, for which pre-market approval (as
distinct from pre-market notification) is required before commercial marketing
to assure product safety and effectiveness.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Before a new
medical device can be introduced into the market, the manufacturer generally
must obtain FDA clearance through either a 510(k) pre-market notification or a
pre-market approval application (“PMA”). A 510(k) clearance will be
granted if the submitted data establish that the proposed device is
“substantially equivalent” to a legally marketed Class I or II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The PMA process can be expensive, uncertain and lengthy, frequently
requiring from one to several years from the date the PMA is accepted. In
addition to requiring clearance for new products, FDA rules may require a filing
and waiting period prior to marketing modifications of existing products. The
Company has received 510(k) approvals to market the Breathe Right nasal strip as
a device that can (i) temporarily relieve the symptoms of nasal congestion and
stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by
reducing nasal airflow resistance, and (iv) temporarily relieve breathing
difficulties due to a deviated nasal septum. Nasal dilators have been classified
by the FDA as Class I devices and exempt from pre-market notification.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The
Company’s FiberChoice product is considered to be a dietary supplement and
is regulated under the Federal Food, Drug, and Cosmetic Act as amended by the
Dietary Supplement Health and Education Act “DSHEA” of 1994, and under
the Fair Packaging and Labeling Act. There is generally no requirement that a
company obtain a license or approval from FDA before marketing dietary
supplements in the United States. The FDA is developing implementing regulations
for certain provisions of the DSHEA which will be published as final rules in
the Federal Register.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> There is no
national regulatory body for horse racing. Consequently, approval from state
horse racing commissions must be obtained on a state-by-state basis before the
Company’s FLAIR equine nasal strip can be used during horse racing events.
The Company has been working with state racing commissions to gain approval for
the use of the FLAIR equine nasal strip in competition. To date, the FLAIR
equine nasal strip can be used in horse races in most states, including the
leading racing states of Kentucky, California and Florida, 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><font size=2> Sales of the
Company’s products outside the United States are subject to regulatory
requirements that vary widely from country to country. 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</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>13</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 13; page: 13" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>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. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> No assurance can
be given that the FDA or state or foreign regulatory agencies will give on a
timely basis, if at all, the requisite approvals or clearances for additional
applications for the Breathe Right nasal strip or for any of the other
Company’s products. Moreover, after clearance is given, the Company is
required to advise the FDA and these other regulatory agencies of modifications
to its products. These agencies have the power to withdraw the clearance or
require the Company to change the device or its manufacturing process or
labeling, to supply additional proof of its safety and effectiveness or to
recall, repair, replace or refund the cost of the medical device if it is shown
to be hazardous or defective. The process of obtaining clearance to market
products is costly and time-consuming and can delay the marketing and sale of
the Company’s products. Furthermore, federal, state and foreign regulations
regarding the manufacture and sale of medical devices and other products are
subject to future change. The Company cannot predict what impact, if any, such
changes might have on its business.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company is
also subject to substantial federal, state and local regulation regarding
occupational health and safety, environmental protection, hazardous substance
control and waste management and disposal, among others.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Patents, Trademarks and Proprietary Rights</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company has
registered trademarks, owns two patents and one pending patent application, and
has a number of patents through 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> There can be no
assurance that the Company’s technology and proprietary rights will not be
challenged on the grounds that its products infringe on patents, copyrights or
other proprietary information owned or claimed by others, or that others will
not successfully utilize part or all of the Company’s technology without
compensation to the Company. Nor can there be any assurance that others will not
attempt to challenge the validity or enforceability of the Company’s
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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company
entered into license agreements pursuant to which the Company acquired from the
licensors the exclusive rights to manufacture and sell the Breathe Right nasal
strip in its various versions, 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 to
pay royalties to the licensors based on sales of the products typically
including certain minimum royalty amounts in order to maintain its exclusivity.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The original
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. Seven 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</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>14</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 14; page: 14" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>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, in addition to the two patents and one
patent application pending in the U.S. mentioned above, has filed a
corresponding patent application seeking protection in several foreign countries
to protect certain rights to nasal dilation technology that it acquired. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The licensor of
the FiberChoice chewable fiber tablet has filed one patent application with the
U.S. Patent and Trademark Office seeking patent protection for different aspects
of this product which remain pending. The later licensor of the Breathe Right
aromatic nasal strip has filed at least four pending patent applications with
the U.S. Patent and Trademark Office resulting in three issued patents 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 four 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Although the
Company believes that its owned and licensed patents on nasal strips 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 or that the Company will have sufficient resources to
pursue enforcement of any patents issued. The Company does, however, intend to
aggressively enforce the patents covering nasal strips and its other products.
In order to enforce any patents issued covering nasal strips, including the
Breathe Right nasal strip, or any of its other products, the Company may have to
engage in litigation which may result in substantial cost to the Company and
counterclaims against the Company. Any adverse outcome of such litigation could
have a negative impact on the Company’s business.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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. 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 would narrow the 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Employees</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> At March 18,
2002, the Company had 55 full-time employees and 1 part-time employee, of whom
14 were engaged in operations, 23 in general administration, and 19 in marketing
and sales. There are no unions</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>15</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 15; page: 15" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>representing Company employees. Relations with its employees are
believed to be positive and there are no pending or threatened labor employment
disputes or work interruptions. </FONT></P>
<!-- MARKER FORMAT-SHEET="Head Major" -->
<H1 ALIGN=CENTER><FONT SIZE=2>EXECUTIVE OFFICERS OF THE COMPANY</FONT></H1>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The following
table sets forth the names and ages of the Company’s Executive Officers
together with all positions and offices held with the Company by such executive
officers. Officers are appointed to serve until the meeting of the Board of
Directors following the next Annual Meeting of Stockholders and until their
successors have been elected and have qualified.</font></P>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="80%">
<TR VALIGN="BOTTOM">
<TD align=left><font size=-1> <U>Name and Age</U></font></TD>
<TD align=left><font size=-1> <U>Office</U></font></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD WIDTH="47%" ALIGN="LEFT"><FONT SIZE="2">Daniel E. Cohen (49)</FONT></TD>
<TD WIDTH="53%" ALIGN="LEFT"><FONT SIZE="2">Chairman of the Board and Director</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Marti Morfitt (44)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Chief Executive Officer and Director</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="TOP">
<TD ALIGN="LEFT"><FONT SIZE="2">M. W. Anderson, Ph.D (51)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Product Development and <BR>Regulatory Affairs</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="TOP">
<TD ALIGN="LEFT"><FONT SIZE="2">David J. Byrd (48)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Finance, Chief Financial<BR> Officer and Treasurer</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">John J. Keppeler (40)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Worldwide Sales</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Larry R. Muma (51)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Operations</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Teri P. Osgood (38)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of U.S. Marketing</FONT></TD></TR>
<tr><td> </td></tr>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Carol J. Watzke (54)</FONT></TD>
<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Consumer Strategy</FONT></TD></TR>
</TABLE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>Daniel E.
Cohen</I> has served as the Company’s Chairman of the Board since 1993, its
Chief Executive Officer from 1989 to June 2001 and a director since 1982. He
also served as the Company’s Treasurer from 1982 to March of 1999. Mr.
Cohen, a founder of the Company, is a medical doctor and board-certified
neurologist.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>Marti
Morfitt</I> has served as the Company’s President and a director since
March 1998 and its Chief Executive Officer since June 2001. She also served as
the Company’s Chief Operating Officer from 1998 to June 2001. From
September of 1982 through February of 1998, Ms. Morfitt served in a series of
positions of increasing responsibility with The Pillsbury Company, a
Minneapolis-based manufacturer and distributor of food products, most recently
serving from May of 1997 to February of 1998 as Vice-President, Meals, and from
February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves
as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling
systems.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>M. W.
Anderson, Ph.D</I> has served as the Company’s Vice President of Product
Development and Regulatory Affairs since 1998,Vice President of Clinical and
Regulatory Affairs from 1994 to 1998, and Vice President of Research and
Development from 1990 to 1994. He has served in various other capacities since
joining the Company in 1984, including Director of Applications Research and
Director of Research and Development. Prior to joining the Company in 1984, Dr.
Anderson was an Assistant Professor at the University of Minnesota’s
College of Pharmacy.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>16</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 16; page: 16" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>David J. Byrd</I> has served
as the Company's Vice President of Finance and Chief Financial Officer since February of
1996 and its Treasurer since March of 1999. Prior to joining the Company, Mr. Byrd was
Chief Financial Officer and Treasurer of Medisys, Inc., a health care services company,
since 1991. From 1975 to 1991, Mr. Byrd was employed by Coopers & Lybrand, where he was a
partner from 1986 to 1991. Mr. Byrd is a certified public accountant.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>John J.
Keppeler</I> has served as the Company’s Vice President of Worldwide Sales
since August of 1999, and has served as the Company’s Vice President of
Sales from 1998 to 1999. From November of 1986 to June of 1998, Mr. Keppeler
served in a series of sales and marketing positions of increasing responsibility
with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of
food products, most recently serving as Director of Category & Customer
Development for the Green Giant and Progresso Business.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>Teri P.
Osgood</I> has served as the Company’s Vice President of U.S. Marketing
since December of 1999, of the Breathe Right Brand from April to December of
1999, and has served as the Company’s Vice President of New Business
Commercialization from 1998 to April of 1999. From August of 1990 to July of
1998, Ms. Osgood served in a series of positions of increasing responsibility
with The Pillsbury Company, a Minneapolis- based manufacturer and distributor of
food products, most recently serving from May of 1997 to July of 1998 as
Business Team Leader for Old El Paso, and from October of 1995 to May of 1997 as
Business Team Leader for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood
was employed in marketing by the Kimberly Clark Corp., from 1988 to 1990.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> <I>Carol J.
Watzke</I> has served as the Company’s Vice President of Consumer Strategy
since July of 1998. Prior to joining the Company, Ms. Watzke served in a series
of positions of increasing responsibility since 1974 with The Pillsbury Company,
a Minneapolis-based manufacturer and distributor of food products, most recently
serving as Consumer Insights Director from May of 1997 to July of 1998 and as
Market Research Director, Green Giant Brands, from 1994 to 1997.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 2. PROPERTIES</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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.</FONT> </P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 3. LEGAL PROCEEDINGS</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> None.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> None.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>17</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 17; page: 17" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Head Major" -->
<H1 ALIGN=CENTER><FONT SIZE=2>PART II</FONT></H1>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 5. MARKET FOR REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Market Information</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> The Company’s Common Stock
has been traded on The Nasdaq Stock Market under the symbol “CNXS”
since April 8, 1994. The following table sets forth the high and low last sale
prices of the Company’s Common Stock for the period indicated. </FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="85%">
<TR VALIGN="BOTTOM">
<TH align=left><FONT SIZE="2">Fiscal Year Ended December 31, 2001</FONT> </TH>
<TH><FONT SIZE="2"><U>High</U></FONT></TH>
<TH><FONT SIZE="2"><U>Low</U></FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="74%" ALIGN="LEFT"><FONT SIZE="2">First Quarter.......................................................................................</FONT></TD>
<TD WIDTH="16%" ALIGN="center"><FONT SIZE="2">5.125 </FONT></TD>
<TD WIDTH="10%" ALIGN="center"><FONT SIZE="2">3.500 </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Second Quarter...................................................................................</FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">6.080 </FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">3.250 </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Third Quarter......................................................................................</FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">5.130 </FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">3.150 </FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Fourth Quarter....................................................................................</FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">5.950 </FONT></TD>
<TD ALIGN="center"><FONT SIZE="2">3.660 </FONT></TD></TR>
</TABLE>
<BR><BR>
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="85%">
<TR VALIGN="BOTTOM">
<TH align=left><FONT SIZE="2">Fiscal Year Ended December 31, 2000</FONT> </TH>
<TH><FONT SIZE="2"><U>High</U></FONT></TH>
<TH><FONT SIZE="2"><U>Low</U></FONT></TH></TR>
<TR VALIGN="BOTTOM">
<TD WIDTH="74%" ALIGN="LEFT"><FONT SIZE="2">First Quarter........................................................................................</FONT></TD>
<TD WIDTH="16%" ALIGN="CENTER"><FONT SIZE="2">7.109</FONT></TD>
<TD WIDTH="10%" ALIGN="CENTER"><FONT SIZE="2">3.938</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Second Quarter...................................................................................</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">5.000</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">3.500</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Third Quarter......................................................................................</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">5.500</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">3.906</FONT></TD></TR>
<TR VALIGN="BOTTOM">
<TD ALIGN="LEFT"><FONT SIZE="2">Fourth Quarter....................................................................................</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">4.125</FONT></TD>
<TD ALIGN="CENTER"><FONT SIZE="2">3.125</FONT></TD></TR>
</TABLE>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> On March 18, 2002, the last sale
price of the Common Stock was $6.15 per share. </FONT></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Shareholders</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> As of March 18, 2002, there were approximately
700 owners of record of Common Stock and an estimated 7,000 beneficial holders
whose shares were registered in the names of nominees. </FONT></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Dividends</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> The Company has never paid any
dividends on its Common Stock. The Company currently intends to retain any
earnings for use in its operations and does not anticipate paying cash dividends
in the foreseeable future. The payment of dividends, if any, in the future will
be at the discretion of the Board of Directors and will depend upon, among other
things, future earnings, capital requirements, restrictions in future financing
agreements, the general financial condition of the Company and general business
considerations. </FONT></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>18</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 18; page: 18" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 6. SELECTED FINANCIAL DATA</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> The following selected financial
data should be read in conjunction with the Company’s Consolidated
Financial Statements and Notes thereto together with the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
all of which are included elsewhere in this Report. The Consolidated Statements
of Operations and Balance Sheet data presented below as of and for the Years
Ended December 31, 1999 through December 31, 2001 have been derived from the
Company’s Consolidated Financial Statements included elsewhere in this
Report, which have been audited by KPMG LLP, independent certified public
accountants.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2"><B>FINANCIAL HIGHLIGHTS</B><BR> (In thousands, except per share
amounts)</FONT></P>
<PRE><FONT SIZE=-1>
<B>Years Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997</B>
---------- ------------ ------------ ------------ ------------
Net sales.......................... $ 83,934 $ 68,892 $ 46,050 $ 53,623 $ 66,957
Operating income (loss)............ (1,225) (17,843) (18,696) 701 9,644
Net income (loss).................. 81 (15,660) (13,756) 2,982 8,770
Diluted net income (loss) per share 0.01 (1.09) (0.89) 0.16 0.44
Working capital.................... $ 32,712 $ 32,507 $ 50,183 $ 72,025 $ 76,919
Total assets....................... 50,618 56,344 65,337 84,963 88,495
Stockholders’ equity............... 36,612 36,937 53,584 75,866 80,645
</FONT></PRE>
<BR><BR><BR><BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>19</font></P>
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<H2><FONT SIZE="2"><U>Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND </U><BR> <u>RESULTS OF OPERATIONS</U></FONT></H2>
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<P><font size=2> The following
discussion of the financial condition and results of operations should be read
in conjunction with the Company’s audited consolidated financial statements
and notes thereto appearing elsewhere in this Annual Report. In the opinion of
the Company’s management, the quarterly unaudited information set forth
below has been prepared on the same basis as the audited financial information,
and includes all adjustments (consisting only of normal, recurring adjustments)
necessary to present this information fairly when read in conjunction with the
Company’s consolidated financial statements and notes thereto.</font></P>
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<H2><FONT SIZE=2>Overview</FONT></H2>
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<P><font size=2> The Company was
founded in 1982. From 1987 until 1995, the Company designed, manufactured and
marketed computer-based diagnostic devices for sleep disorders. In 1995, the
Company divested itself of the assets related to its sleep disorders business to
focus on the Breathe Right® nasal strip.</font></P>
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<P><font size=2> The Company
obtained the exclusive license to manufacture and sell the Breathe Right nasal
strip in 1992 and received FDA clearance in October 1993 to market the Breathe
Right nasal strip as a product that improves nasal breathing. 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.</font></P>
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<P><font size=2> In August 1995,
the Company signed an exclusive international distribution agreement with the 3M
Company (“3M”) to market Breathe Right nasal strips outside the U.S.
and Canada. On September 30, 1999, the Company and 3M amended the distribution
agreement in a manner that 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 the international
distribution agreement with 3M terminated on June 30, 2000. During 2000, the
Company established an international distribution network that consists of both
sales representatives and reselling distributors. The Company has reintroduced
nasal strips in Europe, Japan and Australia.</font></P>
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<P><font size=2> 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 have amended and are also seeking to amend certain claims to
provide the Company with additional protection under the patent. The final
outcome of the reexamination is 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.</font></P>
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<P><font size=2> During 1998, the Company
strengthened its management team to add consumer packaged goods and new products
experience and organized into focused business teams. The Company</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>20</font></P>
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<P><FONT SIZE=2>completed positioning research work to expand the Breathe Right
brand and developed 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>
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<P><font size=2> 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. Breathe Right
nasal strips for colds with mentholated vapors were introduced in selected
overseas markets in 2001.</font></P>
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<P><font size=2> 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.</font></P>
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<P><font size=2> In 2001, the
Company announced a plan to streamline and realign the Company’s resources
to better match its strategic goals and to focus on building the core
businesses. The Company recorded a special charge related to costs associated
with this plan. Approximately 25% of the workforce, from throughout the
organization, were eliminated. These cost-cutting actions are expected to result
in annual savings of approximately $2 to $2.5 million. Cost savings relating to
this plan were realized beginning in July of 2001.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> In 2002, the
Company changed its fiscal year-end from December 31 to March 31. The first
period to be reported in 2002 will be a three-month stub period ending March 31,
2002. Fiscal 2003 will be from April 1, 2002 through March 31, 2003.</font></P>
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<P><FONT SIZE="2"><B>Accounting Policies </B></FONT></P>
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<P><font size=2> In preparing the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management must make
decisions which impact the reported amounts and the related disclosures. Such
decisions include the selection of the appropriate accounting principles to be
applied and the assumptions on which to base accounting estimates. In reaching
such decisions, management applies judgment based on its understanding and
analysis of the relevant circumstances. Note 1 to the consolidated financial
statements provides a summary of the significant accounting policies followed in
the preparation of the financial statements.</font></P>
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<P><font size=2> The
Company’s critical accounting policies include the following:</font></P>
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<P><FONT SIZE="2"> <I>Sales Returns
and Other Allowances, and Allowance for Doubtful Accounts</I>. Revenue from sales is
recognized at the time products are shipped less estimated sales returns and
other allowances. Management must make estimates of potential future product
returns and other allowances related to current period revenue. Management
analyzes historical returns, current trends, and changes in customer and
consumer demand when evaluating the adequacy of the sales returns and other
allowances. The Company has established a reserve of $1.2 million for future
sales returns and other allowances as of December 31, 2001. Similarly,
management must make estimates of the uncollectability of accounts receivables.
Management specifically analyzes customer account balances, historical bad
debts, current economic trends and changes in the timing of customer payments.
The balance of accounts receivable was $12.3 million net of the allowance for
doubtful accounts of $500,000 as of December 31, 2001.</FONT></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>21</font></P>
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<P><FONT SIZE="2"> <I>Inventory
Valuation</I>. Inventory is valued at lower of cost, determined on a first in first
out basis, or market. The Company analyzes the cost and the market value of
inventory items and establishes the appropriate valuation reserves. The Company
has established a reserve of $326,000 as of December 31, 2001. Management
believes that the inventory valuation results in carrying inventory at the lower
of cost or market.</FONT></P>
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<P><FONT SIZE="2"> <I>Accounting for
Income Taxes</I>. As part of the process of preparing financial statements, the
Company is required to estimate income taxes, both state and federal. This
process involves management estimating the actual current tax exposure together
with assessing temporary differences resulting from different treatment for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet.
Management must then assess the likelihood that deferred tax assets will be
utilized to offset future taxable income during the periods in which these
temporary differences are deductible. Based on the level of historical taxable
income and projections of future taxable income for 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 of $9.3
million against the net deferred tax assets as of December 31, 2001.</FONT></P>
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<P><FONT SIZE="2"> <I>Valuation of
Product Rights.</I> Management assesses the impairment of product rights whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors that are considered important for the assessment include
significant underperformance of a product line relative to projected or
historical results, significant change in the market in relation to competitive
products, significant negative industry or economic trends. Management currently
does not believe that it is necessary to record an impairment charge at this
time and that the carrying value of these assets will be recoverable.</FONT></P>
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<P><FONT SIZE="2"><B>Operating Results </B></FONT></P>
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<P><font size=2> The tables below
set forth certain selected financial information of the Company and the
percentage of net sales represented by certain items included in the
Company’s statements of operations for the periods indicated.</font></P>
<BR><BR><BR>
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<p ALIGN=CENTER><FONT SIZE=2>22</FONT></p>
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<P><font size=2> Certain
prior year amounts have been reclassified to conform to the current
period’s presentation. These reclassifications had no impact on the
operating loss or net loss for 2000 and 1999.</FONT></P>
<DIV><FONT SIZE=-6>
<PRE>
THREE MONTHS ENDED THREE MONTHS ENDED
--------------------------------------------- YEAR ----------------------------------------------- YEAR
ENDED ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
2001 2001 2001 2001 2001 2001 2001 2001 2001 2001
----------- ----------- --------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Domestic net sales ......... $ 22,284 $ 12,540 $14,847 $18,041 $ 67,712
International net sales .... 4,828 2,936 3,398 5,060 16,222
-------- -------- ------- ------- --------
Net sales ................. 27,112 15,476 18,245 23,101 83,934 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 8,706 5,557 6,059 7,376 27,698 32.1 35.9 33.2 31.9 33.0
-------- -------- ------- ------- -------- ------- ------- ---- ----- -----
Gross profit ............. 18,406 9,919 12,186 15,725 56,236 67.9 64.1 66.8 68.1 67.0
-------- -------- ------- ------- -------- ------- ------- ---- ----- -----
Operating expenses:
Advertising and promotion . 17,579 8,635 4,371 11,363 41,948 64.8 55.8 24.0 49.2 50.0
Selling, general and
administrative ........... 4,766 3,519 3,247 3,051 14,583 17.6 22.7 17.8 13.2 17.4
Special charges ........... 0 1,100 0 (170) 930 0.0 7.1 0.0 (0.7) 1.1
-------- -------- ------- ------- -------- ------- ------- ---- ----- -----
Total operating expenses . 22,345 13,254 7,618 14,244 57,461 82.4 85.6 41.8 61.7 68.5
-------- -------- ------- ------- -------- ------- ------- ---- ----- -----
Operating income (loss) .. (3,939) (3,335) 4,568 1,481 (1,225) (14.5) (21.5) 25.0 6.4 (1.5)
Interest income ............ 362 345 269 330 1,306 1.3 2.2 1.5 1.4 1.6
-------- -------- ------- ------- -------- ------- ------- ---- ----- -----
Income (loss) before
income taxes ............ $ (3,577) $ (2,990) $ 4,837 $ 1,811 $ 81 (13.2)% (19.3)% 26.5% 7.8% 0.1%
======== ======== ======= ======= ======== ======= ======= ==== ===== =====
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
----------------------------------------------- ENDED ----------------------------------------------- ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
2000 2000 2000 2000 2000 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 68,892 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 4,846 5,110 6,875 8,076 24,907 33.1 38.4 35.8 37.2 36.2
-------- -------- ------- -------- --------- ------- ----- ----- ------- -------
Gross profit ............. 9,788 8,193 12,346 13,658 43,985 66.9 61.6 64.2 62.8 63.8
-------- -------- ------- -------- --------- ------- ----- ----- ------- -------
Operating expenses:
Advertising and promotion . 12,058 5,998 9,490 19,148 46,694 82.4 45.1 49.4 88.1 67.8
Selling, general and
administrative ........... 3,915 3,470 3,756 3,993 15,134 26.8 26.1 19.5 18.4 22.0
Special charges ........... 0 0 0 0 0 0.0 0.0 0.0 0.0 0.0
-------- -------- ------- -------- --------- ------- ----- ----- ------- -------
Total operating expenses . 15,973 9,468 13,246 23,141 61,828 109.1 71.2 68.9 106.5 89.7
-------- -------- ------- -------- --------- ------- ----- ----- ------- -------
Operating loss ........... (6,185) (1,275) (900) (9,483) (17,843) (42.3) (9.6) (4.7) (43.6) (25.9)
Interest income ............ 498 566 507 612 2,183 3.4 4.3 2.6 2.8 3.2
-------- -------- ------- -------- --------- ------- ----- ----- ------- -------
Loss before income taxes . $ (5,687) $ (709) $ (393) $ (8,871) $ (15,660) (38.9)% (5.3)% (2.0)% (40.8)% (22.7)%
======== ======== ======= ======== ========= ======= ===== ===== ======= =======
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
----------------------------------------------- ENDED ----------------------------------------------- ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1999 1999 1999 1999 1999 1999 1999 1999 1999 1999
----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Domestic net sales ......... $ 11,811 $ 7,994 $ 10,151 $ 15,106 $ 45,062
International net sales .... 123 191 312 362 988
-------- --------- -------- -------- ---------
Net sales ................. 11,934 8,185 10,463 15,468 46,050 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......... 4,688 3,629 3,992 6,049 18,358 39.3 44.3 38.2 39.1 39.9
-------- --------- -------- -------- --------- ------- ------- ------- ------- -------
Gross profit ............. 7,246 4,556 6,471 9,419 27,692 60.7 55.7 61.8 60.9 60.1
-------- --------- -------- -------- --------- ------- ------- ------- ------- -------
Operating expenses:
Advertising and promotion . 9,749 2,864 2,915 12,576 28,104 81.7 35.0 27.9 81.3 61.0
Selling, general and
administrative ........... 3,463 3,164 3,452 1,859 11,938 29.0 38.7 33.0 12.0 25.9
Special charges ........... 0 0 6,345 0 6,345 0.0 0.0 60.6 0.0 13.8
-------- --------- -------- -------- --------- ------- ------- ------- ------- -------
Total operating expenses . 13,212 6,028 12,712 14,435 46,387 110.7 73.6 121.5 93.3 100.7
-------- --------- -------- -------- --------- ------- ------- ------- ------- -------
Operating loss ........... (5,966) (1,472) (6,241) (5,016) (18,695) (50.0) (18.0) (59.6) (32.4) (40.6)
Interest income ............ 899 698 643 598 2,838 7.5 8.5 6.1 3.9 6.2
-------- --------- -------- -------- --------- ------- ------- ------- ------- -------
Loss before income taxes . $ (5,067) $ (774) $ (5,598) $ (4,418) $ (15,857) (42.5)% ( 9.5)% (53.5)% (28.6)% (34.4)%
======== ========= ======== ======== ========= ======= ======= ======= ======= =======
</PRE>
</font></DIV>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>23</font></P>
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<P><FONT SIZE="2"><B>2001 Compared to 2000 </B></FONT></P>
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<P><FONT SIZE="2"> <I>Net Sales. </I>Net
sales for 2001 of $83.9 million showed a 21.8% increase over 2000 sales of $68.9
million. The sales increase is the result of growth in all areas of the
Company’s business. Domestic sales of Breathe Right nasal strips grew to
$59.8 million, representing an increase of 8.7% over 2000 sales of $55.0
million. FiberChoice tablet sales for 2001 grew to $7.9 million from $7.3
million for the previous year, representing an increase of 8.2%, primarily as
the result of a full year of sales activity.</FONT></P>
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<P><font size=2> International
sales increased by 161.3% to $16.2 million dollars compared to 2000 sales of
$6.2 million. This increase was the result of a full year of distribution in
Japan, Europe and Australia as well as the launch of Breathe Right strips for
colds with mentholated vapors in selected countries.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company has
experienced in the past, and expects that it will continue to experience in the
future, quarterly fluctuations in both domestic and international sales and
earnings. These fluctuations are due in part to advertising levels and
seasonality of sales as described below, as well as increases and decreases in
purchases by distributors and retailers in anticipation of future demand by
consumers.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Gross Profit.</I>
Gross profit was $56.2 million for 2001 compared to $44.0 million for 2000.
Gross profit as a percentage of net sales increased to 67.0% for 2001 compared
to 63.8% for 2000. Gross profit in 2000 was unfavorably impacted by the lower
gross profit on 10-count FiberChoice chewable tablets, disposal of an excess
inventory of pillow covers and higher costs associated with expediting inventory
purchases and deliveries.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Advertising and
Promotion Expenses.</I> Advertising and promotion expenses were $41.9 million for
2001 compared to $46.7 million for 2000. Advertising and promotion expenses as a
percentage of net sales decreased to 50.0% in 2001 from 67.8% in 2000. This
decrease in spending rate was the result of a planned lower support level for
FiberChoice tablets the year following its introduction and the elimination of
less effective expenditures for the Breathe Right brand.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Selling, General
and Administrative Expenses.</I> Selling, general and administrative expenses were
$14.6 million for 2001 compared to $15.1 million for 2000. Selling, general and
administrative expenses as a percentage of net sales decreased to 17.4% compared
to 22.0% for 2000. This decrease was primarily the result of the corporate
restructure that included a workforce reduction and that enabled the Company to
streamline its resources to focus on building the core businesses.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Special Charges.</I>
The Company recorded a special charge of $930,000 in 2001 for the costs of
implementing the Company’s corporate restructuring plan to streamline and
realign the Company’s resources. The charge was primarily for severance
benefits.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Investment
Income.</I> Investment income was $1.3 million for 2001 compared to $2.2 million for
2000. The decrease in investment income was the result of a decrease in funds
invested and market interest rates.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Income Tax Benefit
(Expense).</I> There was no income tax provision for 2001 due to tax loss carryforwards.</FONT></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>24</font></P>
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<P><FONT SIZE="2"><B>2000 Compared to 1999 </B></FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <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 the impact of 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.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <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.
The gross profit percentage was lower in 1999, primarily due to costs for the
transition of Breathe Right nasal strips to new product packaging.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Advertising and
Promotion Expenses.</I> Advertising and promotion expenses were $46.7 million for
2000 compared to $28.1 million for 1999. Marketing and selling expenses as a
percentage of net sales increased to 67.8% in 2000 from 61.0% 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.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Selling, General
and Administrative Expenses.</I> Selling, general and administrative expenses were
$15.1 million for 2000 compared to $11.9 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 22.0% in 2000
from 25.9% in 1999 as a result of the higher level of sales in 2000.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Special Charge.</I>
In 1999, the Company recorded a special charge relating to a contract
termination fee of $6.3 million. This special charge represents a one-time
payment to 3M, the Company’s international distributor, to terminate the
international distribution agreement. The agreement allowed the Company to
regain control of the international business on a phased schedule that was
completed June 30, 2000.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <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.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Income Tax Benefit
(Expense).</I> There was no income tax provision for 2000 due to tax loss carryforwards.</FONT></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>25</font></P>
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<H2><FONT SIZE=2>Seasonality</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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 cough/cold season.</font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Liquidity and Capital Resources</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> At December 31,
2001, the Company had cash, cash equivalents and marketable securities of $27.3
million and working capital of $32.7 million.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Operating
Activities.</I> The Company used cash in operations of $2.8 million in 2001
primarily due to a decrease in operating liabilities. The Company used cash in
operations of $4.4 million and $12.1 million in 2000 and 1999, respectively. The
decreased cash flow in 2000 was primarily due to the net loss for the year
offset by an increase in operating liabilities.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Investing
Activities.</I> Sales and maturities of marketable securities exceeded purchases by
$10.5 million in 2001. Net proceeds were used primarily to fund the cash used in
operations and purchase treasury shares. 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, purchase property and equipment and purchase
treasury shares. Marketable securities purchased consisted of cash equivalents,
corporate bonds, U.S. Government obligations and municipal bonds.</FONT></P>
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<P><font size=2> The Company
purchased $400,000 and $2.0 million of property and equipment in 2001 and 2000,
respectively, primarily associated with the Company’s move to different
facilities.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Financing
Activities.</I> The Company purchased 202,000 shares of its common stock for $1.0
million in 2001 and purchased 396,000 shares for $1.5 million in 2000. These
treasury shares will 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 $288,000 in 2001 and $103,000 in 2000 from
the exercise of stock options and issuance of stock under the employee stock
purchase plan.</FONT></P>
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<P><FONT SIZE="2"> <I>Significant
Agreements and Lease Obligations.</I> The Company has entered into certain
agreements and leases in order to secure product rights and office space. The
following is a summary of significant agreements and lease obligations:</FONT></P>
<PRE><FONT SIZE=1>
<B>
Minimum Operating
<u>Year Ending December 31,</U> <u>Royalties</U> <u>Leases</U> <U>Total</u></B>
2002 ..................... $ 1,070 $ 733 $ 1,803
2003 ..................... 1,070 744 1,814
2004 ..................... 1,070 727 1,797
2005 ..................... 1,070 740 1,810
2006 ..................... 1,070 755 1,825
Later years .............. 3,104
-------
Total .................... $ 6,803
-------
</FONT></PRE>
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<P><font size=2> The Company has
agreements that exclusively license intellectual property rights for certain
products. Royalties due under these agreements are based on various percentages
to net sales. The licensing agreements are valid for the lives of the related
patents, however, they may be terminated earlier under certain conditions. Total
minimum royalties are not determinable since royalties</font></P>
<BR><BR><BR>
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<P ALIGN="CENTER"><FONT size=2>26</font></P>
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<P><FONT SIZE=2>continue for the life of current and potential future patents
related to the licensed intellectual property. The Company has entered into
operating leases for office space and office equipment. Leases expire at various
dates beginning in 2002 through 2010. Management is not aware of any significant
agreements or obligations that would have a material negative impact upon the
Company’s short-term or long-term liquidity. </FONT></P>
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<P><font size=2> The Company
believes that its existing funds will be sufficient to support its planned
operations for the foreseeable future.</font></P>
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<P><FONT SIZE="2"><B>Recent Accounting Pronouncements </B></FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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 March 31, 2002. If the Company would have applied the presentation set
forth in this issue in 2001, 2000 and 1999, net sales would have been reduced by
$1.1, $1.5 and $3.1 million, 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></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> In 2001, the
EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement
Characterization of Consideration Paid to a Reseller”. This EITF requires
companies to present in their statements of operations, certain consideration
paid to a purchaser of the company’s products as sales allowances,
resulting in a reduction of net sales. The Company currently records costs
covered by this EITF as operating expenses. The Company plans on adopting this
EITF beginning with the quarter ending March 31, 2002. The Company is in the
process of evaluating this EITF and its potential impact.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> In 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” This statement supercedes SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of”. The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale. It also
expands the previously existing reporting requirements for discontinued
operations to include a component of an entity that either has been disposed of
or is classified as held for sale. The Company is required to implement SFAS No.
144 beginning with the quarter ending March 31, 2002. Management does not expect
this statement to have a material impact on the Company’s consolidated
financial position or results of operations.</font></P>
<BR><BR><BR>
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<p ALIGN=CENTER><FONT SIZE=2>27</FONT></p>
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<H2><FONT SIZE=2><U>Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK</U></FONT></H2>
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<P><font size=2> The Company’s market
risk exposure is primarily interest rate risk related to its cash and cash equivalents
and investments in marketable securities. The Company has investment guidelines which
limit the types of securities in which it may invest as well as the length of maturities.
No investment may exceed 36 months in maturity and the weighted average life of the
portfolio may not exceed 18 months. </font></P>
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<P><font size=2> The table below provides
information about the Company’s cash and cash equivalents and marketable securities
as of December 31, 2001: </font></P>
<PRE><FONT SIZE=-1>
<b>(In thousands)
Cost Fair Value</b>
-------- ----------
Due within one year........................... $19,022 $19,158
Due after one year through three years........ 7,911 8,137
------- -------
$26,933 $27,295
======= =======
</font></PRE>
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<P><FONT SIZE="2"><B><U>Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</U></B></FONT> </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Consolidated Balance
Sheets of the Company as of December 31, 2001 and 2000, 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, 2001, the
Notes to the Consolidated Financial Statements and the Report of KPMG LLP, independent
certified public accountants, are listed under Item 14 of this Report. </font></P>
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<P><FONT SIZE="2"><B><U>Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE</U></B></FONT> </P>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=2> </FONT></TD>
<TD WIDTH=5%><FONT SIZE=2> </FONT></TD>
<TD WIDTH=5%><FONT SIZE=2>None.</FONT></TD>
<TD WIDTH=85%><FONT SIZE=2></FONT></TD>
</TR>
</TABLE>
<BR>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>28</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<H1 ALIGN=CENTER><FONT SIZE=2>PART III</FONT></H1>
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<H2><FONT SIZE="2"><U>Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT</U></FONT></H2>
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<H2><FONT SIZE=2>Directors</FONT></H2>
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<P><font size=2> The following sets forth
certain information with respect to the Company’s directors: </font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Daniel E. Cohen,</I> 49, has
served as the Company's Chairman of the Board since 1993 and has served as a director of
the Company since its formation in 1982. Mr. Cohen also served as the Company's Chief
Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr.
Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Patrick Delaney</I>, 59, has
served as a director of the Company since 1983 and as the Company's Secretary since 1995.
Mr. Delaney is a partner in the Minneapolis-based law firm of Lindquist & Vennum P.L.L.P.,
counsel to the Company. He has been in the private practice of law since 1967. He is also
a director of Community First Bankshares, Inc., a multi-bank holding company, and the
secretary of Cardia, Inc., a manufacturer of medical devices.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>R. Hunt Greene</I>, 51, has
served as a director of the Company since 1985. Mr. Greene has been an investment banker
for over twenty years. He is presently Managing Director and Member of Greene Holcomb
&Fisher LLC (“GH&F”), a Minneapolis investment banking firm that was
formed in 1995. GH&F has provided the Company with certain financial advisory and
investment banking services from time to time since 1996.</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Andrew J. Greenshields</I>,
64, has served as a director of the Company since 1986. Mr. Greenshields has been
President of Pathfinder Ventures, Inc., Minneapolis, Minnesota, since 1980. He is also a
general partner of Pathfinder Venture Capital Fund III and a general partner of Spell
Capital Partners, LP, both of which are Minneapolis-based financial limited partnerships.
Mr. Greenshields is also a director of Aetrium, Inc., a manufacturer of semi-conductor
handling equipment.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>H. Robert Hawthorne</I>, 57,
has served as a director of the Company since 1999. Mr. Hawthorne has been
Chief Executive Officer of Ocean Spray Cranberries, Inc., a Boston-based food and
beverage company, since February 2000. From 1997 to 1999, Mr. Hawthorne served as a
director, President and Chief Executive Officer of Select Comfort Corporation, a
Minneapolis-based company that manufactures air beds and sleep related products. From
1986 to 1997, Mr. Hawthorne served in a series of positions of increasing responsibility
with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food
products, most recently serving from February 1992 to December 1997 as President of The
Pillsbury Brands Group, a subsidiary of The Pillsbury Company.</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Marti Morfitt</I>, 44, has
served as the Company’s President and Chief Executive Officer since June 2001, its
President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has
served as a director of the Company since 1998. From September 1982 to February 1998, Ms.
Morfitt served in a series of positions of increasing responsibility with The Pillsbury
Company, a Minneapolis-based manufacturer and distributor of food products, most recently
serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994
to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of
Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems.</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Richard A. Peddie</I>, 55,
has served as a director of the Company since July 19, 2001. Mr. Peddie currently serves
as President and Chief Executive Officer of Canadian-based Maple Leaf Sports &</FONT></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>29</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 45; page: 45" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>Entertainment, Ltd., which owns the Toronto Raptors Basketball
Club, the Toronto Maple Leafs Hockey Team and Air Canada Centre, and has served
in that capacity since 1998. From 1996 to 1998, Mr. Peddie served President and
Chief Executive Officer of the Toronto Raptors Basketball Club. From 1994 to
1996, Mr. Peddie served as President and Chief Operating Officer of NetStar
Communications, Inc., a Canadian-based broadcast company. From 1989 to 1994, Mr.
Peddie served as the President and Chief Executive Officer of Stadium
Corporation of Ontario (SkyDome). From 1985 to 1989, Mr. Peddie served as
President and Chief Executive Officer of Pillsbury Canada Limited, a subsidiary
of The Pillsbury Company and manufacturer and distributor of food products. From
1973 to 1985, Mr. Peddie served in positions of increasing responsibility with
General Foods Limited, a manufacturer and distributor of food products, most
recently serving from 1983 to 1985 as the President of the Hostess Food Products
Division. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <I>Richard W. Perkins</I>, 71,
has been a director of the Company since 1993. Mr. Perkins has been President, Chief
Executive Officer and a director of Perkins Capital Management, Inc., a Minneapolis-based
investment management company, since 1985. He is also a general partner of Spell Capital
Partners, LP, a Minneapolis-based venture capital limited partnership. He is also a
director of the following publicly-held companies: Bio-Vascular, Inc., a manufacturer of
medical products; Intellefilm Corp., a producer of television and internet commercials;
PW Eagle, Inc., a manufacturer of plastic pipe; Lifecore Biomedical, Inc., a medical
device company; Nortech Systems, Inc., a contract manufacturer for the electronics
industry; Quantech, Ltd., a development stage medical device company; Vital Images, Inc.,
a medical diagnostic software company; and Paper Warehouse, Inc., a retailer specializing
in party supplies and paper products.</FONT></P>
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<HR SIZE=1 WIDTH=15% ALIGN=CENTER>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Certain other 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 15, 2002 (the “2002 Proxy Statement”), a definitive copy of which will be
filed with the Commission within 120 days of the close of the last fiscal year, and is
incorporated herein by reference. </font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE=2>Executive Officers</FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Information concerning
executive officers is set forth in the Section entitled “Executive Officers of the
Company” in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of
Item 401 of Regulation S-K. </font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 11. EXECUTIVE COMPENSATION</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Information required
under this item is contained in the section entitled “Executive Compensation” in
the Company’s 2002 Proxy Statement and is incorporated herein by reference. </font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT</U></FONT></H2>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Information required
under this item is contained in the section entitled “Security Ownership of
Principal Stockholders and Management” in the Company’s 2002 Proxy Statement and
is incorporated herein by reference. </font></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS</U></FONT></H2>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%> </TD>
<TD WIDTH=95%><FONT SIZE=2>
Not
Applicable.</FONT></TD>
</TR>
</TABLE>
<BR>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>30</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Center Bold" -->
<P ALIGN="CENTER"><B>PART IV</B></P>
<!-- MARKER FORMAT-SHEET="Head Minor" -->
<H2><FONT SIZE="2"><U>Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K</U></FONT></H2>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=2>(a) </FONT></TD>
<TD WIDTH=95%><FONT SIZE=2>Documents
filed as part of this Report:</FONT></TD>
</TR>
</TABLE>
<BR>
<PRE><FONT SIZE=-1>
<B>Form 10-K
Page Reference</B>
--------------
1. Financial Statements.
Independent Auditors' Report.............................................................F-1
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999......................................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.............................F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 2001, 2000 and 1999....................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999......................................................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>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=5%><FONT SIZE=2>(b) </FONT></TD>
<TD WIDTH=95%><FONT SIZE=2>Reports
on Form 8-K.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company did not file
a report on Form 8-K during the fourth quarter ended December 31, 2001. On February 7, 2002, the Company
filed a report on Form 8-K announcing that the Board of Directors adopted a resolution changing the Company's
fiscal year end from December 31 to March 31.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>31</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<P ALIGN="CENTER"><B>SIGNATURES</B></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. </font></P>
<TABLE WIDTH="100%">
<TR><TD WIDTH=50%></TD>
<TD><FONT SIZE=2>CNS, INC.<BR>
(“Registrant”)</FONT></TD></TR>
<TR><TD> </TD></TR>
<TR>
<TD><FONT SIZE=2>
Dated: March 25, 2002 </FONT></TD> <TD><FONT SIZE=2> <U>By /s/ Marti Morfitt</U><BR>
Marti Morfitt<BR>
Chief Executive Officer and Director</FONT></TD></TR>
</TABLE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed by the
following persons on March 25, 2002 on behalf of the Registrant in the capacities
indicated. </font></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><font size=2> Each person whose
signature appears below constitutes and appoints DANIEL E. COHEN and MARTI MORFITT 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 or she might or could do in person,
hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone,
or his or her substitute or substitutes, may lawfully do or cause to be done by virtue
thereof. </font></P>
<P><FONT SIZE=2>
<U>/s/ Marti Morfitt</U><BR>
Marti Morfitt<BR>
Chief Executive Officer and Director<BR>(Principal Executive Officer)</FONT></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ David J. Byrd</U> <BR> David J. Byrd<BR>Vice President of Finance,<BR>Chief Financial Officer and Treasurer<BR>(Principal Financial and Accounting Officer)</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ Daniel E. Cohen</U> <BR> Daniel E. Cohen<BR>Chairman of the Board and Director</FONT> </P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>32</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ Patrick Delaney</U> <BR>Patrick Delaney<BR>Director</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ H. Robert Hawthorne</U> <BR>H. Robert Hawthorne<BR>Director</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ R. Hunt Greene</U> <BR>R. Hunt Greene<BR>Director</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ Andrew J. Greenshields</U><BR> Andrew J. Greenshields<BR>Director</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ Richard A. Peddie</U><BR> Richard A. Peddie<BR>Director</FONT> </P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE="2"><U>/s/ Richard W. Perkins</U> <BR>Richard W. Perkins<BR>Director</FONT> </P>
<BR><BR><BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>33</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2">CNS, INC.<BR><U>EXHIBIT INDEX</U></FONT></P>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>3.1 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Company’s
Certificate of Incorporation as amended to date (incorporated by reference to Exhibit 3.1
to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995
(the “1995 Form 10-K”)). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>3.2 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Company’s
Amended and Restated By-Laws.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>4.1 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Form
of Rights Agreement dated July 20, 1995 between CNS, Inc. and Norwest Bank Minnesota,
N.A. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s
Registration Statement on Form 8-A/A, Commission File No. 0-16612).</FONT></TD>
</TR>
</TABLE>
<BR>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.1* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>CNS,
Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company’s Registration Statement on Form S-18, Commission File No. 33-14052C).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.2* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>CNS,
Inc. 1989 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibits
4.1 and 4.2 to the Company’s Registration Statement on Form S-8, Commission File No.
33-68310).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.3* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>CNS,
Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 1990).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.4* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>CNS,
Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1997).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.5* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>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).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.6** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>License
Agreement dated January 30, 1992 between the Company and Creative Integration and Design,
Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement
on Form S-2, Commission File No. 33-46120).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.7** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>License
Agreement dated November 10, 1997 between the Company and Onesta Nutrition, Inc.
(incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form
10-K for the year ending December 31, 1999 (the “1999 Form 10-K”)). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.8** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>License
Agreement dated March 12, 1999 between the Company and WinEase LLC (incorporated by
reference to Exhibit 10.10 to the Company’s 1999 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.9** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Addendum
to License Agreement between the Company and WinEase LLC dated March 21, 2002.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.10** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>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). </FONT></TD>
</TR>
</TABLE>
<BR>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>34</font></P>
<!-- *************************************************************************** -->
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.11** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>License
Agreement dated March 1, 2000 between the Company and Proctor and Gamble (incorporated by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2000 (the “2000 Form 10-K”)). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.12 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Amendment
to Trademark License Agreement effective as of March 20, 2001 by and between the Company
and the Procter & Gamble Company (incorporated by reference to Exhibit 10.11 to the
Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2001). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.13** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Second
Amendment to Trademark License Agreement effective as of April 27, 2001 by and between
the Company and the Procter & Gamble Company (incorporated by reference to Exhibit
10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2001). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.14** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Distributor
Agreement between the Company and Eisai Co., Ltd. dated August 1, 2000 (incorporated by
reference to Exhibit 10.11 to the Company’s 1999 Form 10-K).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.15** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Repackaging Agreement between the Company and Herusu, Co., Ltd. dated August 1, 2000
(incorporated by reference to Exhibit 10.12 to the Company’s 2000 Form 10-K).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.16** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Supply
Agreement between the Company and Tapemark, Inc. dated October 15, 2001 (incorporated by
reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the
period ended September 30, 2001 (the “September 30, 2001 Quarterly Report”)). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.17** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Supply
Agreement between the Company and WebTec Converting, LLC dated October 5, 2001
(incorporated by reference to Exhibit 10.16 to the September 30, 2001 Quarterly Report). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.18** </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Medical
Specialties Material Purchase Agreement between the Company and Minnesota Mining and
Manufacturing Company dated August 1, 2001 (incorporated by reference to Exhibit 10.17 to
the September 30, 2001 Quarterly Report). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.19* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Daniel E. Cohen dated February 12, 1999 (incorporated
by referenced to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1998 (the “1998 Form 10-K”)). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.20* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>First
Amendment to Executive Employment Agreement between the Company and Daniel E. Cohen dated
June 29, 2001 (incorporated by reference to Exhibit 10.19 to the September 30, 2001
Quarterly Report). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.21* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Marti Morfitt dated February 12, 1999 (incorporated by
referenced to Exhibit 10.10 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.22* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Kirk P. Hodgdon dated February 12, 1999 (incorporated
by referenced to Exhibit 10.11 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.23* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and David J. Byrd dated February 12, 1999 (incorporated by
referenced to Exhibit 10.12 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Head Major" -->
<P ALIGN=CENTER><FONT SIZE=2>35</FONT></P>
<!-- *************************************************************************** -->
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.24* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and John J. Keppeler dated February 12, 1999 (incorporated
by referenced to Exhibit 10.13 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.25* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Teri P. Osgood dated February 12, 1999 (incorporated by
referenced to Exhibit 10.14 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.26* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Carol J. Watzke dated February 12, 1999 (incorporated
by referenced to Exhibit 10.15 to the 1998 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.27* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and M. W. Anderson dated February 12, 1999 (incorporated by
referenced to Exhibit 10.17 to the 1998 Form 10-K).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>10.28* </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Employment
Agreement between the Company and Larry R. Muma dated January 2, 2001 (incorporated by
reference to Exhibit 10.21 to the 2000 Form 10-K). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>21.1 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Subsidiaries
of the Company (incorporated by reference to Exhibit 21.1 to the 1999 Form 10-K).</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>23.1 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Consent
of KPMG LLP.</FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=TOP>
<TD WIDTH=10%><FONT SIZE=2>24.1 </FONT></TD>
<TD WIDTH=90%><FONT SIZE=2>Powers
of Attorney (included on signature page hereof). </FONT></TD>
</TR>
</TABLE>
<BR>
<!-- MARKER FORMAT-SHEET="Footnote Rule" -->
<P>__________</P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>*Indicates Compensatory Agreement.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>**Certain portions of this Exhibit have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment under Rule 24b-2.
Spaces corresponding to the deleted portions are represented by brackets with asterisks. </FONT></P>
<BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>36</font></P>
<PAGE>
<!-- MARKER FORMAT-SHEET="Para Center Bold" -->
<P ALIGN="CENTER"><B>Independent Auditors’ Report</B></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>The Board of Directors and Stockholders<BR>CNS, Inc.: </FONT></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>We have audited the accompanying consolidated balance sheets of
CNS, Inc. and subsidiaries as of December 31, 2001 and 2000 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, 2001. 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>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>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>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
CNS, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. </FONT></P>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>/s/ KPMG LLP</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>Minneapolis, Minnesota<BR>January 22, 2002 </FONT></P>
<BR><BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-1</font></P>
<PAGE>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Operations<BR> Years
ended December 2001, 2000 and 1999 <BR>(in thousands, except per share amounts)</FONT></P>
<PRE><FONT SIZE=-1>
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Net sales $ 83,934 $ 68,892 $ 46,050
Cost of goods sold 27,698 24,907 18,358
- ------------------------------------------------------ -------- --------- ---------
Gross profit 56,236 43,985 27,692
- ------------------------------------------------------ -------- --------- ---------
Operating expenses:
Advertising and promotion 41,948 46,694 28,104
Selling, general and administrative 14,583 15,134 11,938
Special charges 930 0 6,345
- ------------------------------------------------------ -------- --------- ---------
Total operating expenses 57,461 61,828 46,387
- ------------------------------------------------------ -------- --------- ---------
Operating loss (1,225) (17,843) (18,695)
Interest income 1,242 2,234 2,596
Gain (loss) on sales of marketable securities 64 (51) 242
- ------------------------------------------------------ -------- --------- ---------
Income (loss) before income taxes 81 (15,660) (15,857)
Income tax benefit 0 0 2,101
- ------------------------------------------------------ -------- --------- ---------
Net income (loss) $ 81 $ (15,660) $ (13,756)
====================================================== ======== ========= =========
Basic net income (loss) per share $ .01 $ (1.09) $ (.89)
====================================================== ======== ========= =========
Weighted average number of common shares outstanding 14,131 14,372 15,435
====================================================== ======== ========= =========
Diluted net income (loss) per share $ .01 $ (1.09) $ (.89)
====================================================== ======== ========= =========
Weighted average number of common
and assumed conversion shares outstanding 14,431 14,372 15,435
====================================================== ======== ========= =========
</font></PRE>
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<P>The accompanying notes are an integral part of the consolidated
financial statements.</P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-2</font></P>
<!-- *************************************************************************** -->
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B><BR> Consolidated Balance Sheets <BR>December 31, 2001
and 2000<BR> (in thousands, except per share amounts)</FONT></P>
<PRE><FONT SIZE=-1>
<B>Assets 2001 2000</B>
- --------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 8,311 $ 2,079
Marketable securities 18,984 29,244
Accounts receivable, net of allowance for doubtful accounts
of $500 in 2001 and $300 in 2000 12,307 12,582
Inventories 5,822 4,752
Prepaid expenses and other current assets 1,294 3,257
- ----------------------------------------------------------------------------- --------- ---------
Total current assets 46,718 51,914
Property and equipment, net 2,631 3,201
Product rights, net 1,269 1,229
- ----------------------------------------------------------------------------- --------- ---------
$ 50,618 $ 56,344
============================================================================= ========= =========
<B>Liabilities and Stockholders’ Equity</B>
- --------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 6,699 $ 12,600
Accrued expenses 6,751 6,251
Accrued income taxes 556 556
- ----------------------------------------------------------------------------- --------- ---------
Total current liabilities 14,006 19,407
Stockholders’ equity:
Preferred stock -- authorized 8,484 shares;
none issued or outstanding 0 0
Common stock -- $.01 par value; authorized 50,000 shares;
issued 19,295 shares in 2001 and 2000 193 193
Additional paid-in capital 60,785 61,182
Treasury shares -- at cost; 5,294 shares in 2001 and 5,179 shares in 2000 (23,550) (23,279)
Retained deficit (1,178) (1,259)
Accumulated other comprehensive income 362 100
- ----------------------------------------------------------------------------- --------- ---------
Total stockholders’ equity 36,612 36,937
Commitments (notes 9 and 10)
- ----------------------------------------------------------------------------- --------- ---------
$ 50,618 $ 56,344
============================================================================= ========= =========
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated financial
statements. </FONT></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-3</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 30; page: 30" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Stockholders’Equity
and Comprehensive Income (Loss)<BR>
Years ended December 31, 2001, 2000 and 1999<BR>
(in thousands)</FONT></P>
<PRE><FONT SIZE=-2>
<B>Common Stock Treasury Shares Accumulated
------------------- Additional ------------------------- Retained Other Total
Number Par Paid-in Number Earnings Comprehensive Stockholders’
of Shares Value Capital of Shares Cost (Deficit) Income (Loss) Equity</B>
- ------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 19,295 $193 $61,933 2,692 $ (14,670) $ 28,157 $ 253 $ 75,866
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (98) (18) 151 0 0 53
Stock options exercised 0 0 (414) (108) 860 0 0 446
Warrants issued 0 0 110 0 0 0 0 110
Treasury shares purchased 0 0 0 2,272 (8,562) 0 0 (8,562)
Comprehensive loss:
Net loss for the year 0 0 0 0 0 (13,756) 0 (13,756)
Unrealized losses on marketable
securities net of income tax
effect of $154 0 0 0 0 0 0 (573) (573)
----------
Total comprehensive loss (14,329)
- ------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 19,295 193 61,531 4,838 (22,221) 14,401 (320) 53,584
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (131) (26) 214 0 0 83
Stock options exercised 0 0 (218) (29) 238 0 0 20
Treasury shares purchased 0 0 0 396 (1,510) 0 0 (1,510)
Comprehensive loss:
Net loss for the year 0 0 0 0 0 (15,660) 0 (15,660)
Unrealized gains on marketable
securities net of income tax
effect of $0 0 0 0 0 0 0 420 420
----------
Total comprehensive loss (15,240)
- ------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 19,295 193 61,182 5,179 (23,279) (1,259) 100 36,937
Stock issued in connection with
Employee Stock Purchase Plan 0 0 (189) (36) 303 0 0 114
Stock options exercised 0 0 (262) (51) 436 0 0 174
Other 0 0 54 0 0 0 0 54
Treasury shares purchased 0 0 0 202 (1,010) 0 0 (1,010)
Comprehensive income:
Net income for the year 0 0 0 0 0 81 0 81
Unrealized gains on marketable
securities net of income tax
effect of $0 0 0 0 0 0 0 262 262
----------
Total comprehensive income 343
- ------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 19,295 $193 $60,785 5,294 $ (23,550) $ (1,178) $ 362 $ 36,612
========================================================================================================================================
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated
financial statements. <FONT></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-4</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 31; page: 31" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Cash Flows<BR> Years
ended December 31, 2001, 2000 and 1999 <BR>(in thousands)</FONT></P>
<PRE><FONT SIZE=-1>
<B>2001 2000 1999</B>
- ----------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 81 $ (15,660) $ (13,756)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,244 1,051 1,029
Deferred income taxes 0 0 1,486
Other 90 81 110
Changes in operating assets and liabilities:
Accounts receivable 275 (1,212) (3,579)
Inventories (1,070) 153 3,918
Prepaid expenses and other current assets 1,964 3,546 (4,009)
Accounts payable and accrued expenses (5,401) 7,654 2,655
- -------------------------------------------------------- --------- --------- ---------
Net cash used in operating activities (2,817) (4,387) (12,146)
- -------------------------------------------------------- --------- --------- ---------
Investing activities:
Purchases of marketable securities (44,911) (63,151) (97,157)
Sales and maturities of marketable securities 55,433 72,324 118,230
Payments for purchases of property and equipment (394) (2,019) (330)
Payments for product rights (357) (141) (259)
- -------------------------------------------------------- --------- --------- ---------
Net cash provided by investing activities 9,771 7,013 20,484
- -------------------------------------------------------- --------- --------- ---------
Financing activities:
Proceeds from the issuance of common stock under
Employee Stock Purchase Plan 114 83 53
Proceeds from the exercise of stock options 174 20 446
Purchase of treasury shares (1,010) (1,510) (8,562)
- -------------------------------------------------------- --------- --------- ---------
Net cash used in financing activities (722) (1,407) (8,063)
- -------------------------------------------------------- --------- --------- ---------
Net increase in cash and cash equivalents 6,232 1,219 275
Cash and cash equivalents:
Beginning of year 2,079 860 585
- -------------------------------------------------------- --------- --------- ---------
End of year $ 8,311 $ 2,079 $ 860
======================================================== ========= ========= =========
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 0 344
======================================================== ========= ========= =========
</FONT></PRE>
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<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated financial
statements.</FONT> </P>
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<P ALIGN="CENTER"><FONT size=2>F-5</font></P>
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<P ALIGN="CENTER"><B>CNS, INC. <BR>Notes to Consolidated Financial Statements <BR>December 31,
2001, 2000 and 1999</B></P>
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<P><FONT SIZE="2"><B>(1) Summary of Significant Accounting Policies </B></FONT></P>
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<P><FONT SIZE="2"> <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></P>
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<P><FONT SIZE="2"> <B>Principles of
Consolidation</B> The accompanying consolidated financial statements include the
accounts of CNS, Inc. and its subsidiaries (“the Company”). All
material intercompany accounts and transactions have been eliminated in
consolidation.</FONT></P>
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<P><FONT SIZE="2"> <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></P>
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<P><FONT SIZE="2"> <B>Basis of
Presentation</B> Certain amounts from prior years’ financial statements have
been reclassified to conform to the current year presentation. These
reclassifications had no impact on the operating loss or net loss for 2000 and
1999.</FONT></P>
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<P><FONT SIZE="2"> <B>Revenue
Recognition</B> Revenue from sales is recognized at the time products are shipped
less estimated sales returns and other allowances.</FONT></P>
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<P><FONT SIZE="2"> <B>Fair Value of
Financial Instruments</B> All financial instruments are carried at amounts that
approximate fair value.</FONT></P>
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<P><FONT SIZE="2"> <B>Cash Equivalents</B>
Cash equivalents consist primarily of money market funds.</FONT></P>
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<P><FONT SIZE="2"> <B>Marketable
Securities</B> The Company classifies its marketable debt securities as
available-for-sale and records these securities at fair market value. Net
realized and unrealized gains and losses are determined on the specific
identification cost basis. Any unrealized gains and losses are reflected as a
separate component of stockholders’ equity. A decline in the market value
of any available-for-sale security below cost that is deemed other than
temporary, results in a charge to operations resulting in the establishment of a
new cost basis for the security.</FONT></P>
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<P><FONT SIZE="2"> <B>Inventories</B>
Inventories are valued at the lower of cost (determined on a first-in, first-out
basis) or market. Inventory reserves have been established for potential product
obsolescence.</FONT></P>
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<P><FONT SIZE="2"> <B>Property and
Equipment</B> Property and equipment are stated at cost. Equipment is depreciated
using the straight-line method over five years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the improvement or the
term of the lease.</FONT></P>
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<P><FONT SIZE="2"> <B>Product Rights</B>
Product rights, consisting of patents, trademarks and other product rights, are
stated at cost and are amortized over three to seven years using the
straight-line method.</FONT></P>
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<P ALIGN="CENTER"><FONT size=2>F-6</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<P><FONT SIZE="2"> <B>Stock Based
Compensation </B>The Company follows the disclosure requirements for employee stock
based compensation plans and, accordingly, no compensation expense has been
recognized.</FONT></P>
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<P><FONT SIZE="2"> <B>Foreign Currency
Transactions </B>Most foreign transactions are in U.S. dollars, although some are
conducted in functional local currencies. The functional currency is translated
into U.S. dollars for the balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the fiscal year. Gains and losses
resulting from transactions denominated in foreign currencies are included in
the consolidated statements of operations.</FONT></P>
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<P><FONT SIZE="2"> <B>Advertising </B>The
Company capitalizes the production costs of advertising and expenses these costs
the first time the advertising runs.</FONT></P>
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<P><FONT SIZE="2"> <B>Income Taxes</B>
Deferred tax assets and liabilities and the resultant provision for income taxes
are determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.</FONT></P>
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<P><FONT SIZE="2"> <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></P>
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<P><FONT SIZE="2"> <B>Comprehensive
Income (Loss) </B>Comprehensive income (loss) consists of the Company’s net
income (loss) and unrealized gains (losses) on marketable securities and is
presented in the consolidated statements of stockholders’ equity and
comprehensive income (loss).</FONT></P>
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<P><FONT SIZE="2"> <B>New Accounting
Standards </B>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 March 31, 2002. If the Company would have
applied the presentation set forth in this issue in 2001, 2000 and 1999, net
sales would have been reduced by $1,123,000, $1,527,000 and $3,126,000,
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></P>
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<P><font size=2> In 2001, the
EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement
Characterization of Consideration Paid to a Reseller”. This EITF requires
companies to present in their statements of operations, certain consideration
paid to a purchaser of the company’s products as sales allowances,
resulting in a reduction of net sales. The Company currently records costs
covered by this EITF as operating expenses. The Company plans on adopting this
EITF beginning with the quarter ending March 31, 2002. The Company is in the
process of evaluating this EITF and its potential impact.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> In 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-7</font></P>
<!-- *************************************************************************** -->
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<P><FONT SIZE=2>This statement supercedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of”. The statement retains the previously existing accounting requirements
related to the recognition and measurement of the impairment of long-lived
assets to be held and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale. It also expands the previously
existing reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is classified as held
for sale. The Company is required to implement SFAS No. 144 beginning with the
quarter ending March 31, 2002. Management does not expect this statement to have
a material impact on the Company’s consolidated financial position or
results of operations. </FONT></P>
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<P><FONT SIZE=2><B>(2) Marketable Securities</B> </FONT></P>
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<P><font size=2> Marketable
securities, including estimated fair value based on quoted market prices or
valuation models, are summarized as follows (in thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>December 31,
----------------------------------------------------
2001 2000
------------------------- ------------------------
Cost Fair Value Cost Fair Value</B>
---------- ------------ ---------- -----------
Cash equivalents $ 1,419 $ 1,419 $ 2,166 $ 2,166
Corporate bonds 12,544 12,879 24,308 24,413
U.S. Government obligations 4,659 4,686 2,670 2,665
- ------------------------------ -------- -------- -------- --------
Total marketable securities $ 18,622 $ 18,984 $ 29,144 $ 29,244
============================== ======== ======== ======== ========
</FONT></PRE>
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<P><FONT SIZE=2>Maturities of marketable securities at December 31, 2001 are as follows
(in thousands): </FONT></P>
<PRE><FONT SIZE=-1>
<B>Cost Fair Value</B>
----------- -----------
Due within one year $ 10,711 $ 10,847
Due after one year through three years 7,911 8,137
- ---------------------------------------- -------- --------
Total marketable securities $ 18,622 $ 18,984
======================================== ======== ========
</FONT></PRE>
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<P><font size=2> There were
realized gains of $64,000 and $243,000 during 2001 and 1999, respectively and
realized losses of $51,000 during 2000.</font></P>
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<P><FONT SIZE=2><B>(3) Advertising</B> </FONT></P>
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<P><font size=2> At December 31,
2001 and 2000, $540,000 and $1,924,000, respectively, of advertising costs were
reported as assets. Advertising expense was $19,486,000 in 2001, $26,027,000 in
2000, and $11,728,000 in 1999.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-8</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<P><FONT SIZE=2><B>(4) Details of Selected Balance Sheet Accounts</B> </FONT></P>
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<P><font size=2> Details of
selected balance sheet accounts are as follows (in thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>2001 2000 1999</B>
-------- -------- --------
Allowance for doubtful accounts:
Balance beginning of year $ 300 $ 280 $ 210
Plus provision for doubtful accounts 316 26 96
Less charge offs 116 6 26
- --------------------------------------- ----- ----- -----
Balance end of year $ 500 $ 300 $ 280
======================================= ===== ===== =====
<B>December 31
-----------------------
2001 2000</B>
---------- ----------
Inventories:
Finished goods $ 3,421 $ 2,139
Raw materials and component parts 2,401 2,613
- ------------------------------------------- ------- -------
Total inventories $ 5,822 $ 4,752
=========================================== ======= =======
Property and equipment:
Warehouse and production equipment $ 760 $ 556
Office equipment and information systems 3,642 3,623
Leasehold improvements 1,050 1,022
- ------------------------------------------- ------- -------
5,452 5,201
Less accumulated depreciation 2,821 2,000
- ------------------------------------------- ------- -------
Property and equipment, net $ 2,631 $ 3,201
=========================================== ======= =======
Product rights:
Product rights $ 2,905 $ 2,548
Less accumulated amortization 1,636 1,319
- ------------------------------------------- ------- -------
Product rights, net $ 1,269 $ 1,229
=========================================== ======= =======
Accrued expenses:
Promotions and allowances $ 3,511 $ 3,085
Royalties and commissions 1,276 954
Salaries, incentives and paid time off 1,501 2,000
Restructuring costs 322 0
Other 141 212
- ------------------------------------------- ------- -------
Total accrued expenses $ 6,751 $ 6,251
=========================================== ======= =======
</FONT></PRE>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-9</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
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<P><FONT SIZE=2><B>(5) Stockholders’Equity</B> </FONT></P>
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<P><FONT SIZE="2"> <B>Stock Options</B>
The Company’s stock option plans allow for the grant of options to
officers, directors, and employees to purchase up to 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, 2001.</FONT></P>
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<P><font size=2> Stock option
activity under these plans is summarized as follows:</font></P>
<PRE><FONT SIZE=-1>
<B>Weighted-average Shares
Exercise Price Shares Available
Per Share Outstanding for Grant</B>
------------------ ------------- -------------
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 0 700,000
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
Granted 4.26 345,960 (345,960)
Exercised 3.36 (51,800)
Canceled 4.47 (102,970) 102,970
Expired 0 (7,280)
- ------------------------------ --------- --------
Balance at December 31, 2001 $ 4.33 2,083,190 324,180
============================== ======== ========= ========
</FONT></PRE>
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<P><font size=2> Information on
outstanding and currently exercisable options by price range as of December 31,
2001, is summarized as follows:</font></P>
<PRE><FONT SIZE=-1>
<B> Weighted Weighted Weighted
Total -Average -Average Exercisable -Average
Price Range Number of Remaining Exercise Number of Exercise
Per Share Shares Life (Years) Price Shares Price</B>
- ------------------ ----------- -------------- ---------- ------------- -----------
$2.31 -- 2.81 242,500 6.9 $ 2.78 171,000 $ 2.77
3.10 -- 4.00 699,560 5.6 3.56 445,320 3.38
4.13 -- 5.00 580,680 7.9 4.52 264,800 4.69
5.44 -- 5.94 466,700 4.2 5.49 434,700 5.49
7.25 93,750 5.6 7.25 93,750 7.25
------- -------
2,083,190 1,409,570
========= =========
</FONT></PRE>
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<P><font size=2> At December 31,
2001, the weighted-average remaining contractual life of outstanding options was
6.1 years. At December 31, 2001, 2000 and 1999, currently exercisable options
aggregated 1,409,570, 1,207,232 and 1,091,156 shares of common stock,
respectively and the weighted-average exercise price of those options was $4.46,
$4.55 and $4.73, respectively.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The per share
weighted-average fair value of stock options granted during 2001, 2000 and 1999
is estimated as $2.55, $2.60 and $1.98, respectively on the date of grant using
the Black-Scholes</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-10</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 37; page: 37" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->
<P><FONT SIZE=2>option pricing model with the following assumptions: volatility
of 60% in 2001 and 65% in 2000 and 1999; risk-free interest rate of 5.00% in
2001, 6.50% in 2000 and 6.00% in 1999, and an expected life of 6 years. </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company
applies APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock compensation plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company’s net income and diluted earnings per share would
have been reduced by approximately $950,000, or $.07 per share in 2001,
$900,000, or $.06 per share in 2000 and $950,000, or $.06 per share in 1999.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <B>Employee Stock
Purchase Plan</B> The Employee Stock Purchase Plan allows eligible employees to
purchase shares of the Company’s common stock through payroll deductions.
The purchase price is the lower of 85% of the fair market value of the stock on
the first or last day of each six-month period during which an employee
participated in the plan. The Company has reserved 400,000 shares under the plan
of which employees as of December 31, 2001 have purchased 224,367 shares.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <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, 48,000 shares are currently exercisable.</FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><FONT SIZE="2"> <B>Preferred Stock</B>
At December 31, 2001, 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></P>
<BR><BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-11</font></P>
<!-- *************************************************************************** -->
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>(6) Income Taxes</B> </FONT></P>
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<P><font size=2> Income tax
expense (benefit) for the three years ended December 31, 2001, is as follows (in
thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>Current Deferred Total</B>
------------- ---------- ------------
2001:
Federal $ 0 $ 0 $ 0
State 0 0 0
- -------------------------------- --------- ------- ---------
Income tax expense $ 0 $ 0 $ 0
================================ ========= ======= =========
2000:
Federal $ 0 $ 0 $ 0
State 0 0 0
- -------------------------------- --------- ------- ---------
Income tax expense $ 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)
================================ ========= ======= =========
</FONT></PRE>
<BR><BR><BR><BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-12</font></P>
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<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="Para" -->
<P ALIGN="LEFT"><FONT SIZE=2> Income tax expense (benefit)
differed from the amounts computed by applying the U.S. federal income tax rate
of 35% as a result of the following (in thousands): </FONT></P>
<PRE><FONT SIZE=-1>
<B>2001 2000 1999</B>
-------- ------------- -------------
Computed tax expense (benefit) $ 28 $ (5,481) $ (5,550)
State taxes, net of federal benefit 0 (554) (431)
Tax exempt interest 0 0 (178)
Change in deferred tax valuation allowance (46) 6,018 3,932
Other 18 17 126
- -------------------------------------------- ----- --------- ---------
Actual tax expense (benefit) $ 0 $ 0 $ (2,101)
============================================ ===== ========= =========
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The tax effects
of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities for 2001 and 2000 are presented below
(in thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>December 31
---------------------
2001 2000</B>
-------- ----------
Deferred tax assets:
Inventory items $ 339 $ 795
Accounts receivable allowance 185 111
Product rights 304 246
Accrued expenses 2,109 1,580
Net operating loss and credit carryforwards 6,654 7,445
- ---------------------------------------------- ------ -------
9,591 10,177
Less valuation allowance 9,273 9,950
- ---------------------------------------------- ------ -------
318 227
------ -------
Deferred tax liabilities:
Unrealized gains on marketable securities (134) (35)
Property and equipment (184) (192)
- ---------------------------------------------- ------ -------
(318) (227)
------ -------
Net deferred tax assets $ 0 $ 0
============================================== ====== =======
</FONT></PRE>
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<P><font size=2> In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Based on the level of 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, 2001.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> As of December
31, 2001, the Company has reported federal net operating loss carryforwards of
approximately $17,000,000. The federal net operating loss carryforwards expire
in 2019 and 2020. Additionally, the Company has a federal credit carryforward
for alternative minimum tax of approximately $327,000 that has no expiration
date.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-13</font></P>
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<P><FONT SIZE=2><B>(7) Sales</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company had
one significant customer who accounted for approximately 21%, 19% and 24% of net
sales in 2001, 2000 and 1999, respectively. Accounts receivable from this
customer as of December 31, 2001 and 2000 were $2,413,000 and $2,274,000,
respectively.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Net sales by
geographic area are as follows (in thousands):</font></P>
<PRE><font size=-1>
2001 2000 1999
----------- ----------- -----------
Domestic $ 67,712 $ 62,735 $ 45,062
International 16,222 6,157 988
- --------------- -------- -------- --------
Net sales $ 83,934 $ 68,892 $ 46,050
=============== ======== ======== ========
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>(8) Special Charges</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> On June 26,
2001, the Company announced a plan to streamline and realign the Company’s
resources to better match its strategic goals. The Company recorded a special
charge of $930,000 for costs associated with this restructure plan.
Approximately 20 jobs, or 25% of the workforce from throughout the Company, were
eliminated. These cost-cutting actions are expected to result in annualized
savings of approximately $2 to $2.5 million. Cost savings relating to this plan
were realized beginning in July of 2001. During 2001, the Company utilized
$608,000 of the $930,000 accrual, primarily for severance benefits. The
remaining accrual of $322,000 will be utilized during 2002, primarily for
severance benefits.</font></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> 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></P>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>(9) License Agreements</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company has
agreements to exclusively license intellectual property rights to certain
products. Royalties due under these agreements are based on various percentages
of net sales. To maintain the Company’s licenses, it must make minimum
royalty payments of $1,070,000 each year until patents for the products expire.
Royalty expense was approximately $3,524,000 in 2001, $2,692,000 in 2000, and
$1,477,000 in 1999.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-14</font></P>
<!-- *************************************************************************** -->
<!-- MARKER PAGE="sheet: 41; page: 41" -->
<HR SIZE=5 COLOR=GRAY NOSHADE>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>(10) Operating Leases</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> The Company
leases equipment and office space under noncancelable operating leases that have
initial or noncancelable lease terms in excess of one year. Future minimum lease
payments due in accordance with these leases as of December 31, 2001 are as
follows (in thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>Year Ending December 31, Amount</B>
- --------------------------------- ----------
2002 $ 733
2003 744
2004 727
2005 740
2006 755
Later years 3,104
- --------------------------------- -------
Future minimum lease payments $ 6,803
================================= =======
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Total rental expense for
operating leases was $789,000 in 2001, $559,000 in 2000 and $555,000 in 1999. </font></P>
<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->
<P><FONT SIZE=2><B>(11) Net Income (Loss) Per Share</B> </FONT></P>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> A reconciliation of
basic and diluted weighted average common shares outstanding is as follows (in
thousands):</font></P>
<PRE><FONT SIZE=-1>
<B>2001 2000 1999</B>
-------- -------- ---------
Weighted average common shares outstanding 14,131 14,372 15,435
Assumed conversion of stock options 300 0 0
- ---------------------------------------------- ------ ------ ------
Average common and assumed conversion shares 14,431 14,372 15,435
============================================== ====== ====== ======
</FONT></PRE>
<!-- MARKER FORMAT-SHEET="Para In 0" -->
<P><font size=2> Options and
warrants to purchase 722,000 shares of common stock with a range of exercise
prices from $5.00 to $8.00 per share were outstanding as of December 31, 2001
but were not included in the computation of diluted earnings per share because
the exercise price was greater than the average market price of the common
shares. The options expire from 2002 to 2011.</font></P>
<BR><BR><BR>
<!-- MARKER FORMAT-SHEET="Para Center" -->
<P ALIGN="CENTER"><FONT size=2>F-15</font></P>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>3
<FILENAME>cns021471_ex3-1.txt
<DESCRIPTION>AMENDED AND RESTATED BY-LAWS
<TEXT>
Exhibit 3.1
AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
DATED JANUARY 23, 2002
<PAGE>
CONTENTS OF AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
ARTICLE 1 - OFFICES............................................................1
1.1) Registered Offices...........................................1
1.2) Offices......................................................1
ARTICLE 2 - CORPORATE SEAL.....................................................1
ARTICLE 3 - SHAREHOLDERS.......................................................1
3.1) Regular Meeting..............................................1
3.2) Special Meetings.............................................2
3.3) Quorum.......................................................2
3.4) Voting.......................................................2
3.5) Notice of Meeting............................................3
3.6) Proxies......................................................3
3.7) Closing Transfer Books.......................................3
3.8) Record Date..................................................3
3.9) Presiding Officer............................................3
3.10) Conduct of Meetings of Shareholders..........................4
3.11) Order of Business............................................4
3.12) Inspectors of Election.......................................5
3.13) Informal Action by Shareholders..............................5
ARTICLE 4 - DIRECTORS..........................................................5
4.1) General Powers...............................................5
4.2) Number.......................................................5
4.3) Qualifications and Term of Office............................5
4.4) Quorum.......................................................5
4.5) Regular Meetings.............................................6
4.6) Telephonic Meetings..........................................6
4.7) Special Meetings.............................................6
4.8) Compensation.................................................6
4.9) Salaries.....................................................6
4.10) Committees...................................................6
4.11) Committee of Disinterested Persons...........................7
4.12) Vacancies....................................................7
4.13) Order of Business............................................7
4.14) Written Consent or Opposition in Advance of Meeting..........7
4.15) Informal Action by Directors.................................8
4.16) Nominations for Election of Directors........................8
ARTICLE 5 - OFFICERS...........................................................8
5.1) Number.......................................................8
5.2) Election, Term of Office and Qualifications..................8
<PAGE>
5.3) Chairman of the Board........................................9
5.4) President and Chief Executive Officer........................9
5.5) Chief Operating Officer......................................9
5.6) Vice President...............................................9
5.7) Secretary....................................................9
5.8) Treasurer and Chief Financial Officer........................9
5.9) Assistant Officers..........................................10
5.10) Officers Shall Not Lend Corporate Credit....................10
ARTICLE 6 - INDEMNIFICATION...................................................10
ARTICLE 7 - SHARES AND THEIR TRANSFER.........................................10
7.1) Certificates of Stock.......................................10
7.2) Facsimile Signature.........................................10
7.3) Issuance of Shares..........................................11
7.4) Transfer of Shares..........................................11
7.5) Lost Certificates...........................................11
7.6) Treasury Stock..............................................11
7.7) Indebtedness of Shareholders................................11
7.8) Transfer Agent and Registrar................................11
ARTICLE 8 - BOOKS AND RECORDS.................................................11
8.1) Share Register; Dates of Issuance...........................11
8.2) Other Documents Required....................................12
8.3) Financial Records...........................................12
8.4) Right to Inspect............................................12
8.5) Cost of Copies..............................................12
8.6) Computerized Records........................................13
8.7) Financial Statements........................................13
ARTICLE 9 - DISTRIBUTIONS.....................................................13
9.1) Distributions...............................................13
9.2) Record Date.................................................13
9.3) Restrictions................................................14
ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................14
10.1) Fiscal Year.................................................14
10.2) Audit of Books and Accounts.................................14
10.3) Contracts...................................................14
10.4) Checks......................................................14
10.5) Deposits....................................................14
10.6) Voting Securities Held by Corporation.......................14
ARTICLE 11 - WAIVER OF NOTICE.................................................15
ARTICLE 12 - AMENDMENTS.......................................................15
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
CNS, INC.
ARTICLE 1
OFFICES
1.1) Registered Offices - The address of the registered office of the
corporation shall be established and maintained at the office of the Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of New
Castle, State of Delaware and the Corporation Trust Company shall be the
registered agent of the corporation. The Board of Directors shall have authority
to change the registered office of the corporation from time to time, and any
such change shall be registered by the secretary with the Secretary of State of
Delaware.
1.2) Offices - The corporation may have such other offices, including
its principal business office, either within or without the State of Delaware,
as the Board of Directors may designate or as the business of the corporation
may require from time to time.
ARTICLE 2
CORPORATE SEAL
The corporate seal shall have thereon the name of the corporation, and
the words "Corporate Seal" and when so directed by the Board of Directors a
duplicate of the seal may be kept and used by the secretary or treasurer or by
an assistant secretary or assistant treasurer.
ARTICLE 3
SHAREHOLDERS
3.1) Regular Meeting - The regular meeting of the shareholders of the
corporation shall be an annual meeting held at the principal business office of
the corporation, or at such place as is designated by the Board of Directors or
by written consent of all the shareholders entitled to vote thereat, at which
time the shareholders, voting as provided in the Articles of Incorporation,
shall elect a Board of Directors for the ensuing year, and shall transact such
other business as shall properly come before them. In the event the regular
meeting is not held for a period of thirteen (13) months or more, a shareholder
or director may apply to the Court of Chancery to summarily order a meeting to
be held. To be properly brought before the annual meeting, business must be of a
nature that is appropriate for consideration at an annual meeting and must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly brought
before the meeting by a shareholder. In addition to any other applicable
requirements, for business to be properly brought before the annual meeting by a
1
<PAGE>
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, each such notice must be given,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the corporation, not less than 45 days nor more than 60 days prior
to the date the proxy materials for the previous year's annual meeting were
mailed to shareholders of the corporation. Each such notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (w) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (x) the name and address of record of the shareholders proposing
such business, (y) the class or series (if any) and the number of shares of the
corporation which are owned by the shareholder, and (z) any material interest of
the shareholder in such business. Notwithstanding anything in these By-laws to
the contrary, no business shall be transacted at the annual meeting except in
accordance with the procedures set forth in this Article; provided, however,
that nothing in this Article shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting, in
accordance with these By-Laws.
3.2) Special Meetings - Special meetings of the shareholders shall be
called by the Secretary at any time upon request of the President, a
Vice-President acting in the capacity of the President, the Treasurer or two (2)
or more members of the Board of Directors, or upon a written request of
shareholders holding ten percent (10%) or more of the capital stock entitled to
vote. Notice shall be given in accordance with the provisions of Article 3.5
hereof.
3.3) Quorum - The holders of fifty (50%) percent of the outstanding
shares entitled to vote, represented either in person or by proxy, shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting, at which a quorum of the shareholders is present,
may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. In case a quorum
is not present at any meeting, those present shall have the power to adjourn the
meeting from time to time, without notice or other announcement at the meeting,
until the requisite number of voting shares shall be represented. Any business
may be transacted at such reconvened meeting which might have been transacted at
the meeting which was adjourned.
3.4) Voting - At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy duly
appointed by an instrument in writing subscribed by such shareholder. Each
shareholder shall have one (1) vote for each share having voting power standing
in his name on the books of the corporation. Shares owned by two (2) or more
shareholders may be voted by any one of them unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. A holder of voting shares may vote any portion of the shares in
any way the shareholder chooses. If a shareholder votes without designating the
proportion or number of shares voted in a particular way, the shareholder is
deemed to have voted all the shares in that way. Upon the demand of any
shareholder, the vote for director, or the vote upon any question before the
meeting shall be by ballot. All elections shall be had and all questions decided
by a majority vote of the number of shares entitled to vote and represented at
any meeting at which there is a quorum, except in such cases as shall otherwise
be required or permitted by statute, the Certificate of Incorporation, these
By-Laws or by agreement approved by a majority vote of the number of shares
entitled to vote.
2
<PAGE>
3.5) Notice of Meeting - There shall be mailed to each shareholder
shown by the books of the corporation to be a holder of record of voting shares,
at his address as shown by the books of the corporation, a notice setting out
the time and place of the regular meeting or any special meeting, which notice
shall be mailed at least ten (10) days and not more than sixty (60) days prior
thereto. Every notice of any special meeting shall state the purpose or purposes
of the proposed meeting, and the business transacted at all special meetings
shall be confined to purposes stated in the call. A shareholder may waive notice
of a meeting of shareholders. A waiver of notice by a shareholder entitled to
notice is effective whether given before, at, or after the meeting, or whether
given in writing, orally, or by attendance. Attendance by a shareholder at a
meeting is a waiver of notice of that meeting, except where the shareholder
objects at the beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened, or objects before a vote on an
item of business because the item may not lawfully be considered at that meeting
and does not participate in the consideration of the item at that meeting.
3.6) Proxies - At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxies shall be filed with the Secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy. No appointment of a proxy is irrevocable unless the appointment is
coupled with an interest in the shares of the corporation.
3.7) Closing Transfer Books - The Board of Directors may close the
stock transfer books for a period of time not exceeding sixty (60) days
preceding the date of any meeting of shareholders, payment of dividend,
allotment of rights, change, conversion or exchange of capital stock or the date
of obtaining consent of shareholders for any purpose.
3.8) Record Date - In lieu of closing the stock record books the Board
of Directors may fix in advance a date, not exceeding sixty (60) days preceding
the date of any of the aforesaid events, as a record date for the determination
of shareholders entitled to notice of and to vote at any such meeting and any
adjournment thereof, or to receive any such dividend or allotment or rights, or
to exercise the rights in respect to any change, conversion or exchange of
capital stock or to give such consent, and in such case only such shareholders
on the record date so fixed shall be entitled to notice of and to vote at such
meeting and any adjournment thereof, or to receive such dividend or allotment of
rights, or to exercise such rights, or to give such consent, as the case may be,
notwithstanding any transfer of any stock on the books of the corporation after
any such record date so fixed. If the stock transfer books are not closed and no
record date is fixed for such determination of the shareholders of record, the
date on which notice of the meeting is mailed, or the date of adoption of a
resolution of the Board of Directors declaring a dividend, allotment of rights,
change, conversion or exchange of capital stock or to give such consent, as the
case may be, shall be the record date for such determination of shareholders. A
determination of shareholders entitled to vote shall apply to any adjournment of
such meeting except when the date of determination or the closing of the stock
transfer book exceeds sixty (60) days preceding such adjourned meeting, in which
event a new meeting must be called.
3.9) Presiding Officer - The appropriate officers of the corporation
shall preside over all meetings of the shareholders; provided, however, that in
the absence of an appropriate corporate
3
<PAGE>
officer at any meeting of the shareholders, the meeting shall choose any person
present to act as presiding officer of the meeting.
3.10) Conduct of Meetings of Shareholders - Subject to the following,
meetings of shareholders generally shall follow accepted rules of parliamentary
procedure:
1. The chairman of the meeting shall have absolute authority over
matters of procedure and there shall be no appeal from the
ruling of the chairman. If the chairman, in his absolute
discretion, deems it advisable to dispense with the rules of
parliamentary procedure as to any one meeting of shareholders
or part thereof the chairman shall so state and shall clearly
state the rules under which the meeting or appropriate part
thereof shall be conducted.
2. If disorder should arise which prevents continuation of the
legitimate business of the meeting, the chairman may quit the
chair and announce the adjournment of the meeting; and upon
his so doing, the meeting is immediately adjourned.
3. The chairman may ask or require that anyone not a bona fide
shareholder or proxy leave the meeting.
4. A resolution or motion shall be considered for vote only if
proposed by a shareholder or duly authorized proxy, and
seconded by an individual who is a shareholder or a duly
authorized proxy, other than the individual who proposed the
resolution or motion; provided, however, that the chairman
shall have the discretion to rule out of order any resolution
or motion which seeks shareholder vote on (i) a proposal that
has failed to comply with the requirements of Article 3.1, or
(ii) any nomination(s) for the election of directors that
fails to comply with Article 4.16.
3.11) Order of Business - The suggested order of business at the
regular meeting of shareholders, and so far as possible at all other meetings of
the shareholders, shall be:
1. Calling of roll.
2. Proof of due notice of meeting, or unanimous waiver.
3. Reading and disposal of any unapproved minutes.
4. Annual reports of all officers and committees.
5. Election of directors.
6. Unfinished business.
7. New business properly presented.
8. Adjournment.
4
<PAGE>
3.12) Inspectors of Election - The Board of Directors in advance of any
meeting of shareholders may appoint inspectors to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the officer
or person acting as chairman of any such meeting may, and on the request of any
shareholder or his proxy, shall make such appointment. In case any person
appointed as inspector shall fail to appear or act, the vacancy may be filled by
appointment made by the Board of Directors in advance of the meeting, or at the
meeting by the officer or person acting as chairman. The inspectors of election
shall determine the number of shares outstanding, the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes, ballots, assents or consents,
hear and determine all challenges and questions in any way arising and announce
the result, and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
No inspector whether appointed by the Board of Directors or by the
officer or person acting as chairman need be a shareholder.
3.13) Informal Action by Shareholders - Any action required to be taken
at a meeting of the shareholders, or any other action which may be taken at a
meeting of the shareholders, may be taken without a meeting and notice thereof
if a consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The written
action is effective when it has been signed by all of those shareholders, unless
a different effective time is provided in the written action.
ARTICLE 4
DIRECTORS
4.1) General Powers - The property, affairs, and business of the
corporation shall be managed by the Board of Directors.
4.2) Number - The Board of Directors shall consist of such number of
directors, not less than five (5) nor more than ten (10), the exact number to be
fixed from time to time solely by resolution of the Board of Directors, acting
by not less than a majority of the directors then in office.
4.3) Qualifications and Term of Office - Directors need not be
shareholders or residents of the State of Delaware. Directors shall be elected
by the shareholders at the regular meeting for a term of one (1) year or until
their successors are elected and qualified. Each of the directors of the
corporation shall hold office until the regular meeting next following or
closely coinciding with the expiration of his term of office and until his
successor shall have been elected and shall qualify or until he shall resign, or
shall have been removed as provided by statute.
4.4) Quorum - A majority of the whole Board of Directors shall
constitute a quorum for the transaction of business; provided, however, that if
any vacancies exist by reason of death, resignation or otherwise, a majority of
the remaining directors shall constitute a quorum for the conduct of business.
If less than a quorum is present at any meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice. If a
quorum is present when a duly called or held meeting is convened, the directors
present may continue to transact
5
<PAGE>
business until adjournment, even though the withdrawal of a number of directors
originally present leaves less than a majority.
4.5) Regular Meetings - As soon as practical after each regular meeting
of shareholders, the Board of Directors shall meet for the purposes of
organization, choosing the officers of the corporation and for the transaction
of other business at the place where the shareholders' meeting is held or at the
place where regular meetings of the Board of Directors are held. No notice of
such meeting need be given. Such first meeting may be held at any other time and
place which shall be specified in a notice given as hereinafter provided for
special meetings or in a consent and waiver of notice signed by all the
directors.
4.6) Telephonic Meetings - Any member or members of the Board of
Directors, or any committee designated by such Board, may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this paragraph shall constitute presence in person at such meeting.
4.7) Special Meetings - Special meetings of the Board of Directors may
be held at such time and place as may from time to time be designated in the
notice or waiver of notice of the meeting. Special meetings of the Board of
Directors may be called by the president, or by any director. Unless notice
shall be waived by all directors entitled to notice, notice of the special
meeting shall be given by the secretary, who shall give at least twenty-four
(24) hours notice thereof to each director by mail, telegraph, telephone, or in
person; provided, however, that meetings may be held without waiver of notice
from or giving notice to any director while he is in the Armed Forces of the
United States. Each director, by his attendance and his participation in the
action taken at any directors' meeting, shall be deemed to have waived notice of
such meeting.
4.8) Compensation - Directors and any members of any committee of the
corporation contemplated by these By-Laws or otherwise provided for by
resolution of the Board of Directors, shall receive such compensation therefore
as may be determined from time to time by resolution of the Board of Directors.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving proper compensation
therefor.
4.9) Salaries - Salaries and other compensation of all officers and
employees of the corporation shall be fixed by the Board of Directors. Nothing
herein contained shall be construed to preclude any officer from serving the
corporation as a director, consultant or in any other capacity and receiving
proper compensation therefor. In the event that any authority, such as the
Internal Revenue Service, determines, and such determination is ultimately
accepted, that any compensation paid to a director, officer or employee of the
corporation is excessive and disallows the corporate deduction therefor, the
recipient of the amounts so determined to be excessive shall repay the
corporation said amount.
4.10) Committees - A resolution approved by the affirmative vote of a
majority of the Board of Directors may establish committees having the authority
of the Board in the management of the business of the corporation to the extent
provided in the resolution. Committees are subject at all times to the direction
and control of the Board of Directors except as provided in Article 4.11. A
committee shall consist of one or more natural persons, who are directors,
appointed by
6
<PAGE>
affirmative vote of a majority of the directors present. A majority of the
members of the committee present at a meeting is a quorum for the transaction of
business unless a larger or smaller proportion is provided in a resolution
approved by the affirmative vote of a majority of the directors present.
4.11) Committee of Disinterested Persons - The Board of Directors may
establish a committee composed of two or more disinterested directors or other
disinterested persons to determine whether it is in the best interests of the
corporation to pursue a particular legal right or remedy of the corporation and
whether to cause the dismissal or discontinuance of a particular proceeding that
seeks to assert a right or remedy on behalf of the corporation. A director or
other person is "disinterested" if he is not an owner of more than one percent
of the outstanding shares of, or a present or former officer, employee or agent
of the corporation or of a related corporation and has not been made or
threatened to be made a party to the proceeding in question. The committee, once
established, is not subject to the direction or control of, or termination by,
the Board of Directors. A vacancy on the committee may be filled by a majority
vote of the remaining members. The good faith determinations of the committee
are binding upon the corporation and its directors, officers and shareholders.
The committee terminates when it issues a written report of its determinations.
4.12) Vacancies - Any vacancy in the Board of Directors shall be filled
by an affirmative vote of a majority of the remaining directors of the Board,
though less than a quorum, and each person so elected shall be a director until
his successor is elected by the shareholders, who may make such election at
their next annual meeting or any meeting duly called for that purpose.
4.13) Order of Business - The meetings shall be conducted in accordance
with Roberts Rules of Order, Revised, and the suggested order of business at any
meeting of the directors shall be:
1. Roll call.
2. Proof of due notice of meeting, or unanimous consent, or
unanimous presence and declaration by president.
3. Reading and disposal of any unapproved minutes.
4. Reports of officers and committees.
5. Election of officers.
6. Unfinished business.
7. New business.
8. Adjournment.
4.14) Written Consent or Opposition in Advance of Meeting - Any member
of the Board of Directors or a committee thereof, may give advance written
consent or opposition to a proposal or resolution stating an action to be taken
by the Board or committee. Such consent or opposition shall be a vote in favor
of or against the proposal or resolution if the proposal or resolution acted
7
<PAGE>
upon at the meeting is substantially the same or has substantially the same
effect as the proposal or resolution to which the member of the Board or
committee has consented or objected.
4.15) Informal Action by Directors - Any action required or permitted
to be taken at a meeting of the directors may be taken without a meeting and
notice thereof if a consent in writing, setting forth the action so taken, shall
be signed by all of the directors entitled to vote with respect to the subject
matter set forth.
4.16) Nominations for Election of Directors - Subject to the rights of
holders of any class or series of stock having a preference over the common
shares as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board of Directors or a committee appointed by the
Board of Directors or by any shareholder entitled to vote generally in the
election of directors. However, any shareholder entitled to vote generally in
the election of directors may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the corporation
not less than 45 days nor more than 60 days prior to the date the proxy
materials for the previous year's annual meeting were mailed to shareholders of
the corporation. Each such notice to the Secretary shall set forth: (i) the name
and address of record of the shareholder who intends to make the nomination;
(ii) a representation that the shareholder is a holder of record of shares of
the Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) the name, age, business and residence addresses, and principal
occupation or employment of each nominee; (iv) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (vi) the consent of each nominee to
serve as a director of the corporation if so elected. The corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the corporation to determine the eligibility of such proposed
nominee to serve as a director of the corporation. The chairman or presiding
officer of the meeting may, if the facts warrant, determine that a nomination
was not made in accordance with the foregoing procedure, and if the chair or
presiding officer should so determine, he or she shall so declare to the meeting
and the defective nomination shall be disregarded.
ARTICLE 5
OFFICERS
5.1) Number - The officers of the corporation shall include a president
or chief executive officer, a treasurer or chief financial officer and a
secretary and may include such other officers as may from time to time be chosen
by the Board of Directors. Any two offices except those of president and
vice-president may be held by one person.
5.2) Election, Term of Office and Qualifications - At any regular
meeting of the Board of Directors, the Board shall elect from their number a
president or chief executive officer and shall, from within or without their
number, elect a treasurer or chief financial officer and a secretary, and
8
<PAGE>
may, in addition, from within or without their number, elect one or more
vice-presidents and such other officers and assistant officers as may be deemed
advisable. Such officers shall hold office until the next regular meeting or
until their successors are elected and qualified; provided, however, that any
officer may be removed with or without cause by the affirmative vote of a
majority of the whole Board of Directors.
5.3) Chairman of the Board - The chairman of the board of directors
shall preside at all meetings of shareholders and directors, and he shall have
such other powers and perform such other duties as the Board of Directors may
from time to time prescribe.
5.4) President and Chief Executive Officer - The president shall have
general and active management of the business under the supervision and
direction of the Board of Directors, and he shall be responsible for carrying
into effect all orders and resolutions of the Board of Directors. He shall be
the chief executive officer of the corporation and shall perform all duties
usually incident to the office of president and chief executive officer and such
other duties as may be from time to time prescribed by the Board of Directors;
except that if the Board of Directors elects a separate chief executive officer,
then the president shall perform such duties usually incident to the office of
president and the chief executive officer shall perform such duties usually
incident to the office of the chief executive officer and each of them shall
perform such duties as may be from time to time prescribed to each of them by
the Board of Directors.
5.5) Chief Operating Officer - The chief operating officer of the
corporation shall be responsible for directing and supervising the corporation's
overall business activities. He shall be the officer primarily responsible for
planning and carrying out the business policies of the corporation and shall
report to the Board of Directors thereon at each meeting of the Board of
Directors. He shall have such other responsibilities and shall exercise such
additional authority as may from time to time be assigned to him by the Board.
5.6) Vice President - Each vice-president shall have such powers and
shall perform such duties as may be specified in these By-Laws or prescribed by
the Board of Directors. In the event of absence or disability of the president,
a vice-president shall succeed to his powers and duties in the order in which
they are elected or as otherwise prescribed by the Board of Directors. A vice-
president who is not a director shall not succeed to the office of president.
5.7) Secretary - The secretary shall be secretary of and shall attend
all meetings of the shareholders and Board of Directors. He shall act as clerk
thereof and shall record all the proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He shall keep the seal of the corporation and shall affix the same to
any instrument requiring it and shall attest the seal by his signature. He
shall, with the president or any vice-president, acknowledge all certificates
for shares of the corporation and shall perform such other duties as may be
prescribed from time to time by the Board of Directors.
5.8) Treasurer and Chief Financial Officer - The treasurer shall keep
accurate accounts of all moneys of the corporation received or disbursed. He
shall deposit all moneys, drafts, and checks in the name and to the credit of
the corporation in such banks and depositories as the Board of Directors shall
designate from time to time. He shall endorse for deposit all notes, checks and
drafts received by the corporation as ordered by the Board of Directors, making
proper vouchers therefor.
9
<PAGE>
He shall disburse the funds of the corporation as authorized by the Board of
Directors. He shall render to the president and the Board of Directors, whenever
required, an account of all of his transactions as treasurer and of the
financial condition of the corporation and shall perform such other duties as
may be prescribed by the Board of Directors from time to time.
5.9) Assistant Officers - In the event of absence or disability of any
vice-president, secretary, or treasurer, such assistants to such officers shall
succeed to the powers and duties of the absent officer in the order in which
they are elected or as otherwise prescribed by the Board of Directors until such
principal officer shall resume his duties or a replacement is elected by the
Board of Directors. Such assistant officers shall exercise such other powers and
duties as may be delegated to them from time to time by the Board of Directors,
but they shall be subordinate to the principal officer they are designated to
assist.
5.10) Officers Shall Not Lend Corporate Credit - Except for the proper
use of the corporation, no officer of this corporation shall sign or endorse in
the name or on behalf of this corporation, or in his official capacity, any
obligations for the accommodation of any other party or parties, nor shall any
check, note, bond, stock certificate or other security or thing of value
belonging to this company be used by any officer or director as collateral for
any obligation other than valid obligations of this corporation.
ARTICLE 6
INDEMNIFICATION
Any person who at any time shall serve or shall have served as a
director, officer, employee or agent of the Corporation, and the heirs,
executors and administrators of such person shall be indemnified by the
Corporation in accordance with, and the fullest extent permitted by, the
provisions of the Delaware General Corporation Law, as it may be amended from
time to time.
ARTICLE 7
SHARES AND THEIR TRANSFER
7.1) Certificates of Stock - Every owner of stock of the corporation
shall be entitled to a certificate, to be in such form as the Board of Directors
prescribe, certifying the number of shares of stock of the corporation owned by
him. The certificates for such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the corporation by the
president, and by the secretary, or by any other two (2) proper officers of the
corporation authorized by the Board of Directors. A record shall be kept of the
name of the person, firm or corporation owning the stock represented by each
such certificate, and the respective issue date thereof, and in the case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the corporation for exchange or transfer shall be canceled and no
other certificate or certificates shall be issued in exchange for any existing
certificates until such existing certificate shall have been so canceled except
in cases provided for in Article 7.5.
7.2) Facsimile Signature - Where any certificate is manually signed by
a transfer agent, a transfer clerk or by a registrar appointed by the Board of
Directors to perform such duties, a
10
<PAGE>
facsimile or engraved signature of the president and secretary or other proper
officer of the corporation authorized by the Board of Directors may be inscribed
on the certificate in lieu of the actual signature of such officer. The fact
that a certificate bears the facsimile signature of an officer who has ceased to
hold office shall not affect the validity of such certificate if otherwise
validly issued.
7.3) Issuance of Shares - Subject to the provisions and limitations of
Article 4 of the Certificate of Incorporation, the Board of Directors is
authorized to cause to be issued shares of the corporation, to the full amount
of such authorized shares, and at such times as may be determined by the Board
of Directors and as may be permitted by law.
7.4) Transfer of Shares - Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate,
or by the shareholder's legal representative, or duly authorized
attorney-in-fact, and upon surrender for cancellation of the certificate or
certificates for such shares. The shareholder in whose name shares of stock
stand on the books of the corporation shall be deemed the owner thereof for all
purposes as regards the corporation; provided, that when any transfer of shares
shall be made as collateral security, and not absolutely, such facts, if known
to the secretary of the corporation, or to the transfer agent, shall be so
expressed in the entry of transfer.
7.5) Lost Certificates - Any shareholder claiming a certificate of
stock to be lost or destroyed shall make an affidavit or affirmation of that
fact in such form as the Board of Directors may require, and shall, if the
directors so require, give the corporation a bond of indemnity in form and with
one or more sureties satisfactory to the Board, in an amount determined by the
Board of Directors not exceeding double the value of the stock represented by
such certificate to indemnify the corporation, against any claim that may be
made against it on account of the alleged loss or destruction of such
certificate; whereupon a new certificate may be issued in the same tenor and for
the same number of shares as the one alleged to have been destroyed or lost.
7.6) Treasury Stock - Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors, in accordance with the
Certificate of Incorporation and these By-Laws, and shall not have voting rights
nor participate in dividends.
7.7) Indebtedness of Shareholders - The corporation shall have a first
lien on all the shares of its capital stock and upon all dividends declared upon
the same for any indebtedness of the respective holders thereof to the
corporation.
7.8) Transfer Agent and Registrar - The Board of Directors may appoint
one or more transfer agents or transfer clerks, and may require all certificates
for shares to bear the signature or signatures of any of them.
ARTICLE 8
BOOKS AND RECORDS
8.1) Share Register; Dates of Issuance - The corporation shall keep at
its principal business office, or at another place or places within the United
States determined by the Board of Directors,
11
<PAGE>
a share register not more than one year old, containing the names and addresses
of the shareholders and the number and classes of shares held by each
shareholder. The corporation shall also keep, with the share register, a record
of the dates on which certificates or transaction statements representing shares
were issued.
8.2) Other Documents Required - A corporation shall keep at its
principal business office, or, if its principal business office is outside of
this state, shall make available at its registered office within ten days after
receipt by an officer of the corporation of a written demand for them made by a
person described in Article 8.4, originals or copies of:
1. Records of all proceedings of shareholders for the last three
years;
2. Records of all proceedings of the board for the last three
years;
3. Its articles and all amendments currently in effect;
4. Its by-laws and all amendments currently in effect;
5. Financial statements required by Article 8.7 and the financial
statement for the most recent interim period prepared in the
course of the operation of the corporation for distribution to
the shareholders or to a governmental agency as a matter of
public record;
6. Reports made to shareholders generally within the last three
years;
7. A statement of the names and usual business addresses of its
directors and principal officers;
8. Voting trust agreements; and
9. Shareholder control agreements.
8.3) Financial Records - A corporation shall keep appropriate and
complete financial records.
8.4) Right to Inspect - A shareholder, beneficial owner, or a holder of
a voting trust certificate has an absolute right, upon written demand, to
examine and copy, in person or by a legal representative, during the usual hours
for business, the share register and all documents referred to in Article 8.2. A
shareholder, beneficial owner, or a holder of a voting trust certificate has a
right, upon written demand, to examine and copy in person or by legal
representative, other corporate records during the usual hours for business,
only if the shareholder, beneficial owner, or holder of a voting trust
certificate demonstrates a proper purpose for the examination. A "proper
purpose" is one reasonably related to the person's interest as a shareholder,
beneficial owner, or holder of a voting trust certificate of the corporation.
8.5) Cost of Copies - Copies of all documents referred to in Article
8.2 shall be furnished at the expense of the corporation. A copy of the most
recently generated share register shall be
12
<PAGE>
furnished at the expense of the corporation if the requesting party shows a
proper purpose. In all other cases, the corporation may charge the requesting
party a reasonable fee to cover the expenses of providing the copy.
8.6) Computerized Records - The records maintained by the corporation,
including its share register, financial records, and minute books, may utilize
any information storage technique, including, for example, punched holes,
printed or magnetized spots, or microimages, even though that makes them
illegible visually, if the records can be converted, by machine and within a
reasonable time, into a form that is legible visually and whose contents are
assembled by related subject matter to permit convenient use by people in the
normal course of business. The corporation shall convert any of the records
referred to in Articles 8.1 and 8.2 upon the request of a person entitled to
inspect them, and the expense of the conversion shall be borne by the person who
bears the expense of copying pursuant to Article 8.5. A copy of the conversion
is admissible in evidence, and shall be accepted for all other purposes, to the
same extent as the existing or original records would be if they were legible
visually.
8.7) Financial Statements - The corporation shall upon written request
by a shareholder stating a proper purpose therefor, furnish annual financial
statements, including at least a balance sheet as of the end of each fiscal year
and a statement of income for the fiscal year, which shall be prepared on the
basis of accounting methods reasonable in the circumstances and may be
consolidated statements of the corporation and one or more of its subsidiaries.
In the case of statements audited by a public accountant, each copy shall be
accompanied by a report setting forth the opinion of the accountant on the
statements; in other cases, each copy shall be accompanied by a statement of the
president or other person in charge of the corporation's financial records
stating the reasonable belief of the person that the financial statements were
prepared in accordance with accounting methods reasonable in the circumstances,
describing the basis of presentation, and describing any respects in which the
financial statements were not prepared on a basis consistent with those prepared
for the previous year.
ARTICLE 9
DISTRIBUTIONS
9.1) Distributions - The Board of Directors may authorize distributions
by the corporation from funds legally available therefor at such times and in
such amounts as the Board shall deem reasonable.
9.2) Record Date - Subject to any provisions of the Certificate of
Incorporation, the Board of Directors may fix a date preceding the date fixed
for the payment of any distribution or allotment of other rights as the record
date for the determination of the shareholders entitled to receive payment of
such distribution or allotment notwithstanding any transfer of shares on the
books of the Corporation after such record date.
13
<PAGE>
9.3) Restrictions - A distribution may be made to the holders of a
class or series of shares only if:
1. All amounts payable to the holders of shares having a
preference for the payment of that kind of distribution are
paid; and
2. The payment of the distribution does not reduce the remaining
net assets of the corporation below the aggregate preferential
amount payable in the event of liquidation to the holders of
shares having preferential rights, unless the distribution is
made to those shareholders in the order and to the extent of
their respective priorities.
3. The money or property available for distribution is
insufficient to satisfy all preferences, the distributions
shall be made pro rate according to the order of priority of
preferences by classes and by series within those classes.
ARTICLE 10
FINANCIAL AND PROPERTY MANAGEMENT
10.1) Fiscal Year - The fiscal year of the corporation shall be set by
the Board of Directors.
10.2) Audit of Books and Accounts - The books and accounts of the
corporation shall be audited at such times as may be ordered by the Board of
Directors.
10.3) Contracts - The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
10.4) Checks - All checks, drafts, or other orders for the payment of
money, notes, or other evidences of indebtedness issued in the name of the
corporation shall be signed by the treasurer or such other officer or officers,
agent or agents of the corporation and in such manner as shall from time to time
be determined by resolution of the Board of Directors.
10.5) Deposits - All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Board of Directors may
select.
10.6) Voting Securities Held by Corporation - The president or other
agent designated by the Board of Directors, shall have full power and authority
on behalf of the corporation to attend, act and vote at any meeting of security
holders of other corporations in which this corporation may hold securities. At
such meeting the president, or such other agent, shall possess and exercise any
and all rights and powers incident to the ownership of such securities which the
corporation might possess and exercise.
14
<PAGE>
ARTICLE 11
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be given by these By-Laws
or the Certificate of Incorporation of the corporation or any of the corporate
laws of the State of Delaware, a waiver thereof in writing, signed by the person
or persons entitled to said notice, either before, at, or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE 12
AMENDMENTS
Subject to the limitations set forth in the Delaware General
Corporation Law, these By-Laws may be amended by a vote of the majority of the
whole Board of Directors at any meeting, provided that notice of such proposed
amendment shall have been included in the notice of such meeting given to the
directors.
The undersigned Secretary hereby certifies that the foregoing Amended
and Restated By- Laws were adopted as the complete By-Laws of the corporation by
the Board of Directors on this 23rd day of January, 2002.
/s/ Patrick Delaney
----------------------------------------
Patrick Delaney, Secretary
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>4
<FILENAME>cns021471_ex10-9.txt
<DESCRIPTION>ADDENDUM TO LICENSE AGREEMENT
<TEXT>
Exhibit 10.9
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.
EXECUTION COPY
ADDENDUM TO LICENSE AGREEMENT
THIS ADDENDUM TO LICENSE AGREEMENT (the "Addendum") is made and
effective as of the 25th day of March, 2002 (the "Effective Date"), by and
between CNS, Inc., a Delaware corporation ("Licensee"), and WinEase, L.L.C., a
Minnesota limited liability company ("Licensor").
R E C I T A L S
WHEREAS, Licensor and Licensee are parties to that certain license
agreement dated March 12, 1999 (the "License Agreement");
WHEREAS, Licensor granted to Licensee under the License Agreement an
exclusive, worldwide, royalty bearing license under all of those Patent Rights,
Know-how, Product Improvements and Trademark Rights relating to the development,
manufacture, sale and use of the Products and Licensed Methods and other
intellectual property rights relating to nasal support devices for animals;
WHEREAS, Licensee has been engaged in, among other things, the
development, commercialization, production and marketing of the "Products" (as
that term is defined in the License Agreement) in accordance with the License
Agreement;
WHEREAS, Licensee desires to enter into an exclusive and worldwide
distribution, marketing and selling relationship for the Products (the
"Distribution Relationship") with a recognized distributor known as Merial
Limited, a company registered in England and Wales and domesticated in the
United States as Merial LLC ("Merial");
WHEREAS, Licensee will be entering into the Distribution Relationship
with Merial substantially concurrently with the execution of this Addendum;
WHEREAS, Licensee represents that the total expenses that Licensee has
incurred to date in connection with the development, commercialization,
production and marketing of the Products have exceeded Net Sales by at least
[***]; and
WHEREAS, Licensor and Licensee desire to address certain issues
relating to the rights and relationship of the parties and desire to amend the
License Agreement accordingly and further desire to provide for certain other
agreements as set forth herein;
<PAGE>
NOW, THEREFORE, in consideration of these premises, and the mutual
covenants and agreements set forth in the License Agreement and hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
A. Amendments to License Agreement. The License Agreement is
hereby amended as follows:
1. General Definitions. Paragraph 1 is hereby amended to
add the following after Paragraph 1.9:
"1.10 Other Definitions. The terms "Acquirer,"
"Affiliate," "Effective Date," "Excess Amount," "Proceeds,"
"Recoupment Amount," "Transfer," "Third-Party Transferee" and
any other terms not defined in this Paragraph 1 shall have the
meanings ascribed to the terms elsewhere in this Agreement."
2. Assignments. Paragraph 2.4 of the License Agreement
is hereby amended and restated in its entirety to
read as follows:
"(a) Licensee may sell, assign, convey or transfer
any and all of its rights under this Agreement ("Transfer") to
a successor in interest of all, or substantially all, of the
assets or capital stock of Licensee (the "Acquirer"). In the
event of such a Transfer, any such Acquirer shall assume all
of the obligations of Licensee hereunder and this Agreement
shall be binding upon and inure to the benefit of such
Acquirer. No other Transfer may be made by Licensee or
Acquirer without complying with subsections (b) and (c) of
this Paragraph.
(b) Except as otherwise set forth in or contemplated
by Paragraph 2.3 above, no other Transfer may be made by
Licensee or the Acquirer without Licensor's prior written
consent unless Licensee or the Acquirer grants Licensor an
exclusive right of first refusal to purchase all of the rights
conferred under this Agreement in accordance with the
following procedure:
(i) First, Licensee shall give Licensor
written notification of its intention to enter into a
transaction which operates to effectuate a Transfer
to a third party that is not an Acquirer
("Third-Party Transferee") and shall not enter into
any such transaction without first disclosing all
material information about the proposed transaction
to Licensor and offering to enter into a transaction
on substantially identical terms with Licensor; and
then
(ii) Second, Licensor shall, unless
otherwise waived in writing by Licensor, have a
period of thirty (30) days after receipt of written
notification provided in accordance with subsection
(b)(i) above to exercise its right of first refusal
by providing written notice to Licensee
2
<PAGE>
and agree to consummate a Transfer on substantially
identical terms. The right of first refusal procedure
outlined in this Paragraph 2.4 shall be repeated
prior to entering into by Licensee of any transaction
that is (a) on terms less favorable in a material
respect to the Licensee or the Acquirer than
specified in an earlier written notice to Licensor,
or (b) with a party other than that specified in an
earlier written notice.
(c) In the event that Licensee, after complying with
the right of first refusal procedure set forth in subsections
(b)(i) through (b)(ii) of Paragraph 2.4, consummates a
Transfer with a Third-Party Transferee in a transaction that
results in Licensee receiving "Proceeds" (defined to mean
cash, stock or other consideration solely attributable to the
Transfer) from and on account of such a Transfer having a fair
market value on the date of the closing of the transaction in
an amount that is in excess of the Recoupment Amount (as
defined in Paragraph 4.3.1 below) (the "Excess Amount"),
Licensee agrees to pay Licensor an amount equal to [***]% of
the Excess Amount.
(d) In the event that Licensee, after complying with
the applicable provisions of subsections (b)(i) through
(b)(ii) of Paragraph 2.4, consummates a Transfer with a
Third-Party Transferee, the terms of Paragraph 4.3.2
pertaining to royalties to be paid by such Third-Party
Transferee on account of Net Sales of Products shall come into
effect. In the event of such a Transfer with a Third-Party
Transferee, any such Third-Party Transferee shall assume all
of the obligations of Licensee hereunder and this Agreement
shall be binding upon and inure to the benefit of such
Third-Party Transferee."
3. Additional License Fees. Paragraph 4.2 of the License
Agreement is hereby amended to strike the period at
the end of subsection (c) and add the following after
the word "aggregate":
"; and
(d) the sum of $[***] which sum shall be
payable without regard to the limitation set forth in
the preamble of this Section 4.2 relating to
termination and which sum shall be payable in four
(4) equal installments of $[***] on the following
dates: (i) the Effective Date; (ii) April 30, 2002;
(iii) July 31, 2002; and (iv) October 31, 2002.
Paragraph 4.8 of the Agreement shall be applicable to
any payments that are overdue and payable to Licensor
under Paragraph 4.2(d) of this Agreement."
4. Royalties on Account of Net Sales. Paragraph 4.3 of
the License Agreement is hereby amended and restated
in its entirety to add the following after the
heading of Paragraph 4.3:
"4.3.1 Net Sales Made by Licensee.
3
<PAGE>
(a) Licensee agrees to pay Licensor
royalties as follows based on the annual Net Sales
from the sale of Products: (i) [***]% of Net Sales
until Licensee has received on account of Net Sales a
total amount equal to the Recoupment Amount (as
defined below), then (ii) [***]% of all Net Sales in
excess of the Recoupment Amount.
(b) For purposes of this Agreement, the term
"Recoupment Amount" shall mean the amount derived
from the following calculation:
Recoupment Amount = $[***] U.S. PLUS ($[***]
TIMES the number of Products sold from and
after the Effective Date MINUS $[***] TIMES
the number of Products in Licensee's
inventory on the Effective Date) PLUS
(Earned Royalties paid to Licensor from and
after the Effective Date) MINUS (the
Proceeds, if any, that Licensee receives
from Merial as an upfront fee or other
payment for entering into the Distribution
Agreement).
4.3.2 Net Sales Made by a Third-Party Transferee in
the Event of a Transfer.
(a) In the event that a Transfer with a
Third-Party Transferee is consummated, the
Third-Party Transferee shall, notwithstanding and
without regard to Paragraph 4.3.1, pay Licensor a
royalty of [***] of Net Sales from the sale of
Products by such Third-Party Transferee or its
Affiliate (as hereinafter defined), whichever is
greater. The term "Affiliate" shall mean (i) any
business entity fifty percent (50%) or more of which
is owned directly or indirectly by a Third-Party
Transferee; (ii) any business entity which directly
or indirectly owns fifty percent (50%) or more of a
Third-Party Transferee; or (iii) any business entity
under the direct or indirect control of any business
entity described in (i) or (ii) above.
(b) In the event that a Transfer with a
Third-Party Transferee is consummated, Paragraphs
2.4(c) and 4.3.1 shall no longer apply or be of any
force or effect with respect to any Third-Party
Transferee.
4.3.3 Net Sales Made by an Acquirer in the Event of a
Transfer.
(a) In the event that a Transfer with an
Acquirer is consummated, the Acquirer shall,
notwithstanding and without regard to Paragraph
4.3.1, pay Licensor a royalty of [***]% of Net Sales
from the sale of Products by such Acquirer.
(b) In the event that a Transfer with an
Acquirer is consummated, Paragraph 4.3.1 shall no
longer apply or be of any force or effect with
respect to any Acquirer."
4
<PAGE>
5. Minimum Obligations in the Event of a Transfer.
Paragraph 4.5 of the License Agreement is hereby
amended and restated in its entirety to read as
follows:
"4.5 Minimum Royalty Obligation of "Third-Party
Transferee" in the Event of a Transfer. In the event
that a Transfer with a Third-Party Transferee is
consummated, the Third-Party Transferee shall, in
order to maintain its rights hereunder, pay Licensor
minimum royalties in accordance with Paragraphs 4.4,
4.7 and the following:
Minimum Royalty Payment Minimum Royalty Payment
Per Contract Year Per Contract Quarter
----------------- --------------------
$[***] $[***]"
6. Termination. Paragraph 7.2 of the License Agreement
is hereby amended and restated as follows:
"(a) If Licensee is in material default of
any of its obligations under this Agreement, Licensor
shall have the right to terminate this Agreement by
giving thirty (30) days' written notice of
termination specifying the reason for termination,
provided that such notice will be of no effect and
termination will not occur if the specified default
is cured prior to the expiration of said thirty (30)
day period.
(b) In the event that Licensee does not sell
an "average" of [***] Products each calendar year
commencing January 1, 2002 through December 31, 2004,
measured on a cumulative basis and adjusted each
calendar year during the term hereof in order to
account for fluctuations in sales from year to year,
Licensor shall have, as its sole and exclusive remedy
and without any other recourse against Licensee as a
result of such event, the right to terminate this
Agreement by giving thirty (30) days' written notice
of termination.
(c) In the event that Licensee does not sell
Products in each calendar year following December 31,
2004 sufficient to generate annual Net Sales of at
least $[***], Licensor shall have, as its sole and
exclusive remedy and without any other recourse
against Licensee as a result of such event, the right
to terminate this Agreement by giving thirty (30)
days' written notice of termination.
(d) In the event that a Transfer with an
Acquirer is consummated and such Licensee does not
either sell Products in each calendar year following
December 31, 2003 sufficient to generate annual Net
Sales of at least $[***], or, alternatively, pay
Licensor the minimum royalties applicable to a
Third-Party Transferee set forth and contemplated by
Paragraphs 4.5 and 4.7, Licensor shall have, as its
sole and exclusive
5
<PAGE>
remedy and without any other recourse against
Licensee as a result of such event, the right to
terminate this Agreement by giving thirty (30) days'
written notice of termination."
7. Continued Obligations. Paragraph 7.4 of the License
Agreement is hereby amended to add the number
"4.2(d)" after the number 3 and before the number 5
in the Paragraph such that Paragraph 4.2(d) as
amended in Section A.3. of this Addendum shall
survive the termination of the License Agreement.
8. Notices. Paragraph 9.5 of the License Agreement is
amended to change the mailing and facsimile address
of the Licensee such that the following shall be
substituted for that which is currently set forth
therein:
"If to Licensee: CNS, Inc.
7615 Smetana Lane
Eden Prairie, MN 55344
Attn: Marti Morfitt
Fax No.: (952) 229-1701"
B. Waiver and Release. In furtherance and not in limitation of the
amendment set forth in and contemplated by Section A.5. above, Licensor hereby
waives any and all right under the License Agreement to any minimum royalties
that may be due, become due or have accrued or become due on or before the
Effective Date, and hereby releases Licensee from any obligation, liability or
responsibility with respect to the same.
C. Permitted Sublicense in Favor of Merial or its Affiliates. To the
extent that the grant of a sublicense by Licensee of any of the rights granted
by Licensor to Licensee under or in connection with the License Agreement is
necessary or desirable for Licensee to implement the Distribution Relationship
with Merial or its Affiliates, Paragraph 2.3 of the License Agreement is hereby
amended to permit Licensee to grant any such a sublicense to Merial or its
Affiliates.
D. Limited Cross-Licenses.
1. CNS. In the event that (i) Licensee terminates the License Agreement
in accordance with Paragraph 7.3(a), or (ii) Licensor terminates the License
Agreement in accordance with 7.2, the parties hereto agree that the following
shall apply:
a. License and Field of Use Restriction. Licensee shall grant
to Licensor a limited, exclusive and worldwide license and/or
sublicense to make, have made, use, sell or offer for sale products
utilizing any of the inventions within the scope of any valid claim in
the United States Patents identified on Schedule A (the "CNS Licensed
Patents") or from any continuations, re-exams or re-issues relating to
those patents together with any and all foreign counterparts; provided,
however, that the license and/or sublicense granted hereunder shall be
limited solely to the field of equine nasal support products or devices
("Licensor's Field of Use").
6
<PAGE>
b. Further Sublicenses and Assignments. Except as may be
necessary or desirable to manufacture or have manufactured the equine
nasal support products or devices, Licensor shall have no right to
sublicense or assign any of the rights granted by Licensee to Licensor
with respect to any of the CNS Licensed Patents; provided, however,
that Licensor may assign, convey or transfer any and all of its rights
under this Section D of this Addendum to a successor in interest to all
of the assets, capital securities or membership interests of Licensor.
c. Term. The licenses and/or sublicenses granted hereunder
shall commence upon the termination of the License Agreement by
Licensor or Licensee in accordance with Paragraph 7 and shall expire,
unless earlier terminated pursuant to subsection (e) below, upon the
earlier of: (i) the expiration of the last of the CNS Licensed Patents
to expire; or (ii) the termination of Licensee's rights with respect
any of the CNS Licensed Patents.
d. Royalties. Licensor agrees to pay Licensee royalties based
upon the Net Sales from the sale of equine nasal support products or
devices of [***]% of Net Sales that, but for the license granted
hereunder, would infringe any claims of the CNS Licensed Patents. All
payments shall be due and payable to Licensee on a quarterly basis, and
the provisions of Paragraphs 4.4, 4.8, 4.9 and 4.10 of the License
Agreement shall be applicable and inure to the benefit of Licensee.
e. Termination. If Licensor is in material default of any of
its obligations under this Section D.1., Licensee shall have the right
to terminate the licenses and/or sublicenses granted hereunder by
giving thirty (30) days' written notice of termination specifying the
reason for termination, provided that such notice will be of no effect
and termination will not occur if the specified default is cured prior
to the expiration of said thirty (30) day notice period.
2. WinEase. In the event that (i) Licensee terminates the License
Agreement in accordance with Paragraph 7.3(a), (ii) Licensor terminates the
License Agreement in accordance with 7.2, or (iii) Licensee enters into a
transaction that operates to effectuate a Transfer with a Third-Party
Transferee, the parties hereto agree that the following shall apply:
a. License and Field of Use Restriction. Licensor shall grant
to Licensee a limited, exclusive and worldwide license and/or
sublicense to make, have made, use, sell or offer for sale products
utilizing any of the inventions within the scope of any valid claim in
the United States patents and any patents which issue or have issued
from the applications listed on Schedule B of this Addendum or from any
continuations, re-exams or re-issues relating to those patents and
applications, together with any and all foreign counterparts (the
"WinEase Patents"); provided, however, that the licenses and/or
sublicenses granted hereunder shall be limited solely to the field of
human nasal dilation products or devices ("Licensee's Field of Use").
b. Further Sublicenses and Assignments. Except as may be
necessary or desirable to manufacture or have manufactured any human
nasal dilation products or devices, Licensee shall have no right to
sublicense or assign any of the rights granted by
7
<PAGE>
Licensor to Licensee with respect to any of the WinEase Patents;
provided, however, that Licensee may assign, convey or transfer any and
all of its rights under Section D of this Addendum to a successor in
interest to all of the assets of Licensee relating to its human nasal
dilation business or to all of its capital stock.
c. Term. The licenses and/or sublicenses granted hereunder
shall commence upon the termination of the License Agreement by
Licensor or Licensee in accordance with Paragraph 7 and shall expire,
unless earlier terminated pursuant to subsection (e) below, upon the
expiration of the last of the WinEase Patents to expire.
d. Royalties. Licensee agrees to pay Licensor royalties of
[***]% of Net Sales from the sale of those human nasal dilation
products or devices that, but for the license granted hereunder, would
infringe any claims of the WinEase Patents (the "Covered CNS
Products"); provided, however, that Licensee shall not be obligated to
pay any royalties with respect to the sale of any Covered CNS Products
or with respect to the use of any of WinEase Patents that relate to or
result from any patent application filed between March 13, 1999 and the
Effective Date (the "Excluded Patents"), it being understood and agreed
that the licenses and/or sublicenses granted by Licensor to Licensee
with respect to such Excluded Patents shall be on a royalty-free basis.
All payments shall be due and payable to Licensor on a quarterly basis,
and the provisions of Paragraphs 4.4, 4.8, 4.9 and 4.10 of the License
Agreement shall be applicable and inure to the benefit of Licensor.
e. Termination. If Licensee is in material default of any of
its obligations under this Section D.1., Licensor shall have the right
to terminate the licenses and/or sublicenses granted hereunder by
giving thirty (30) days' written notice of termination specifying the
reason for termination, provided that such notice will be of no effect
and termination will not occur if the specified default is cured prior
to the expiration of said thirty (30) day notice period.
3. Miscellaneous. The following provisions shall apply in the event
that the either paragraph 1 or paragraph 2 of this Section D becomes applicable:
a. Right to Abate Infringement of Excluded Patents. In the
event that either Licensor or Licensee become aware of any activity on
the part of any third party which may constitute infringement of any of
the Excluded Patents, such party shall give the other party written
notice thereof. In the event of an infringement in Licensee's Field of
Use, Licensee shall (for so long as its rights under Paragraph D.2 are
in force and effect), at its sole discretion and expense, have the
first exclusive right to initiate and thereafter maintain reasonable
efforts to prevent and abate such infringement, including the
initiation of appropriate civil action for infringement and the taking
of such other action as it may determine to be necessary or desirable
to enforce any of the Excluded Patents and/or any rights thereunder or
relating thereto. In such event, (i) Licensor agrees to fully cooperate
with Licensee and will permit the use of its name in, and as a party
to, all such suits and execute all pleadings, documents and other
papers necessary or desirable in conjunction therewith, and (ii)
Licensee shall receive the full benefits of any action it takes
pursuant to this paragraph, including retaining all sums recovered in
any
8
<PAGE>
such suit or in settlement thereof. In the event that Licensee fails or
refuses to take or cause to be taken any such measures against any
third party after six (6) months from the date of receipt of written
notice to Licensee by Licensor of such infringement, Licensor may take
such legal action in its own name and at its own expense upon giving
twenty-one (21) days advance, written notice of its intention to do so.
In this case, all damages recovered as a result of such action by
Licensor shall be and become the property of Licensor. In the event
that Licensor takes any action to prevent or abate an infringement by a
third party of any of the Excluded Patents under this paragraph or
otherwise, Licensee will fully cooperate with Licensor and, to the
extent necessary to maintain suit under applicable law, permit the use
of its name in, and as a party to, all such suits and execute all
pleadings, documents and other papers necessary or desirable in
conjunction therewith. If Licensee litigates any matter relating to the
Excluded Patents under this paragraph or otherwise, it shall first
provide Licensor with ten (10) days advance written notice of its
intention to commence such litigation which notice shall identify the
name of the alleged third-party infringer, the infringing product and
the patent involved. If either party litigates any matter relating to
the Excluded Patents, the other party may, at its option and its cost
and expense, participate in meetings with the litigating party and/or
its counsel and receive all pleadings, documents and other related
papers useful for the purposes of keeping the other party informed of
the status of any proceedings commenced by the litigating party.
b. General Provisions. All of the provisions of Section 9 of
the License Agreement shall apply to the agreements contained in
Section D of this Addendum.
c. Survival. Section D of this Addendum shall survive the
termination of the License Agreement.
E. No Impairment. The provisions set forth in the License Agreement and
not amended or altered by this Addendum shall remain in full force and effect
and shall apply to this Addendum unless to do so would be inconsistent with the
intentions of the parties as expressed in this Addendum. This Addendum
supersedes and replaces any and all other amendments, whether written or oral,
to the License Agreement that have been entered into by the parties prior to the
date hereof.
F. Further Assurances. The parties agree to cooperate and take such
actions and execute such other documents and instruments as may be reasonably
requested by the other party hereto in order to consummate the transactions and
agreements set forth in or contemplated by this Addendum.
G. Recitals. The Recitals set forth in this Addendum are true and
correct, incorporated herein and made a part of the Addendum and the parties'
agreement as set forth above.
H. Capitalized Terms. Capitalized terms in this Addendum that are not
defined shall have the meaning ascribed to such terms in the License Agreement
unless the context requires otherwise.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as
of the day and year first above written.
CNS, INC.
By: /s/ Daniel E. Cohen
---------------------------------------
Its: Chairman
--------------------------------------
WINEASE, LLC
By: /s/ Edward F. Blach
---------------------------------------
Its: President/CEO
--------------------------------------
10
<PAGE>
SCHEDULE A
----------
CNS LICENSED PATENTS
--------------------
United States Patent Nos.:
1. 5,533,499
2. 5,533,503
3. 5,653,224
4. 5,476,091
5. 5,549,103
6. 5,611,333
7. 6,318,362
11
<PAGE>
SCHEDULE B
----------
WINEASE PATENTS
---------------
United States Patent Nos.:
1. 5,913,873
2. 6,017,457
3. 6,203,560
4. 6,033,422
United States Pending Patent Application Nos.:
1. 09/438,676
2. 09/264,464
3. 09/379,425
4. 09/713,308
12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>cns021471_ex23.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 22, 2002, relating to the consolidated balance sheets of
CNS, Inc. and subsidiaries as of December 31, 2001, and 2000, 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, 2001, which report is included in the December 31, 2001,
annual report on Form 10-K of CNS, Inc.
/s/ KPMG LLP
Minneapolis, Minnesota
March 25, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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