AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1996
REGISTRATION NO. 333-01589
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
41-1580270
(I.R.S. Employer Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MINNESOTA 55439
(612) 820-6696
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
DANIEL E. COHEN, M.D.
CHIEF EXECUTIVE OFFICER
CNS, INC.
P.O. BOX 39802
MINNEAPOLIS, MINNESOTA 55439
(612) 820-6696
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
COPIES TO:
PATRICK DELANEY
LINDQUIST & VENNUM P.L.L.P.
4200 IDS CENTER, 80 SOUTH EIGHTH STREET
MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 371-3211
JONATHAN B. ABRAM
DORSEY & WHITNEY LLP
PILLSBURY CENTER SOUTH, 220 SOUTH SIXTH STREET
MINNEAPOLIS, MN 55402
TELEPHONE: (612) 340-2600
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 13, 1996
PROSPECTUS
DATED , 1996
1,500,000 SHARES
COMMON STOCK
Of the 1,500,000 shares of Common Stock (the "Common Stock") offered hereby,
1,375,000 shares are being sold by CNS, Inc., a Delaware corporation (the
"Company"), and 125,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders.") See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"CNXS." On March 11, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $20.00 per share. See "Price Range of Common
Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2) SELLING STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$225,000.
(3) The Company and certain of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 130,000 and 95,000 additional
shares of Common Stock, respectively, solely to cover over-allotments, if
any, at the per share Price to Public less the Underwriting Discount. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $
, respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates representing shares of Common Stock will be
made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or
about , 1996.
PIPER JAFFRAY INC. MONTGOMERY SECURITIES
Inside Front Cover Graphics:
Logo: Breathe Right(R) nasal strips
Side by side photos:
Left-hand photo: drawing of nasal passages.
Text above drawing: Without Breathe Right(R) Strip
Text below drawing: Nasal valves are only 1/10 inches wide.
Vascular tissue can swell to block or narrow valves.
Right-hand photo: drawing of nasal passages.
Text above drawing: With Breath Right (R) Strip
Text below drawing: A Breath Right nasal strip lifts and expands
nasal valve openings.
Text, middle of the page:
The Company has received the following FDA clearance to market Breathe Right
nasal strips:
* Can reduce or eliminate snoring
* May provide temporary relief from nasal congestion and stuffiness
* Improves breathing by reducing nasal airflow resistance
"Breathe Right" is a registered trademark of CNS, Inc. All other company or
product names are registered trademarks of their respective owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE
ACT OF 1934. SEE "UNDERWRITING."
Photo: Man sleeping and wearing Breathe Right nasal strip
Photo: Breathe Right packaging box
Page 2 Graphics:
Photo: 1995 REX AWARD Plaque
Text beneath photo of plaque:
In the Fall of 1995, CNS, Inc. received the REX (Retail Excellence Award) as the
"Market Maker of the Year." This award recognizes the single most important
product which disproportionately increased drug store traffic and profits, as
determined by executives of the drug chain retailers and drug wholesalers.
Photo, bottom of the page shows Breathe Right(R) packaging boxes:
Shown:
Jr. Small quantity 10
Sm./Med. quantity 10
Med./Lg. quantity 10
Sm/Med. quantity 30
Med./Lg. quantity 30
Page 3 Graphics showing various advertising campaigns:
ADVERTISING CAMPAIGN INCLUDES
NATIONAL PRINT, RADIO, AND TELEVISION.
Photos depicting television screens; photos are three across the page by four
down the page:
CNN TV Network Football player in motion ESPN
wearing Breathe Right(R) Total Sports Network
nasal strip
Breath Right Package Box Rollerblader in motion Audience Meter
Text: If you don't hear wearing Breathe Right(R) The Fixture Shaker
improvement in 10 days, nasal strip
talk to your doctor.
Runner in motion Breathe Right(R) nasal Winning athlete at
wearing Breathe Right(R) strip being applied to the finish line.
nasal strip a man's nose at bed time. wearing Breathe Right(R)
nasal strip
TNT TV Network Various magazines The Family Channel
carrying advertising. TV Network
Photos across the bottom of the page:
Photo: Statue of Liberty wearing a Breathe Right(R) nasal strip
Text: Consumer Print AD
Photo: Paul Harvey
Text: Paul Harvey, radio personality with the
highest rated show in network radio.
Photo: Rush Limbaugh
Text: Rush Limbaugh, featured on over 650 radio stations
with an average audience of over 4.5 million.
Photo: Dr. Dean Edell
Text: Dr. Dean Edell, administers medical advice to
millions with his two national radio programs.
Photo: Mona Lisa wearing a Breathe Right(R) nasal strip
Consumer Print Ad
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Except where otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. This Prospectus, including the
information incorporated by reference, contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
THE COMPANY
The Company manufactures and markets the Breathe Right nasal strip, which is
a nonprescription single-use disposable device that can reduce or eliminate
snoring by improving nasal breathing and temporarily relieve nasal
congestion. Broad consumer marketing of the Breathe Right nasal strip began
in September 1994. Net sales of the Breathe Right nasal strip grew from $2.8
million in 1994 with a pre-tax loss of $2.6 million, to $48.6 million in 1995
with pre-tax income of $13.0 million. According to data collected by
Information Resources, Inc., Breathe Right nasal strips became a leading
sales volume producer during 1995 in the over-the-counter ("OTC") cough, cold
and allergy section of drug, grocery and mass merchant stores nationwide.
The Breathe Right nasal strip has 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 Company has received 510(k)
clearances from the U.S. Food and Drug Administration (the "FDA") to market
the Breathe Right nasal strip for improvement of nasal breathing (October
1993), reduction or elimination of snoring (November 1995) and temporary
relief of nasal congestion (February 1996). The Company believes that the
Breathe Right nasal strip is the only non-prescription product in wide retail
distribution that the FDA has cleared to market for the reduction or
elimination of snoring.
The Company primarily markets the Breathe Right nasal strip to people who
snore and to people who suffer from nasal congestion and impaired nasal
breathing. Market research commissioned by the Company indicates that
approximately 78% of all households in the U.S. have a snorer and 37 million
adults in the U.S. snore regularly. Clinical studies have shown that the
Breathe Right nasal strip is effective in reducing or eliminating snoring and
may improve the quality of sleep. The market for the treatment of nasal
congestion or impaired nasal breathing includes people who suffer from (i)
the common cold, (ii) allergies and sinus disease (approximately 35 million
people in the U.S.) and (iii) deviated nasal septum or other structural
deficiencies (approximately 12 million people in the U.S.). The Company
believes that the Breathe Right nasal strip, as either an alternative or
adjunct to decongestant drugs (including nasal sprays and oral
decongestants), can in many cases benefit those people by temporarily
relieving nasal congestion. Additional markets for the Breathe Right nasal
strip include the professional medical market for use by patients receiving
various treatments for sleep apnea and chronic lung disease and the athletic
market.
The Company markets the Breathe Right nasal strip to OTC consumers through
advertising in national publications and on nationally syndicated radio
programs and network and cable television. The Company's advertising
currently focuses on the snoring application. The Company plans to advertise
the nasal congestion application in the fall of 1996 coincident with the cold
season. The Company's marketing efforts are supported by high profile
spokespersons such as Jerry Rice, Rush Limbaugh and Paul Harvey. A research
study commissioned by the Company indicates that approximately 5% of
households in the U.S. include a person who has tried Breathe Right nasal
strips, and research data collected by a nationally recognized consumer
market research firm indicates that approximately 28% of those people who
tried Breathe Right nasal strips purchased additional product.
The Breathe Right nasal strip is currently sold over-the-counter in stores
which account for approximately 98% of total drug store sales volume, 99% of
total mass merchant sales volume and 71% of total grocery store sales volume
in the U.S. The Breathe Right nasal strip is typically located in the cough,
cold and allergy section of stores next to nasal sprays or oral
decongestants. The Company believes that the Breathe Right nasal strip is
priced competitively with decongestant drugs on a per dose basis. The Company
also distributes the Breathe Right nasal strip to athletic stores and mass
merchant sports departments in the U.S. In August 1995, the Company signed an
international distribution agreement with 3M Company to market Breathe Right
nasal strips outside of the U.S. and Canada.
The Company's strategy for increasing Breathe Right nasal strip sales and
expanding its product line includes (i) expanding consumer awareness and
trial of the Breathe Right nasal strip through increased advertising, (ii)
encouraging repeat usage through increased distribution and promotion of
higher count boxes of strips, (iii) expanding market presence in
international markets through the Company's relationship with 3M Company,
(iv) expanding the Company's presence in the professional medical and
athletic markets through increased marketing and distribution and (v)
leveraging the Breathe Right name and the Company's distribution channels by
introducing new products.
The Company has an exclusive, worldwide license to manufacture and market the
Breathe Right nasal strip. The licensor of the Breathe Right nasal strip has
received notice of allowance from the U.S. Patent and Trademark Office on two
of its pending patent applications covering the Breathe Right nasal strip
technology, including one that broadly covers the basic product, and has
obtained one patent and received notice of allowance of an additional pending
patent application covering structural changes to the product.
The Company has entered into several agreements to market or license certain
new medical consumer products that are in various stages of being evaluated
and tested. These products include an analgesic pain patch, an externally
applied gel which may reduce the inhalation of airborne particles such as
pollen, and products which may act as smoking and appetite suppressants.
The mailing address of the Company is P.O. Box 39802, Minneapolis, Minnesota
55439, and its telephone number is 612-820-6696.
THE OFFERING
Common Stock offered: 1,375,000 shares
By the Company
By the Selling Stockholders 125,000 shares
Total 1,500,000 shares
Common Stock outstanding after the 18,851,052 shares (1)
Offering
Use of proceeds To provide working capital for
marketing, advertising and
promotional expenses; to finance the
purchase and construction of
equipment, plant and machinery to
develop supplementary in-house
manufacturing capability; to expand
and upgrade management information
systems; and for other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol CNXS
(1) Assumes the exercise of outstanding stock options to purchase 40,000
shares of Common Stock to be sold by certain Selling Stockholders in
this offering. Does not include (i) 1,726,659 shares of Common Stock
issuable under the Company's Stock Option Plans and Employee Stock
Purchase Plan, of which 1,480,100 shares were subject to outstanding
options at March 1, 1996 and (ii) 87,500 shares of Common Stock
issuable upon exercise of outstanding warrants. See "Principal and
Selling Stockholders" and "Description of Capital Stock."
SUMMARY FINANCIAL DATA (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 93 $ 2,798 $48,632
Costs of goods sold 49 1,790 17,555
Gross profit 44 1,008 31,077
Operating expenses 440 3,766 18,679
Operating income (loss) (396) (2,758) 12,398
Other income, net 97 200 572
Income (loss) from continuing operations before (299) (2,558) 12,970
income taxes
Income tax benefit -- -- 341
Income (loss) from continuing operations (299) (2,558) 13,311
Loss from operations of discontinued sleep division (1,132) (309) (460)
Gain on sale of sleep division -- -- 1,226
Net income (loss) $(1,431) $(2,867) $14,077
Net income (loss) per common and common equivalent
share:
From continuing operations (.02) (.16) .72
From discontinued operations (.09) (.02) .04
Net income (loss) per share $ (.11) $ (.18) $ .76
Weighted average number of common and common
equivalent shares outstanding 13,145 15,755 18,376
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
ACTUAL AS ADJUSTED (2)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $25,855 $51,546
Total assets 32,341 58,032
Stockholders' equity 26,885 52,576
</TABLE>
(1) Until June 1995, the Company manufactured and marketed diagnostic
devices for sleep disorders. This line of business was sold in June
1995 and is reported as discontinued operations.
(2) As adjusted to reflect the sale of 1,375,000 shares of Common Stock
offered by the Company hereby (assuming a public offering price of
$20.00 per share), the exercise of outstanding stock options to
purchase 40,000 shares of Common Stock and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
relating to the business of the Company before making an investment. This
Prospectus, including the information incorporated by reference herein,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ significantly from those projected in the
forward-looking statements as a result, in part, of the risk factors set
forth below. In connection with the forward-looking statements which appear
in these disclosures, prospective purchasers of the Common Stock offered
hereby should carefully review the factors set forth in this Prospectus under
"Risk Factors."
RELIANCE ON SINGLE PRODUCT; SUSTAINABILITY OF CURRENT SALES AND PROFIT LEVELS
The Company's revenue and profitability depend on sales of Breathe Right
nasal strips. A reduction in demand for the Breathe Right nasal strip would
have a material adverse effect on the Company's business, results of
operations, financial condition and future prospects. The Company has limited
operating experience with the Breathe Right nasal strip, which the Company
began marketing widely in September 1994. Accordingly, there can be no
assurance that sales of the Breathe Right nasal strip in 1995 represent
long-term consumer acceptance of the product, or that the increase in Breathe
Right nasal strip sales from $2.8 million in 1994 to $48.6 million in 1995 is
indicative of future growth rates for sales of the product. The
sustainability of current levels of Breathe Right nasal strip sales and
profitability and the future growth of such sales and profitability, if any,
will depend on, among other factors: continued consumer trial of the product;
generation of repeat consumer sales; further penetration of the OTC market;
penetration of the professional medical, athletic and other new markets;
competition from substitute products; effective consumer advertising for the
Breathe Right nasal strip; and maintenance of current product pricing. There
can be no assurance that the Company will maintain or increase its current
level of Breathe Right nasal strip sales or profits in future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success will depend, to a large extent, on the enforceability
and comprehensiveness of the patents on the Breathe Right nasal strip
technology. The licensor ("Licensor") of the Breathe Right nasal strip and
related technology, for which the Company is licensee, has received notice of
allowance from the U.S. Patent and Trademark Office on two of its pending
patent applications covering the Breathe Right nasal strip. The Licensor has
also obtained one patent and received notice of allowance of an additional
pending patent application covering structural changes to the product. One
further patent application is pending. The Licensor has also obtained patent
protection on the Breathe Right nasal strip in two foreign countries and has
applications pending which seek patent protection in 23 additional countries.
There may be some countries in which the Licensor is unable to obtain patent
protection. Failure to obtain patent protection in a number of foreign
countries may adversely affect the ability of the Company and 3M Company
("3M") to achieve a significant level of foreign sales. The Company is aware
of several nasal strips that currently compete with the Breathe Right nasal
strip, some of which may have patent applications pending. There can be no
assurance that any patent issued will not be challenged, invalidated or
circumvented or that the rights granted under any patent will provide
significant benefits to the Company. Furthermore, there can be no assurance
that the Company's products will not infringe, or be alleged to infringe, the
proprietary rights of others. In order to enforce any patents issued or
defend against infringement claims, 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 materially and adversely affect the Company's business. In addition to
patent protection, the Company also attempts to protect its trademarks
through registration, proper use and litigation. The Company also attempts to
protect its proprietary information as trade secrets by taking security
precautions. There can be no assurance that these steps will prevent
misappropriation of the Company's proprietary rights or that third parties
will not independently develop functionally equivalent or superior
non-infringing technology. See "Business -- Patents, Trademarks and
Proprietary Rights," "-- Competition" and "-- Litigation."
UNCERTAINTY OF ABILITY TO PENETRATE MARKETS
The Company's future success will depend, in part, on its ability to market
the Breathe Right nasal strip to, and achieve penetration of, the
professional medical market and athletic market. The Company believes its
ability to penetrate these markets would be enhanced to the extent it is able
to demonstrate the efficacy of the Breathe Right nasal strip for applications
in these markets, including use by patients in conjunction with treatments
for sleep apnea and chronic lung disease, and by people to improve endurance
during athletic activities. The Company must conduct additional clinical
studies prior to submitting requests for FDA clearances to market and label
the product for these and other applications. There can be no assurance that
the Company will receive such clearances. In addition, the Company may be
required to develop new distribution channels to enter the professional
medical market. There can be no assurance that the Company can achieve or
maintain significant market penetration in those markets. See "Business --
Markets" and "-- Government Regulation."
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth that has
placed, and could continue to place, a significant strain on the Company's
management. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to attract, train, motivate, manage and retain key
employees. Management's inability to manage its growth effectively could have
a material adverse effect on the Company's business, results of operations
and financial condition. See "Management."
DEPENDENCE ON 3M TO PENETRATE INTERNATIONAL MARKETS; UNCERTAINTY OF
INTERNATIONAL MARKETS
In August 1995, the Company entered into an agreement with 3M pursuant to
which 3M was granted the exclusive right to market the Breathe Right nasal
strip outside of the U.S. and Canada. 3M is responsible for obtaining all
necessary regulatory approvals outside of the U.S. and has complete
discretion as to determining which markets to enter and the timing and manner
of entering those markets. Because 3M has only recently begun to introduce
Breathe Right nasal strips in several international markets, demand and
market acceptance for the product is subject to a high level of uncertainty.
There can be no assurance that 3M will be able to successfully penetrate the
international markets. In addition, there are a number of risks inherent in
the Company's international business activities, including the potential
impact of currency fluctuations on product demand, potential unexpected
changes in regulatory requirements and tariffs and other trade barriers. See
"Business -- International Distribution."
COMPETITION
The Company believes that the market for decongestant products is highly
competitive, while the market for products which reduce or eliminate snoring
may become more competitive in the future. The Company's competition in the
OTC market for decongestant products and other cold, allergy and sinus relief
products consists primarily of pharmaceutical products and products similar
to the Breathe Right nasal strip. Products that compete with the Breathe
Right nasal strip in the OTC market for snoring remedies consist primarily of
internal nasal dilators and products similar to the Breathe Right nasal
strip. Many of the manufacturers of the products that compete with the
Breathe Right nasal strip have significantly greater financial and operating
resources than the Company. In addition, these competitors may develop
products which are able to circumvent the Company's patents. See "Business --
Competition."
UNCERTAINTY OF NEW PRODUCTS
The Company's future growth depends, in part, on its ability to license or
purchase new products and to market those products successfully. The Company
has contractual arrangements to evaluate and market certain new medical
consumer products, including an analgesic pain patch, an external gel
designed to reduce the inhalation of airborne particles such as pollen, and
an inhalant for appetite and smoking suppression. In order to develop and
introduce these and future products, the Company may have to invest
significant resources prior to commercial sales of these products in license
and purchase expenses, clinical trial costs, FDA and other regulatory
expenses and marketing and sales expenses. The Company's new products
generally will require FDA and other regulatory clearance or authorization
prior to marketing. The failure to obtain such clearances or authorizations
could prevent or significantly delay the introduction of the new products.
There can be no assurance that such clearances or authorizations will be
obtained or that, if obtained, new products introduced by the Company will
achieve market acceptance. There can be no assurance that additional new
products will be available to the Company for license or purchase on
favorable terms, if at all. See "Business -- Potential Line Extensions and
New Products."
DEPENDENCE ON CONTRACT MANUFACTURERS
Substantially all of the production of the Breathe Right nasal strip is
performed by contract manufacturers according to the Company's
specifications. Although the Company currently plans to expand internal
manufacturing capabilities, the Company expects to continue to be primarily
dependent upon such manufacturers for the foreseeable future. The Company is
dependent upon these manufacturers for timely and cost-effective
manufacturing services. In the event that the Company is unable to obtain
manufacturing, or obtain such manufacturing on commercially reasonable terms,
it may not be able to manufacture its products on a timely and competitive
basis. See "Use of Proceeds" and "Business -- Manufacturing and Operations."
DEPENDENCE ON SINGLE SOURCE SUPPLIER
The Company currently obtains major components of the Breathe Right nasal
strip only from 3M. The Company has entered into a multi-year material supply
agreement with 3M for these components. Although similar materials are
currently available from other suppliers, the Company believes that 3M's
materials are of superior quality. Disruption or termination of this vendor
relationship could have a material adverse effect on the Company's
operations. 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, if and as required in the future, could adversely
affect the Company's operations until new sources of these components become
available, if at all. See "Business -- Manufacturing and Operations."
POTENTIAL PRODUCT LIABILITY
Although there are currently no product liability claims against the Company,
product liability claims brought against the Company relating to its Breathe
Right nasal strip or any new products of the Company in the future could have
a material adverse effect upon its financial condition. The Company maintains
product liability insurance in amounts which it believes are sufficient, but
there is no assurance that the current coverage is adequate to cover the
Company's product liability risks, nor can there be any assurance that it
will be able to maintain or obtain substitute insurance on commercially
acceptable terms upon the expiration of its current coverage. Conditions in
the liability insurance industry may make it impossible or extremely
expensive for the Company to maintain insurance protection on its products in
the future.
REGULATION
As a manufacturer of medical products, the Company is subject to the laws and
regulations administered by the FDA which include, but are not limited to,
regulations relating to good manufacturing practice, human investigations,
investigational device requirements, premarket requirements and labeling.
While the Company has obtained FDA clearance to market the Breathe Right
nasal strip for certain applications, there is no assurance that the Company
will obtain FDA clearance for promotion and advertising of (i) the Breathe
Right nasal strip for additional applications, or (ii) for products the
Company is currently developing or may develop in the future. The Company has
begun to conduct clinical studies on certain applications for the Breathe
Right nasal strip and certain of the Company's new products, and it will need
to conduct clinical studies on its other new products prior to submitting
them to the FDA for clearance to market. The process of obtaining marketing
clearance from the FDA for these additional applications and new products can
be costly and time consuming, and there can be no assurance that such
clearance will be granted on a timely basis, if at all. The failure to obtain
additional FDA clearances may adversely affect the Company's ability to sell
the Breathe Right nasal strip to certain markets and prohibit the sale of new
products. Furthermore, the passage of future legislation with regard to
manufacturing and marketing of medical devices is possible. The effect of
such legislation may be to increase the cost and time necessary to begin
marketing new products, and may adversely affect the Company in other
respects not presently foreseeable. Even if new legislation is not
forthcoming, the FDA may nevertheless seek to exercise greater control over
medical devices. 3M will also need to obtain regulatory approvals in each of
the foreign countries in which it will market the Breathe Right nasal strip.
There can be no assurance that 3M will receive the necessary foreign
regulatory approvals for the product on a timely basis, or at all. See
"Business -- Potential Line Extensions and New Products" and "-- Government
Regulation."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock following this offering may be highly
volatile. The market price of the Common Stock has fluctuated significantly
since the fourth quarter of 1994 in response to announcements regarding the
Breathe Right nasal strip. Factors such as variations in the Company's
revenues, earnings and cash flow; failure to meet market expectations; and
announcements of new products or FDA clearances to market new products could
cause the market price of the Common Stock to fluctuate substantially. In
addition, the stock markets have experienced price and volume fluctuations,
resulting in changes in the market prices of the stocks of many companies
which may not have been directly related to the operating performance of
those companies. Such broad market fluctuations may adversely affect the
market price of the Common Stock following this offering. See "Price Range of
Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the market price of the Common Stock.
After this offering, the Company's officers and directors and the Selling
Stockholders will beneficially own 2,045,096 shares, or 10.8%, of the
Company's outstanding Common Stock. The Selling Stockholders and the
Company's officers and directors have agreed that they will not sell or
otherwise dispose of an aggregate of 918,536 shares of Common Stock for a
period of 90 days following the date of this Prospectus without the prior
written consent of Piper Jaffray Inc. The remaining 1,126,560 shares are
beneficially owned by Perkins Capital Management, Inc., an investment advisor
registered under the Investment Advisors Act of 1940, as amended, whose
controlling shareholder, Richard W. Perkins, is a director of the Company.
Mr. Perkins has advised the Company that he is unable to restrict his ability
to sell any shares of Common Stock for which he has investment authority as
an investment adviser on behalf of clients. Mr. Perkins, however, has agreed
that he will not sell or otherwise dispose of any shares that are not subject
to his responsibilities as a registered investment advisor for a period of 90
days following the date of this Prospectus. After the expiration of such
period, such shares of Common Stock will be eligible for sale subject to the
conditions of Rule 144 under the Securities Act of 1933. See "Principal and
Selling Stockholders" and "Underwriting."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Board of Directors is authorized to issue up to 7,483,589 undesignated
shares of Preferred Stock and, without any action by the Company's
stockholders, to establish the rights, preferences and privileges of such
shares, including dividend, liquidation and voting rights. The issuance of
additional shares having preferential rights could adversely affect the
voting power and other rights of holders of the Company's Common Stock. The
Company has adopted a stockholders' Rights Plan pursuant to which each share
of Common Stock has one Preferred Stock Purchase Right attached that entitles
the holder to buy the Company's Series A Junior Participating Preferred
Stock. In addition, the Company will be subject to the provisions of Section
203 of the General Corporation Law of the State of Delaware, which places
restrictions on business combinations with persons deemed to be "interested
stockholders." Any or all of the provisions or factors described above may
have the effect of discouraging a takeover proposal or tender offer not
approved by management and the Board of Directors of the Company, and could
result in stockholders who may wish to participate in such a proposal or
tender offer receiving less for their shares than otherwise might be
available in the event of a takeover attempt. See "Description of Capital
Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered hereby are estimated to be $25,691,000 ($28,195,000 if the
Underwriters' over-allotment option is exercised in full) after deducting the
estimated underwriting discount and estimated offering expenses. The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders, other than proceeds of approximately $66,000 from the exercise
of stock options to purchase 40,000 shares of Common Stock.
The Company's primary use of the net proceeds will be to provide working
capital for marketing, advertising and promotion expenses; to finance the
purchase and construction of equipment, plant and machinery to develop
certain supplementary in-house manufacturing capability; to expand and
upgrade management information systems; and for other general corporate
purposes. The Company may also use a portion of the proceeds to acquire
additional new products. Except as disclosed in this Prospectus, the Company
does not currently have any agreements or understandings for the acquisition
of additional new products, and there can be no assurance that any such
acquisitions will be made. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds of this
offering in short-term, interest bearing, investment-grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has been traded under the symbol "CNXS" on
the Nasdaq National Market since April 8, 1994 and was traded on the Nasdaq
SmallCap Market prior to April 8, 1994. The following table sets forth the
high and low bid prices of the Company's Common Stock for the periods for
which it was traded on the Nasdaq SmallCap Market and sets forth the high and
low last sale prices for the periods for which it has been traded on the
Nasdaq National Market. The Nasdaq SmallCap Market bid quotations represent
interdealer prices, without retail mark-ups, mark-downs or commissions, and
may not necessarily represent actual transactions. The prices prior to June
23, 1995 have been adjusted to reflect the Company's two-for-one stock split.
HIGH LOW
1994
First Quarter $ 4-3/4 $ 2-15/16
Second Quarter 4 2-5/8
Third Quarter 4-1/16 2-1/4
Fourth Quarter 4-13/16 2-7/8
1995
First Quarter $ 9-5/8 $ 4-7/16
Second Quarter 19 9-15/16
Third Quarter 24-1/4 13-1/8
Fourth Quarter 17-3/8 9-1/2
1996
First Quarter (through March 11, 1996) $20-3/4 $15-1/2
On March 11, 1996, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $20.00. As of March 1, 1996, there were
approximately 2,000 owners of record of Common Stock.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its operations and does
not anticipate paying any cash dividends in the foreseeable future. The
payment of dividends, if any, in the future will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, restrictions in future financing agreements, the
general financial condition of the Company and general business
considerations.
CAPITALIZATION
The following table sets forth as of December 31, 1995, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale by the Company of the 1,375,000 shares of
Common Stock offered hereby (assuming a public offering price of $20.00 per
share) and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
ACTUAL AS ADJUSTED (1)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt $ -- $ --
Stockholders' equity:
Common Stock, $.01 par value: 50,000,000 shares 174 188
authorized; 17,387,852 shares issued and outstanding;
18,802,852 shares issued and outstanding as adjusted
(2)
Additional paid-in capital 25,828 51,505
Retained earnings 883 883
Total stockholders' equity 26,885 52,576
Total capitalization $26,885 $52,576
</TABLE>
(1) Assumes the exercise of outstanding stock options to purchase 40,000
shares of Common Stock to be sold by certain Selling Stockholders in
the offering. See "Principal and Selling Stockholders."
(2) Does not include (i) 1,726,659 shares of Common Stock issuable under
the Company's Stock Option Plans and Employee Stock Purchase Plan, of
which 1,480,100 shares were subject to outstanding options at March 1,
1996, and (ii) 87,500 shares of Common Stock issuable upon exercise of
outstanding warrants. See "Description of Capital Stock."
SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1995 are derived from the
financial statements of the Company which have been audited by KPMG Peat
Marwick LLP, independent auditors. The financial statements for each of the
fiscal years in the three-year period ended December 31, 1995, and the report
thereon, are included elsewhere in this Prospectus. The following selected
financial data should be read in conjunction with the Company's financial
statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1991 1992 1993 1994 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (1):
Net sales $ -- $ -- $ 93 $ 2,798 $48,632
Cost of goods sold -- -- 49 1,790 17,555
Gross profit -- -- 44 1,008 31,077
Operating expenses:
Marketing and selling -- -- -- 3,100 16,695
General and administrative -- -- 440 666 1,984
Total operating expenses -- -- 440 3,766 18,679
Operating income (loss) -- -- (396) (2,758) 12,398
Other income, net -- -- 97 200 572
Income (loss) from continuing -- -- (299) (2,558) 12,970
operations before income taxes
Income tax benefit -- -- -- -- 341
Income (loss) from continuing -- -- (299) (2,558) 13,311
operations
Loss from operations of (840) (808) (1,132) (309) (460)
discontinued sleep division
Gain on sale of sleep division -- -- -- -- 1,226
Net income (loss) $ (840) $ (808) $(1,431) $(2,867) $14,077
Net income (loss) per common and
common equivalent share:
From continuing operations -- -- (.02) (.16) .72
From discontinued operations (.08) (.07) (.09) (.02) .04
Net income (loss) $ (.08) $ (.07) $ (.11) $ (.18) $ .76
Weighted average number of common
and common equivalent shares
outstanding 10,065 12,276 13,145 15,755 18,376
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1991 1992 1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(1):
Working capital $3,233 $5,201 $3,717 $10,790 $25,855
Total assets 3,233 5,201 3,872 11,613 32,341
Stockholders' equity 3,233 5,201 3,872 11,207 26,885
</TABLE>
(1) Until June 1995, the Company manufactured and marketed diagnostic devices
for sleep disorders. This line of business was sold in June 1995 and is
reported as discontinued operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
should be read in conjunction with the Company's audited financial statements
and notes thereto appearing elsewhere in this Prospectus. In the opinion of
the Company's management, the quarterly unaudited information set forth below
has been prepared on the same basis as the audited financial information, and
includes all adjustments (consisting only of normal, recurring adjustments)
necessary to present this information fairly when read in conjunction with
the Company's financial statements and notes thereto.
OVERVIEW
The Company was founded in 1982. From 1987 until 1995, the Company designed,
manufactured and marketed computer-based diagnostic devices for sleep
disorders. In 1995, the Company focused on the Breathe Right nasal strip and
divested itself of the assets related to its sleep disorders business. Unless
otherwise noted, the following discussion of financial condition and results
of operations relate only to continuing operations of the Company.
The Company's revenues are derived from the manufacture and sale of the
Breathe Right nasal strip. Revenue from sales is recognized when earned,
generally at the time products are shipped. The Company obtained the 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 which improves nasal breathing.
In September 1994, the Company launched its consumer marketing program which
was enhanced by broad media coverage of the use of Breathe Right nasal strips
by professional football players. At the same time, a number of radio and
television personalities provided unsolicited endorsements of the product on
national radio and television.
In the first quarter of 1995, a rapid increase in demand for the product
resulted in the Company being unable to secure delivery of sufficient raw
materials to avoid large back orders and out of stock situations at the
retail level. It took until the end of the second quarter of 1995 for the
Company to eliminate the back orders and to begin building inventory.
During 1995, the Company continued its marketing efforts and also focused on
expanding its distribution network both domestically and internationally. In
August 1995, the Company signed an exclusive international distribution
agreement with 3M to market Breathe Right nasal strips outside the U.S. and
Canada. At the end of 1995, Breathe Right nasal strips were available in
stores which account for approximately 98% of total drug store sales volume,
99% of total mass merchant sales volume and 71% of total grocery store sales
volume in the U.S.
In November 1995, the Company received FDA clearance to market the Breathe
Right nasal strip for the reduction or elimination of snoring and began
marketing programs emphasizing the snoring benefits of the product. In
February 1996, the Company received FDA clearance to market the Breathe Right
nasal strip for the temporary relief of nasal congestion and thereafter
launched a media program to increase consumer awareness of the benefits of
the product for this application.
OPERATING RESULTS
The table below sets forth certain selected financial information of the
Company for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1994 1994 1994 1994 1994
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 344 $ 529 $ 682 $ 1,243 $ 2,798
Cost of goods sold 248 364 368 809 1,790
Gross profit 96 165 314 434 1,008
Operating expenses:
Marketing and selling 387 517 839 1,357 3,100
General and administrative 140 182 184 160 666
Total operating expenses 527 699 1,023 1,517 3,766
Operating income (loss) (431) (534) (709) (1,083) (2,758)
Other income, net (3) 60 78 64 200
Income (loss) from continuing
operations before income taxes $(434) $(474) $ (631) $(1,019) $(2,558)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1995 1995 1995 1995 1995
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $7,459 $18,818 $10,288 $12,066 $48,632
Cost of goods sold 2,850 7,072 3,513 4,119 17,555
Gross profit 4,609 11,746 6,775 7,947 31,077
Operating expenses:
Marketing and selling 2,140 3,788 4,836 5,931 16,695
General and administrative 300 384 642 657 1,984
Total operating expenses 2,440 4,172 5,478 6,588 18,679
Operating income (loss) 2,169 7,574 1,297 1,359 12,398
Other income, net 84 124 214 149 572
Income (loss) from continuing
operations before income taxes $2,253 $ 7,698 $ 1,511 $ 1,508 $12,970
</TABLE>
The table below sets forth the percentage of net sales represented by certain
items included in the Company's statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1994 1994 1994 1994 1994
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 72.1 68.8 54.0 65.1 63.9
Gross profit 27.9 31.2 46.0 34.9 36.1
Operating expenses:
Marketing and selling 112.5 97.7 123.0 109.1 110.8
General and administrative 40.7 34.4 27.0 12.9 23.8
Total operating expenses 153.2 132.1 150.0 122.0 134.6
Operating income (loss) (125.3) (100.9) (104.0) (87.1) (98.5)
Other income, net (0.9) 11.3 11.5 5.1 7.1
Income (loss) from continuing
operations before income taxes (126.2)% (89.6)% (92.5)% (82.0)% (91.4)%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,
1995 1995 1995 1995 1995
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 38.2 37.6 34.2 34.1 36.1
Gross profit 61.8 62.4 65.8 65.9 63.9
Operating expenses:
Marketing and selling 28.7 20.1 47.0 49.2 34.3
General and administrative 4.0 2.1 6.2 5.4 4.1
Total operating expenses 32.7 22.2 53.2 54.6 38.4
Operating income (loss) 29.1 40.2 12.6 11.3 25.5
Other income, net 1.1 0.7 2.1 1.2 1.2
Income (loss) from continuing
operations before income taxes 30.2% 40.9% 14.7% 12.5% 26.7%
</TABLE>
1995 COMPARED TO 1994
NET SALES. Net sales increased to $48.6 million for 1995 from $2.8 million
for 1994. Breathe Right nasal strip sales increased as a result of expanded
consumer advertising and an increase in the number of retail outlets selling
the product. In the first quarter of 1995, a rapid increase in demand for the
product resulted in the Company being unable to avoid large back orders and
out of stock situations. As a result, net sales for the three months ended
June 30, 1995 included approximately $7 million of back orders received in
the prior quarter. The Company believes that much of the product sold during
the nine months ended September 30, 1995 represented an increase in inventory
levels at existing and new retail outlets and initial stocking of inventory
of additional box and size configurations of the product. As a result, the
Company does not expect that the quarterly sales patterns for the first three
quarters of 1996 will be directly comparable to the first three quarters of
1995.
GROSS PROFIT. Gross profit was $31.1 million for 1995 compared to $1.0
million for 1994. Gross profit as a percentage of net sales improved to 63.9%
for 1995 and 65.9% for the three months ended December 31, 1995 compared to
36.1% for 1994, primarily as a result of efficiencies realized from the
higher level of Breathe Right nasal strip sales and cost reduction programs
initiated by the Company. The Company is continuing efforts to reduce the
manufacturing costs of the product and improve gross profit margins on
domestic sales. The Company obtains lower gross profit margins on
international sales because the Company sells product to 3M at a price lower
than its sales price in domestic markets. In connection with these
international sales, 3M is responsible for substantially all of the operating
expenses and a portion of the packaging costs.
MARKETING AND SELLING EXPENSES. Marketing and selling expenses were $16.7
million for 1995 compared to $3.1 million for 1994. This increase resulted
primarily from the marketing expenses associated with a full year of consumer
advertising for the Breathe Right nasal strip. The Company anticipates that
the total dollar amount spent on marketing and selling will increase in 1996,
in part as a result of increased television advertising. Marketing and
selling expenses as a percentage of net sales decreased to 34.3% in 1995 from
110.8% in 1994 as a result of the higher level of sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$2.0 million for 1995 compared to $666,000 for 1994. This increase resulted
from the additional personnel and systems required to support growth of the
Breathe Right nasal strip business. The Company intends to increase
expenditures for the development of new products and on information systems
personnel during 1996. General and administrative expenses as a percentage of
net sales decreased to 4.1% in 1995 from 23.8% in 1994 primarily as a result
of the higher level of sales.
OTHER INCOME, NET. Other income, net was $572,000 for 1995 compared to
$200,000 for 1994, resulting from investment of funds from the sale of the
Company's sleep disorder diagnostic products business.
INCOME TAX BENEFIT. The income tax benefit for 1995 of $341,000 resulted from
the recognition of the benefit of net operating losses and credit carry
forwards from prior years and the elimination of the valuation allowance on
reinstatement of deferred tax assets due to the Company's expected future
taxable income. There are no net operating loss carry forwards available for
future years.
1994 COMPARED TO 1993
NET SALES. Net sales for 1994 were $2.8 million compared to $93,000 for 1993.
During the fourth quarter of 1994, sales of the Breathe Right nasal strip
increased significantly due to an increase in consumer awareness of the
product from its use by professional athletes in several sports. In addition,
the Company commenced national consumer advertising in newspapers and
magazines and expanded its distribution network.
GROSS PROFIT. Gross profit for 1994 was $1.0 million compared to $44,000 for
1993. The increase in gross profit was due to increased sales of the Breathe
Right nasal strip in 1994.
MARKETING AND SELLING EXPENSES. Marketing and selling expenses related to the
Breathe Right nasal strip were $3.1 million in 1994 compared to no expenses
in 1993. These expenses resulted from the marketing expenses associated with
establishing distribution channels, trade advertisements, consumer
advertisements, and other product roll-out items for the Breathe Right nasal
strip.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
1994 were $666,000 compared to $440,000 for 1993. This increase resulted from
additional personnel and systems required to support the Breathe Right nasal
strip.
OTHER INCOME, NET. Other income, net was $200,000 in 1994 compared to $97,000
in 1993 reflecting the increased cash available for investment and higher
interest rates during 1994.
SEASONALITY
The Company began marketing the Breathe Right nasal strip on a broad scale in
September 1994. Given the short time frame since introduction of the Breathe
Right nasal strip and the rapid revenue growth experienced by the Company in
1995, it is difficult to ascertain what, if any, impact seasonality has had
on sales of the Breathe Right nasal strip during 1995. The Company believes
that sales of the product for the temporary relief of nasal congestion may be
higher during the fall and winter seasons because of increased use during the
cold season. If such seasonality occurs, the Company expects its net sales
and operating income to be relatively higher in the first and fourth
quarters. In November 1995, the Company received FDA clearance to market the
Breathe Right nasal strip for the reduction or elimination of snoring. The
Company believes that sales of the product for the snoring application may be
marginally higher during the allergy seasons, which occur during the second
and third quarters. Accordingly, the Company is unable to predict the extent
to which its business will be affected by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash, cash equivalents and marketable
securities of $10.5 million, working capital of $25.9 million and a $1.25
million line of credit with a bank, subject to certain borrowing base
restrictions.
OPERATING ACTIVITIES. The Company used cash for operations of approximately
$1.5 million for 1995 compared with a use of cash of $4.2 million for 1994.
The improved cash flow was due to an increase in income from continuing
operations offset by increases in accounts receivable and inventories
resulting from higher sales levels.
INVESTING ACTIVITIES. The Company purchased $384,000 of property and
equipment in 1995 compared to $229,000 in 1994 to support increases in sales
of the Breathe Right nasal strip. Capitalized patent and trademark costs were
approximately $73,000 in 1995 compared to $91,000 in 1994.
The Company currently expects to spend up to an aggregate of $7.5 million on
capital expenditures in 1996 and 1997 in order to, among other things,
supplement its in-house manufacturing capability and to expand and upgrade
management information systems. The Company has not yet finalized its plans
for these expenditures or received bids on these projects. The final amount
of the expenditures as well as the timing of the expenditures may be subject
to change.
FINANCING ACTIVITIES. In June 1995, the Company sold all the assets of its
sleep disorder diagnostic products business. Proceeds from the sale included
$5.0 million cash and a note receivable of $596,000 that was collected later
in 1995. The Company also received $1.1 million in 1995 from the exercise of
stock options and warrants. In 1994 the Company completed a public offering
of common stock for $9.7 million and received $507,000 from the exercise of
stock options and warrants.
At December 31, 1995, the Company had a $1.25 million bank line of credit.
Borrowings are due on demand, bear interest at 1% over a defined base rate
(8.5% at December 31, 1995), are secured by substantially all assets of the
Company and are subject to certain restrictive covenants. Borrowings are
limited to the lesser of $1.25 million or 75% of eligible accounts
receivable. There were no borrowings against this line of credit as of
December 31, 1995. The credit line expires on March 31, 1996.
The Company believes that the proceeds from this offering, together with its
existing funds and funds generated from operations, will be sufficient to
support its planned operations for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121). SFAS No. 121 prescribes accounting
and reporting standards when circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company adopted SFAS No. 121 during
1995 and it had no impact on the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. In 1996, the Company
intends to adopt the disclosure provisions of this Statement while continuing
to account for options and other stock-based compensation using the intrinsic
value based method.
BUSINESS
BREATHE RIGHT NASAL STRIPS
The Company manufactures and markets the Breathe Right nasal strip, which is
a nonprescription single-use disposable device that can reduce or eliminate
snoring by improving nasal breathing and temporarily relieve nasal
congestion. Broad consumer marketing of the Breathe Right nasal strip began
in September 1994. Net sales of the Breathe Right nasal strip grew from $2.8
million in 1994 with a pre-tax loss of $2.6 million, to $48.6 million in 1995
with pre-tax income of $13.0 million. According to data collected by
Information Resources, Inc., Breathe Right nasal strips became a leading
sales volume producer during 1995 in the OTC cough, cold and allergy section
of drug, grocery and mass merchant stores nationwide.
The Breathe Right nasal strip has 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 Company has received 510(k)
clearances from the FDA to market the Breathe Right nasal strip for
improvement of nasal breathing (October 1993), reduction or elimination of
snoring (November 1995) and temporary relief of nasal congestion (February
1996). The Company believes that the Breathe Right nasal strip is the only
non-prescription product in wide retail distribution that the FDA has cleared
to market for the reduction or elimination of snoring.
The Breathe Right nasal strip is offered in three sizes (junior/small,
small/medium and medium/large) to accommodate the range of nose sizes from a
child's nose to an adult's nose. The Breathe Right nasal strip is packaged
for the OTC market in quantities of 10 or 30 strips per box and for sporting
goods retailers in quantities of eight strips per box. Product is sold to
retailers or wholesalers in cases of 24 or 96 boxes per size or in a variety
of display configurations ranging from 12 to 60 boxes each. 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
of $4.99 for a box of ten, $11.99 for a box of 30 and $4.99 for an eight
count sports pack that includes a plastic case to protect the strips.
MARKETS
The Company currently sells the Breathe Right nasal strip in the consumer OTC
market, the professional medical market and the athletic market. Because a
substantial number of people may be included in more than one market, the
number of potential customers for the Breathe Right nasal strip does not
equal the aggregate population of these markets.
CONSUMER OTC MARKET. The nose accounts for half of the total airway
resistance involved in the respiratory system (i.e., half of the energy
required for breathing). If the effort to breathe through the nose during
sleep is excessive, the person will resort to mouth breathing, promoting
snoring, dry mouth, sore throat and mini-awakenings which disrupt sleep. In
addition, nasal breathing difficulties during sleep are often caused by nasal
congestion found in people with allergies, sinusitis and the common cold and
by nasal obstruction due to a deviated nasal septum. The Company believes
that people with deviated septa or other structural problems or chronic
conditions such as snoring may be more predisposed to use the Breathe Right
nasal strip on a regular or daily basis while seasonal sufferers would use
the Breathe Right nasal strip as needed. People with the aforementioned
conditions are currently the primary users of the product and are the primary
targets of the Company's advertising.
SNORING. The Company is currently concentrating the majority of its marketing
efforts on the snoring market. In November 1995, the FDA cleared the Breathe
Right nasal strip for marketing for the reduction or elimination of snoring.
The Breathe Right nasal strip reduces nasal airflow resistance and therefore
can reduce or eliminate snoring. Market research commissioned by the Company
indicates that, in the U.S., approximately 78% of all households have at
least one snorer, approximately 37 million people snore regularly (every
night) and 50 million people snore occasionally. In a clinical study
conducted at the Sleep Disorders Center in Cincinnati, Ohio, Breathe Right
nasal strips were effective in reducing snoring loudness or eliminating
snoring in 75% of the participants in the study. Additional clinical studies
show that Breathe Right nasal strips may improve the quality of sleep. The
Company believes that the Breathe Right nasal strip is the only
non-prescription product in wide retail distribution that the FDA has cleared
to market for the reduction or elimination of snoring.
NASAL CONGESTION/OBSTRUCTION. The Company is also focusing its marketing
efforts on the nasal congestion market. In February 1996, the FDA cleared the
Breathe Right nasal strip for marketing for the temporary relief from the
symptoms of nasal congestion. The Company believes the Breathe Right nasal
strip can in many cases benefit those people who suffer from nasal
congestion, stuffy nose and nasal obstruction resulting from the following
conditions: (i) the common cold; (ii) allergies and sinus disease -- 35
million people in the U.S.; and (iii) deviated nasal septum and other nasal
structural deficiencies -- 12 million people in the U.S. Clinical studies at
the Oklahoma Allergy Clinic in Oklahoma City, Oklahoma and at Park Nicollet
Clinic in Minneapolis, Minnesota have shown that the product relieves some of
the symptoms associated with nasal congestion caused by allergies, and a
clinical study at Mount Sinai Hospital, Toronto, Ontario has shown that the
product relieves some of the symptoms of nasal obstruction due to septal
deviation. The Company has submitted applications to the FDA to obtain
clearance to market the product as a treatment for nasal obstruction
associated with a deviated septum. For nasal congestion applications, the
Company believes that the Breathe Right nasal strip is often used as either
an alternative or adjunct to decongestant drugs (including nasal sprays and
oral decongestants).
PROFESSIONAL MEDICAL MARKET. In 1996, the Company plans to increase its
marketing efforts in the professional medical market. The Company will
continue its program to educate physicians such as pulmonologists,
otolaryngologists and allergists on the advantages of using the Breathe Right
nasal strip for patients receiving various treatments for sleep apnea and
chronic lung disease. The Company believes that these patients may become
regular users of the product if it is recommended to them by their
physicians. The Company believes that there are over one million sleep apnea
and chronic lung disease patients receiving treatments and an additional 15
million chronic lung disease sufferers that may benefit from use of the
Breathe Right nasal strip. The Company also believes that awareness of the
product by physicians will increase their recommendations of the product for
other applications. The Company is currently evaluating special packaging
requirements to reach the hospital and home health care markets and is
exploring how to reach these markets through OEM sales arrangements with
medical products companies. As an alternative, the Company may establish an
independent representative sales force to penetrate these markets.
ATHLETIC MARKET. The Company has begun to market the Breathe Right nasal
strip for use during athletic activity. The Company believes that the product
may make nasal breathing more comfortable and may improve endurance during
athletic activity, particularly when a mouth guard is used. Clinical studies
are being conducted to establish the benefit of use during athletic activity.
The use of the Breathe Right nasal strip has been increasingly observed in
football, and to a lesser extent in hockey, baseball and basketball, at the
professional and collegiate levels. In addition, many recreational athletes,
including runners and bikers have begun using the product regularly during
their sports activities. The Company believes the use of the Breathe Right
nasal strip will grow in recreational sports and has initially targeted the
running market (approximately 9.6 million Americans are frequent runners
according to Runners World magazine) and the biking market (approximately 3.3
million cyclists in the U.S. ride at least 80 miles per month according to
Bicycling magazine). Since the introduction of the product in October 1993,
the Company has received publicity as a result of professional athletes
wearing the Breathe Right nasal strip. The Company uses athletes to endorse
the Breathe Right nasal strip to increase the visibility of the product,
which thereby leads to awareness of the product for not only its athletic
applications, but also for snoring, nasal congestion and other applications.
BUSINESS STRATEGY
The Company's strategy for increasing sales of its Breathe Right nasal strip
and expanding its product line consists of:
INCREASING NEW CONSUMER PRODUCT TRIAL. The Company uses a combination of
advertising, promotions and celebrity endorsements to increase consumer
awareness of the Breathe Right nasal strip and its benefits and to encourage
initial consumer trial of the product. The Company has implemented an
advertising campaign which utilizes widely distributed magazines, nationally
syndicated radio programs and network and cable television to establish the
Breathe Right nasal strip as a leading OTC branded product for the relief of
snoring and nasal congestion. A research study commissioned by the Company
indicates that, of the persons surveyed in March 1995 and January 1996, total
consumer awareness of a device used over the nose to improve nasal breathing
and reduce snoring increased from 32% to 53% and household trial of the
product increased from 1% to 5%.
INCREASING REPEAT USAGE. According to research data collected by an
independent, nationally recognized consumer market research firm,
approximately 28% of those who try Breathe Right nasal strips in the U.S.
purchase additional product. To encourage repeat usage, the Company
introduced a 30 count box, which carries a suggested retail price that is 20%
less per strip than the 10 count box. At the end of 1995, the 30 count box
was in 30% of the stores that carried the 10 count box, however the 30 count
box accounted for approximately 25% of the Company's retail sales volume. The
Company plans to increase the retail distribution of the 30 count box in 1996
and emphasize the 30 count box using in-box promotions and couponing programs
to help encourage repeat usage.
EXPANDING PRESENCE IN INTERNATIONAL MARKETS. In August 1995, the Company
signed an exclusive international distribution agreement with 3M to market
the Breathe Right nasal strip outside the U.S. and Canada. 3M has begun the
product introduction in several countries and expects the product to be
available at retail in more than 12 international markets by the end of 1996.
EXPANDING PRESENCE IN OTHER MARKETS. The Company seeks to increase its
presence in the professional medical market, which includes patients
receiving various treatments for sleep apnea and chronic lung disease. The
Company will educate physicians and pharmacists as to the efficacy and
various applications of the Breathe Right nasal strip to gain their
recommendations of the product for treatment of patients in this market as
well as for relief from snoring and nasal congestion. In addition, largely as
a result of NFL exposure, many sporting goods retailers have expressed an
interest in carrying the product. The Company has developed special packaging
for the sports market and plans to continue to leverage its high profile
athletic endorsers to increase sales in the athletic market.
MARKETING NEW PRODUCTS THAT LEVERAGE DISTRIBUTION CHANNELS. The Company has
established a strong brand identity for the Breathe Right name and strong
distribution channels. As a result of its visibility and success to date, the
Company is regularly presented with and evaluates new products. The Company
plans to leverage its marketing and distribution strengths by acquiring or
licensing the rights to those products that it believes have merit and
attempt to bring them to market. There can be no assurance that any of these
products will ever be marketed by the Company. See "-- Potential Line
Extensions and New Products."
MARKETING STRATEGY
The Company began broad consumer marketing of the Breathe Right nasal strip
in September 1994. According to data collected by Information Resources, Inc.
("IRI"), the Breathe Right nasal strip became a leading sales volume producer
during 1995 in the cough, cold and allergy section of drug, grocery and mass
merchant stores nationwide. In September 1995, the Company received two REX
(retail excellence) awards from Drug Stores News magazine. The first award
named the Breathe Right nasal strip as the best new product in the cough,
cold and allergy section in U.S. drug stores. The second award named the
product the "market maker of the year," the single most important product
which disproportionately increased traffic and profits in U.S. drug stores.
The Company's marketing efforts are primarily directed to the OTC market.
After receiving FDA clearance in November 1995 to market the Breathe Right
nasal strip for the reduction or elimination of snoring, the Company's
advertising focused on the snoring application for the product. The Company
currently plans to begin advertising for the treatment of nasal congestion in
the fall of 1996 coincident with the cold season.
The Company primarily uses a mix of consumer and trade promotions and
magazine, radio and television advertising to market the Breathe Right nasal
strip. Marketing communications are generally designed to promote trial of
the Breathe Right nasal strip by increasing consumer awareness of the
product's benefits.
The Company's print ads have featured full face photos of familiar faces
(Jerry Rice, the Statue of Liberty, the Mona Lisa) wearing a Breathe Right
nasal strip as well as a photo of the box and a description of the benefits
of the product. The Company's radio campaign includes advertising on the
nationally syndicated radio programs of Rush Limbaugh, Paul Harvey and Dr.
Dean Edell. The Company recently launched its national cable television
advertising program and advertised on network television during Super Bowl
XXX.
The Company's paid advertising programs have been enhanced by media coverage
of unsolicited use of Breathe Right nasal strips by professional athletes,
including Herschel Walker of the New York Giants and Kirby Puckett of the
Minnesota Twins. In addition, a number of radio and television personalties,
including Rush Limbaugh, have provided unsolicited endorsements of the
product on national radio and television programs.
The Company has also entered into endorsement agreements pursuant to which
the following athletes will provide the Company with endorsement services:
NAME TEAM/SPORT
Jerry Rice San Francisco 49ers football team
Peter Bondra Washington Capitals hockey team
Michael Andretti Race car driver
Luke and Murphy Jensen Tennis players
Ann Marie Lauck U.S. Olympic marathon runner
The Volvo/Cannondale
Mountain Bike Team Mountain bike racers
Manuel Lagos Minnesota Thunder soccer team
Eddy Matzger In-line speed skater
The Company believes that use by professional athletes increases the
visibility of the product, which thereby leads to greater awareness of the
product for not only its athletic applications but also for snoring, nasal
congestion and other applications, and also makes it more acceptable for
consumers to wear the highly visible product.
The Company also uses product promotion programs, such as coupons, and public
relations activities to encourage product trial and repeat purchases.
Typically, coupons for the Breathe Right nasal strip appear three to four
times each year in free standing inserts (FSIs) that are included in Sunday
newspapers and are often tied to a holiday or special event theme such as
Super Bowl, Fathers Day, or the Christmas holidays (stocking stuffer). To
increase consumer product awareness, the Company also uses public relations
programs associated with "special events," such as sponsoring marathons,
providing product to certain professional athletic teams and sponsoring radio
station contests in conjunction with certain holidays.
The Company also has a program aimed at educating pharmacists and physicians
as to the efficacy of the product for various applications and the drug free
nature of the product in order to gain their recommendations of the product.
The Company believes that educating the professional medical market will lead
to both recommendations for use of the product in that market and for other
applications, such as for snoring and nasal congestion.
Because the Breathe Right nasal strip is sold as an OTC 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. A research study commissioned by the Company
indicates that approximately 5% of households in the U.S. include a person
that has tried Breathe Right nasal strips, and research data collected by a
nationally recognized consumer market research firm indicates that
approximately 28% of those who have tried Breathe Right nasal strips
purchased additional product.
The Company conducted consumer awareness surveys in March 1995, September
1995 and January 1996 in which 1,000 consumers over the age of 18 were
surveyed by telephone. Unaided product awareness, where respondents
identified a nasal strip as a product designed to help people breathe more
easily or provide relief from snoring, increased from 6% in March 1995 to 16%
in January 1996. Aided product awareness, where the respondents were asked if
they were aware of a product worn across the nose which is designed to help
people breathe and can also be used to reduce snoring, increased from 26% in
March 1995 to 37% in January 1996. Therefore, as of January 1996, 53% of the
consumers surveyed had some level of awareness of a nasal strip product.
Unaided awareness of the Breathe Right brand name increased from 2% in March
1995 to 7% in January 1996.
DOMESTIC DISTRIBUTION
OTC MARKET. The Breathe Right nasal strip is sold as an OTC product in drug
stores, grocery stores and mass merchant chain stores. In addition, product
distribution has recently begun to military base stores and convenience
stores in the U.S. The Company sells product to these retailers through a
network of independent sales representatives referred to in the industry as
non-food general merchandise brokers. Presently, the Company uses eight
broker groups who call on the chain drug, grocery and mass merchant accounts
and the wholesalers who serve primarily the independent drug stores and many
of the grocery stores in the U.S. Another broker calls on U.S. military base
commissaries and post exchanges, and the Company has a master broker to
market to the convenience store market.
The Company regularly uses IRI InfoScan data to determine market penetration
of Breathe Right nasal strips. IRI measures the all commodity volume ("ACV")
distribution of the Breathe Right nasal strip, which is the total sales
volume in stores in which the Breathe Right nasal strip is sold as a
percentage of total sales volume in all stores in that category. The
following table shows ACV distribution of the Breathe Right nasal strip for
the four-week periods ended:
<TABLE>
<CAPTION>
1/1/95 3/26/95 7/16/95 10/8/95 12/31/95
<S> <C> <C> <C> <C> <C>
Drug store ACV 65% 86% 94% 98% 98%
Grocery store ACV 20% 33% 53% 61% 71%
Mass merchant ACV 10% 85% 94% 97% 99%
</TABLE>
While the Company believes that it has widespread distribution, the 30 count
box that was first distributed to retailers in August 1995 was only available
in stores which accounted for approximately 40% of the total drug store sales
volume, 5% of the total grocery store sales volume and 60% of the total mass
merchant sales volume by the end of 1995. The Company intends to emphasize
increasing the distribution (and availability to the consumer) of the 30
count box during 1996. Since the 30 count box carries a suggested retail
price that is 20% lower per strip than the strips in the 10 count box, the
Company believes that increased availability of the 30 count box will help
encourage repeat usage.
Although the Company's advertising currently focuses on the snoring
application, the Breathe Right nasal strip is typically positioned in the
cough, cold and allergy section of the store because Breathe Right nasal
strips provide benefits similar to those obtained with decongestant products.
There is typically no section in stores for snoring relief products. Due to
the strong sales levels of the Breathe Right nasal strip and its rapid sales
growth, many store managers have also placed the product in secondary
locations, such as on the pharmacy counter or in special sections located at
the end of an aisle reserved for better selling products. The Company
believes that the Breathe Right nasal strip is priced competitively with
decongestant drugs (including nasal sprays and oral decongestants) on a per
dose basis.
The Company's OTC customers for the Breathe Right nasal strip include
national drug store, grocery store and mass merchant chains, such as
Walgreens, Eckerd, Revco, Kroger, Safeway, Wal-Mart, Kmart and Target, as
well as regional and independent stores in the same store categories. In
1995, no OTC customer represented more than 3% of the retail stores that
carried the product, and one retailer accounted for approximately 13% of
Breathe Right nasal strip sales. The loss of this customer or any other large
retailer would require the Company to replace the lost sales through other
retail outlets and could temporarily disrupt distribution of the Breathe
Right nasal strip.
PROFESSIONAL MEDICAL MARKET. The Company believes that establishing a strong
presence in the professional medical market will not only increase sales to
this market, but will also result in physicians recommending the product for
other applications. The Company has sold the product to this market in small
quantities either directly or through a few small respiratory specialty
distributors. The Company is currently evaluating special packaging
requirements to reach the hospital and home health care markets and is
exploring how to reach these markets through OEM sales arrangements with
medical products companies. As an alternative, the Company may establish an
independent representative sales force to penetrate these markets.
ATHLETIC MARKET. Largely as a result of the exposure that the Breathe Right
nasal strips received when NFL football players began wearing them, many
sporting goods retailers expressed an interest in carrying the product. A
special package has been developed for this market and the Company has
contracted with E-Z Gard, Inc. (a mouth guard manufacturer) to act as master
broker to provide sales and distribution to the sporting goods retailer
market in the U.S. and Canada. The Breathe Right nasal strips sports package
was first available in September 1995 and is distributed to sporting goods
stores and mass merchant sports departments. In addition, many drug stores
carry the sports package in their sports medicine section.
INTERNATIONAL DISTRIBUTION
The Company executed an international distributor agreement with 3M in August
1995 pursuant to which 3M has the exclusive right to distribute the Breathe
Right nasal strip outside of the U.S. and Canada. 3M has operations in over
60 foreign countries. The product is marketed internationally under the
co-brand of "3M Breathe Right nasal strips" in order to benefit from both
3M's brand name and the publicity that the Breathe Right brand name has
received. Under the terms of the agreement, 3M buys product from the Company
either in finished form in 3M boxes or in bulk quantities to be packaged by
3M's international subsidiaries. All sales to 3M are denominated in U.S.
dollars. 3M is responsible for obtaining all necessary regulatory approvals
outside of the U.S. and for all marketing and selling expenses. The agreement
contains certain minimum performance objectives and breakup provisions.
3M began training its international sales force on the Breathe Right nasal
strip product line in October 1995. Package designs for several countries
were completed and initial product orders were placed by the end of 1995. The
Company expects that product will be on retail shelves in Japan and several
European countries by March 31, 1996 and in a total of at least 12 foreign
countries by the end of 1996.
In 1995, the Company arranged with LOCIN Industries, a Canadian dental floss
company, to establish distribution in the Canadian market. During 1995, LOCIN
distributed the product to drug stores in Canada. During 1996, LOCIN may
purchase product in bulk and package it at its facility and assume
responsibility for cooperative advertising programs.
POTENTIAL LINE EXTENSIONS AND NEW PRODUCTS
BREATHE RIGHT NASAL STRIP ENHANCEMENTS AND LINE EXTENSIONS. The Company is
currently evaluating a number of enhancements to the existing Breathe Right
nasal strip product line. These enhancements include a modification that
would increase the dilating force of the strip without diminishing the
strip's ability to stay in place, an enhancement that would reduce the
potential for irritation over the top of the nose and production of nasal
strips with different colors, insignias and cartoon or other characters, and
scented nasal strips.
NEW PRODUCTS. As a result of the Company's established distribution channels
and highly visible success with the Breathe Right nasal strip, the Company is
frequently approached by individuals and smaller companies to explore the
possibility of partnering with the Company to manufacture and market new
product ideas. The Company routinely evaluates the merit of these products,
and from time to time may acquire or license the rights to innovative
products which it believes could successfully be sold through the Company's
established distribution channels.
The Company has entered into contractual arrangements for a number of
products which are in various stages of evaluation and testing prior to
potential market launch. The Company plans to incur costs of approximately
$1.0 million relating to evaluation and test marketing of these products in
1996 and expects to launch one product, the TheraPatch in 1996. Most, if not
all, of these products are regulated to varying degrees by the FDA and some
will require extensive clinical studies and regulatory approvals prior to
marketing. There can be no assurance that any required regulatory approvals
will be obtained or, other than the TheraPatch, that the Company will market
any of these products. Products currently being evaluated by the Company
include:
THERAPATCH EXTERNAL ANALGESIC PATCH. The TheraPatch is a 2" by 3" external
analgesic patch designed for temporary relief of pain from arthritis, simple
backaches and muscular aches and strains. The patch is coated with a
proprietary hydrogel formulation which, when placed on the skin, creates a
cutaneous sensation that interferes with the sensation of pain. The Company
believes that the TheraPatch design allows it to provide longer lasting
relief (four to six hours) than similar patches or external analgesic creams
(60 to 90 minutes) currently on the market. The Company, however, will not be
able to make any claims as to duration without FDA approval. The Company is
planning to test market the patch in late spring and summer 1996, with broad
scale product marketing dependent upon favorable test market results and
compliance with applicable FDA requirements.
The FDA has issued a deferment letter to the product's manufacturer which
allows the product to be marketed and defers the product's regulatory status
until the FDA publishes a Final Monograph on External Analgesics. After the
Final Monograph is published, the Company will have one year to comply with
the FDA's requirements listed in the Final Monograph.
POLLEN-GUARD GEL. The Company has the right to enter into an exclusive,
worldwide license agreement covering the patent and pending patent
applications on the Pollen-Guard Gel, which is an ionized gel product that
can be applied around the nostrils. The gel dries clear, colorless and
odorless and creates a local electrostatic field. The product has been the
subject of favorable preliminary laboratory and clinical tests, and a
Company-sponsored clinical study is currently in progress.
The Company believes that this product reduces the inhalation of airborne
contaminants such as pollen, mold spores and dust, which will thereby reduce
allergic symptoms. The Company is not aware of similar competitive products.
SMOKING CESSATION AND APPETITE SUPPRESSANT PRODUCTS. The Company plans to
perform clinical tests on two products that utilize a chemical compound that
is used as a common food additive found in cereals, milk, dairy products and
other common foods and is listed on the Flavor and Extract Manufacturers
Generally Regarded As Safe List. The compound is naturally found in the
Virginia tobacco leaf and is used as an additive in the manufacture of
cigarettes. The Company believes that the compound, when inhaled, may be
effective as an adjunct to assist in stopping smoking or as a smoking
substitute product, and may also be useful in suppressing appetite, resulting
in weight loss, but the Company has not completed any clinical studies on
these products to date. The licensor of the product obtained a patent on the
appetite suppressant product in 1985 and on the smoking cessation product in
1994 and the Company has licensed the rights to the patents.
The Company intends to proceed with formal clinical studies, and if they are
successful the Company will attempt to gain FDA clearance to market both
products. FDA clearance of such products will require filing a new drug
application and completion of extensive clinical studies, the protocols and
results of which must be satisfactory to the FDA. The Company is aware of one
competitive product for smoking cessation that is currently being distributed
in Europe.
LARYNGOSCOPE DENTAL WARNING SYSTEM. A laryngoscope is a medical device used
in the process of intubation, which involves insertion of a breathing tube
into a patient's trachea by passing it through the mouth and throat. During
the process of intubation, the laryngoscope's blade has a tendency to be
pressed against the patient's top teeth, at times causing damage to those
teeth or to adjacent bridge work. The laryngoscope dental warning system uses
a disposable warning circuit embedded into a thin plastic strip placed on the
bottom of the laryngoscope's blade to warn the user when the blade makes
contact with the teeth, allowing the physician to avoid damaging the
patient's teeth. Approximately 19 million surgeries performed each year in
the U.S. are preceded by intubations. The reported incidence of dental damage
is approximately one per 1,000 cases.
The licensor of the product has a patent application pending with the U.S.
Patent Office. The Company intends to finalize the design of the product,
manufacture and test the product and submit an application with the FDA to
obtain regulatory clearance to market the product by the fall of 1996. The
Company is not aware of any similar devices on the market.
MANUFACTURING AND OPERATIONS
The Company currently sub-contracts with five manufacturers (and has
qualified two additional manufacturers), known as converters, to produce the
Breathe Right nasal strip and does no in-house fabrication. Three of the
converters are capable of providing full turnkey service and ship product to
the Company that is completely packaged ready to be sold to retailers. The
others provide semi-finished goods to the Company that require final
packaging. To complete these products, the Company has the ability to wrap
individual strips in the paper sleeve in-house and subcontracts the final
packaging out to one of seven qualified packaging subcontractors.
Each of these converters builds the product to the Company's specifications
using materials specified by the Company and, for the major materials, places
orders against a supply agreement negotiated by the Company with the material
manufacturer. The converters have all entered into confidentiality agreements
with the Company to protect the Company's intellectual property rights.
Company quality control and operations personnel periodically visit the
converters to observe processes and procedures. Finished goods are inspected
at the Company to insure that they meet quality requirements. The Company
inspects its converters on a regular basis and is not aware of any material
violation of FDA Good Manufacturing Practice Standards. The Company works
closely with its material vendors and converters to reduce scrap and waste,
improve efficiency, and improve yields to reduce the manufacturing costs of
the product. These efforts, combined with volume efficiencies, have resulted
in higher gross margins. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
To ensure consistent quality and favorable pricing, the Company has entered
into a multi-year material supply agreement with 3M for the major components
of the Breathe Right nasal strip. Although similar materials are currently
available from other suppliers, the Company believes that 3M's materials are
of superior quality. Although the Company believes that this relationship
will not be disrupted or terminated, the inability to obtain sufficient
quantities of these components or the need to develop alternative sources in
a timely and cost effective manner, if and as required in the future, could
adversely affect the Company's operations until new sources of these
components become available, if at all. In addition, while the Company does
not expect 3M to do so, 3M has the right to discontinue its production or
sale of these products at any time with 90 days notice to the Company.
In the first quarter of 1995, a rapid increase in demand for the product
resulted in the Company being unable to secure delivery of sufficient raw
materials to avoid large back orders and out of stock situations at the
retail level. It took until the end of the second quarter of 1995 for the
Company to eliminate the back orders and to begin building inventory. The
Company believes that its converters can produce sufficient quantities of
product to meet the Company's current and projected requirements.
The Company plans to use a portion of the net proceeds of this offering to
supplement the manufacturing capacity of its packaging subcontractors and
converters with its own manufacturing capabilities. The Company believes that
this will allow it to be more flexible and responsive to changes in the mix
of final packaging requirements while managing both product costs and
inventory levels.
COMPETITION
The Company believes that the market for decongestant products is highly
competitive while the market for products for the reduction or elimination of
snoring may become more competitive in the future. The Company's competition
in the OTC market for decongestant products and other cold, allergy and sinus
relief products consist primarily of pharmaceutical products and products
similar to the Breathe Right nasal strip. Products that compete with the
Breathe Right nasal strip in the OTC market for snoring remedies consist
primarily of internal nasal dilators and products similar to the Breathe
Right nasal strip. Many of the manufacturers of the products that compete
with the Breathe Right nasal strip have significantly greater financial and
operating resources than the Company. In addition, these competitors may
develop products which are able to circumvent the Company's patents.
GOVERNMENT REGULATION
As a manufacturer and marketer of medical devices, the Company is subject to
regulation by, among other governmental entities, the FDA and the
corresponding agencies of the states and foreign countries in which the
Company sells its products. The Company must comply with a variety of
regulations, including the FDA's Good Manufacturing Practice regulations, and
is subject to periodic inspections by the FDA and applicable state and
foreign agencies. If the FDA believes that its regulations have not been
fulfilled, it may implement extensive enforcement powers, including the
ability to ban products from the market, prohibit the operation of
manufacturing facilities and effect recalls of products from customer
locations. The Company believes that it is currently in compliance with
applicable FDA regulations.
FDA regulations classify medical devices into three classes that determine
the degree of regulatory control to which the manufacturer of the device is
subject. In general, Class I devices involve compliance with labeling and
record keeping requirements and are subject to other general controls. Class
II devices are subject to performance standards in addition to general
controls. Class III devices are those devices, usually invasive, for which
pre-market approval (as distinct from pre-market notification) is required
before commercial marketing to assure the products' safety and effectiveness.
The Breathe Right nasal strip has not yet been classified.
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) reduce or eliminate
snoring, (ii) temporarily relieve the symptoms of nasal congestion and stuffy
nose and (iii) improve nasal breathing by reducing nasal airflow resistance.
In addition to the Company's medical device products, the Company has entered
into an agreement to manufacture and market a smoking substitute and appetite
suppressant product that the FDA may classify as a "New Drug." The FDA must
approve safety and effectiveness for each labeled use before a New Drug can
be sold. As part of the requirements for obtaining approval of a New Drug,
the Company will be required to conduct extensive preclinical studies to
determine the safety and efficacy of the drug. Upon completion of these
studies, the Company will submit an Investigational New Drug application
("IND") to the FDA, which permits the Company to begin clinical trials.
These clinical trials of the products must be conducted and the results
submitted to the FDA as part of a New Drug Application ("NDA"). The FDA must
approve the NDA before pharmaceutical products may be sold in the U.S. The
grant of regulatory approvals often takes a number of years and may involve
the expenditure of substantial resources. There is no assurance that NDAs
will be approved for the Company's products if any are required. Even after
initial FDA approval has been granted, further studies may be conducted to
provide additional data on safety or efficacy or to obtain approval for
marketing the drug as a treatment for disease indications in addition to
those originally approved. In addition, the FDA can revoke its approval even
after it has initially been given.
Sales of the Company's products outside the U.S. are subject to regulatory
requirements governing human clinical trials and marketing approval for
drugs, and such requirements vary widely from country to country. Under its
agreement with the Company, 3M is responsible for obtaining all necessary
regulatory approvals outside the U.S. The Company believes it has provided 3M
with the necessary documentation to enable 3M to obtain the "CE" mark, an
international symbol of quality and compliance with applicable European
medical device directives, and 3M is affixing the CE mark on the Company's
products in Europe.
No assurance can be given that the FDA or state or foreign regulatory
agencies will give on a timely basis, if at all, the requisite approvals or
clearances for additional applications for the Breathe Right nasal strip or
for any of the Company's products which are under development. Moreover,
after clearance is given, the Company is required to advise the FDA and these
other regulatory agencies of modifications to its products. These agencies
have the power to withdraw the clearance or require the Company to change the
device or its manufacturing process or labeling, to supply additional proof
of its safety and effectiveness or to recall, repair, replace or refund the
cost of the medical device if it is shown to be hazardous or defective. The
process of obtaining clearance to market products is costly and
time-consuming and can delay the marketing and sale of the Company's
products. Furthermore, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future change. The
Company cannot predict what impact, if any, such changes might have on its
business.
The Company is also subject to substantial federal, state and local
regulation regarding occupational health and safety, environmental
protection, hazardous substance control and waste management and disposal,
among others.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company entered into a license agreement in 1992 (the "License
Agreement") pursuant to which the Company acquired from the licensor (the
"Licensor") the exclusive rights to manufacture and sell the Breathe Right
nasal strip. Pursuant to the License Agreement, the Company has the exclusive
right to manufacture, sell and otherwise practice any invention, including
the Breathe Right nasal strip, claimed in the Licensor's patent applications
related thereto and all patents issued in any country which correspond to
those applications. The Company must pay royalties to the Licensor based on
sales of the Breathe Right nasal strip including certain minimum royalty
amounts to maintain its exclusivity. The Company is also responsible for all
costs and expenses incurred in obtaining and maintaining patents related to
the Breathe Right nasal strip.
The Licensor has filed patent applications with the U.S. Patent and Trademark
Office seeking patent protection for different aspects of the Breathe Right
nasal strip technology. The Licensor has received notice of allowance from
the U.S. Patent and Trademark Office in two of its patent applications
covering the Breathe Right nasal strip, including one with claims that cover
the single-body construction of the Breathe Right nasal strip. A third patent
application has issued as a patent, and a fourth application has received
notice of allowance covering structural changes to the product. A fifth
application pending has just recently been filed and remains pending. The
Licensor has also obtained patent protection on the Breathe Right nasal strip
in two foreign countries and has applications pending which seek patent
protection in 23 additional countries. In addition to its patent position,
the Company believes that its position as the first entrant in the market and
the design knowledge, which the Company has protected as trade secrets, will
provide the Company with advantages over possible competition.
If the Licensor obtains additional patents covering the Breathe Right nasal
strip, there can be no assurance that they, or the patent already issued,
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 intends to aggressively enforce the patents
covering the Breathe Right nasal strip, when and if they are issued. In order
to enforce any patents issued covering the Breathe Right nasal strip, the
Company may have to engage in litigation, which may result in substantial
cost to the Company and counterclaims against the Company. Any adverse
outcome of such litigation could have a negative impact on the Company's
business.
The Company believes its trademarks are important as protection for the
Company's names and advertising. The Company has initiated opposition
proceedings in the U.S. Patent and Trademark Office against two competitors
that are attempting to register trademarks that are substantially similar to
"Breathe Right" and has filed a trademark infringement suit against one of
them.
There can be no assurance that the Company's technology will not be
challenged on the grounds that the Company's 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. The Company will attempt to
protect its technologies and proprietary information as trade secrets.
LITIGATION
Except as otherwise disclosed in this Prospectus, no material legal
proceedings are pending or known to be contemplated to which the Company is a
party or to which any of its property is subject, and the Company knows of no
material legal proceedings pending or threatened, or judgments against any
director or officer of the Company in his or her capacity as such.
In October 1995, an individual commenced a lawsuit against the Company in
U.S. District Court for the Northern District of Ohio claiming that the
Breathe Right nasal strip infringes the plaintiff's patents relating to a
facial cleanser. The plaintiff is seeking an undefined amount of monetary
damages from the Company and an order enjoining the Company from infringing
on his patents. The plaintiff's patents cover a facial cleanser for a
person's nose. The facial cleanser consists of an elongated strip which can
be bent and which is formed of material suitable for scraping one's skin. The
facial cleanser has gripping means in the form of indentations at the ends of
the strips and an absorbent pad which is impregnated with a topically
effective agent for application to the surface of the skin being cleansed.
The Company believes that the suit is completely without merit and has denied
all material allegations in the complaint and is vigorously defending itself
based upon what it considers meritorious defenses.
EMPLOYEES
At March 1, 1996, the Company had 37 full-time employees, of whom 13 were
engaged in operations, 12 in general administration, 10 in marketing and
sales and two in new products and business development. There are no unions
representing Company employees. Relations with its employees are believed to
be good and there are no pending or threatened labor employment disputes or
work interruptions.
FACILITIES
The Company leases approximately 80,000 square feet of office, manufacturing
and warehouse space in Bloomington, Minnesota. The lease expires in December
2000.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Daniel E. Cohen, M.D. 43 Chairman of the Board, Chief Executive
Officer, Treasurer and Director
Richard E. Jahnke 47 President, Chief Operating Officer and
Director
M.W. Anderson, Ph.D. 45 Vice President of Clinical and Regulatory
Affairs
David J. Byrd 42 Vice President of Finance and Chief
Financial Officer
William Doubek 40 Vice President of Operations
Rihab Fitzgerald 44 Vice President of Consumer Sales
Kirk P. Hodgdon 36 Vice President of Consumer Marketing
Gerhard Tschautscher 39 Vice President of International and
Professional Medical Marketing
Patrick Delaney 53 Director and Secretary
R. Hunt Greene 45 Director
Andrew J. Greenshields 58 Director
Richard W. Perkins 65 Director
</TABLE>
Daniel E. Cohen, M.D. has served as the Company's Chairman of the Board since
1993, its Chief Executive Officer since 1989 and a director and the Treasurer
since 1982. Dr. Cohen was a founder of the Company and is a board-certified
neurologist.
Richard E. Jahnke has served as the Company's President and Chief Operating
Officer and as a director since 1993. From 1991 to 1993, he was Executive
Vice President and Chief Operating Officer of Lemna Corporation, which
manufactures and sells waste water treatment systems. From 1986 to 1991, Mr.
Jahnke was general manager of the government operations division of ADC
Telecommunications, an electronic communications systems manufacturer. From
1982 to 1986, he was Director of Marketing and Business and Technical
Development at BMC Industries, Inc. From 1972 to 1982, he held various
positions of increasing responsibility in engineering, sales and marketing
management at 3M Company.
M. W. Anderson, Ph.D. has served as the Company's Vice President of Clinical
and Regulatory Affairs and Vice President of Research and Development since
1990. He has served in various 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.
David J. Byrd has served as the Company's Vice President of Finance and Chief
Financial Officer since February 1996. 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.
William Doubek has served as the Company's Vice President of Operations since
1990, Director of Operations from 1986 to 1990 and was the Company's Senior
Engineer from 1982 to 1986. Prior to joining the Company in 1982, Mr. Doubek
served as Senior Project Engineer at Medtronic, Inc., a manufacturer of
medical devices, Senior Engineer at Micro Control Company, a manufacturer of
computer testing equipment, and Electrical Engineer at Palico Instrument
Company, a manufacturer of computer testing equipment.
Rihab Fitzgerald has served as the Company's Vice President of Consumer Sales
since August 1993, Vice President of Sales and Marketing from 1990 to August
1993 and Director of Marketing from 1985 to 1990. Prior to joining the
Company in 1984, Ms. Fitzgerald was employed in sales and marketing with
Nicolet Instrument Corporation, a medical devices manufacturer.
Kirk P. Hodgdon has been the Company's Vice President of Marketing since
February 1994. Prior to joining the Company, Mr. Hodgdon served as: Vice
President-Management Supervisor at Gage Marketing Communications, a marketing
services company, from 1993 to February 1994; Vice President -- Account
Supervisor at U.S. Communications, a marketing agency, from 1989 to 1993; and
Marketing Manager at Land O'Lakes, Inc., a consumer foods cooperative, from
1988 to 1989.
Gerhard Tschautscher has served as the Company's Vice President of
International and Professional Medical Marketing since January 1994 and as a
Company Product Director and as the International Sales Marketing and Sales
Director between 1988 and December 1993.
Patrick Delaney has been a director of the Company since 1983 and has served
as the Company's Secretary since October 1995. Mr. Delaney is a partner in
the Minneapolis law firm of Lindquist & Vennum P.L.L.P., counsel to the
Company. He has been in the private practice of law since 1967. He is also a
director of Community First Bankshares, Inc., a multi-bank holding company,
the Secretary of MTS Systems Corporation, a manufacturer of systems for
materials testing, simulation, measurement devices and controls, and a
director and the Secretary of Applied Biometrics, Inc., a manufacturer of
medical devices.
R. Hunt Greene has been a director of the Company since 1985. Mr. Greene has
been an investment banker for over fifteen years. He is presently Managing
Director of Hunt Greene & Co., LLC, a Minneapolis investment bank. Mr. Greene
was a Managing Director of Piper Jaffray Inc., a Minneapolis based investment
bank and general broker-dealer in investment securities, from 1979 to 1995.
Andrew J. Greenshields has been a director of the Company since 1986. Mr.
Greenshields was a founder and is a general partner of Pathfinder Venture
Capital Funds I, II and III, Minneapolis based venture capital limited
partnerships. Mr. Greenshields is also a director of Digital Systems
International, Inc., a manufacturer of telecommunications equipment and
software, and Aetrium, Inc., a manufacturer of semiconductor handling
equipment.
Richard W. Perkins 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. since 1985. He is also a director of the following public
companies: Bio-Vascular, Inc., a medical products manufacturer; Children's
Broadcasting Corporation, an operator of radio stations with a children's
format; Discus Acquisition Corporation, a holding company for Peerless Chain
Corp.; Garment Graphics, Inc., a manufacturer of imprinted sportswear;
Lifecore Biomedical, Inc., a medical devices company; Nortech Systems, Inc.,
a contract manufacturer for the electronics industry; Eagle Pacific
Industries, Inc., a manufacturer of plastic pipe; and Quantech, Ltd., a
development stage medical products company.
COMMITTEES
The Board of Directors has established a Compensation Committee, an Audit
Committee, a Plan Committee and a Nominating Committee.
The Compensation Committee of the Board of Directors is comprised of Messrs.
Greenshields and Perkins. Among other duties, the Compensation Committee
makes recommendations to the Board of Directors regarding the employment
practices and the policies of the Company and the compensation paid to
Company officers.
The Audit Committee of the Board of Directors is comprised of Messrs. Greene
and Greenshields. The Audit Committee reviews and evaluates significant
matters relating to the audit and internal controls of the Company, reviews
the scope and results of audits by and the recommendations of the Company's
independent auditors, and approves services provided by the auditors.
The Plan Committee of the Board of Directors is comprised of Messrs. Greene,
Delaney and Greenshields. The Plan Committee has the authority to make awards
under and adopt and alter administrative rules and practices governing the
Company's Stock Option Plans and Employee Stock Purchase Plan (the "Plans").
The Plan Committee also interprets the terms and provisions of the Plans and
any award issued under those Plans.
The Nominating Committee is currently comprised of Dr. Cohen and Messrs.
Greenshields and Delaney. The Nominating Committee was established in
December 1995 to identify candidates for the Company's Board of Directors.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ending December 31, 1995,
1994 and 1993, the cash compensation paid by the Company, as well as certain
other compensation paid or accrued for those years, to Daniel E. Cohen, M.D.,
the Company's Chief Executive Officer, and each of the other four most highly
compensated executive officers of the Company as of December 31, 1995
(together with Dr. Cohen, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION (1)
<S> <C> <C> <C> <C> <C>
Daniel E. Cohen, M.D. 1995 $141,400 $141,400 200,000 $300
Chief Executive Officer, 1994 115,600 -0- -0- 300
Treasurer and Chairman 1993 102,423 -0- -0- 300
of the Board
Richard E. Jahnke 1995 140,500 140,500 75,000 300
President and 1994 112,000 -0- -0- 300
Chief Operating Officer 1993 81,410(2) -0- 200,000 250
Kirk P. Hodgdon 1995 125,250 75,150 50,000 300
Vice President of 1994 102,769(3) -0- 60,000 250
Consumer Marketing 1993 -0- -0- -0- -0-
Rihab Fitzgerald 1995 96,250 57,750 50,000 300
Vice President of 1994 90,419 -0- -0- 264
Consumer Sales 1993 70,628 -0- 10,000 233
Ronald D. Cox 1995 93,750 56,250 40,000 300
Vice President of 1994 75,000 -0- -0- 240
Finance and Chief 1993 68,068 -0- 10,000 226
Financial Officer (4)
</TABLE>
(1) Represents the payment of life insurance premiums.
(2) Mr. Jahnke became President and Chief Operating Officer effective March
8, 1993 and received a salary for only ten months in 1993.
(3) Mr. Hodgdon became Vice President of Consumer Marketing effective
February 21, 1994 and received a salary for the remainder of 1994.
(4) Mr. Cox retired in February 1996.
STOCK OPTIONS
The following table contains information concerning grants of stock options
to the Named Executives during 1995. All options were granted at an exercise
price equal to the fair market value of the Common Stock on the date of
grant.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
POTENTIAL
REALIZABLE VALUE AT
NUMBER % OF TOTAL ASSUMED ANNUAL
OF SECURITIES OPTIONS EXERCISE OR RATE OF STOCK
UNDERLYING GRANTED TO BASE PRICE APPRECIATION
OPTIONS EMPLOYEES PRICE EXPIRATION FOR OPTION TERM
NAME GRANTED (#) IN 1995 ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen 200,000(1) 28.7% $5.50 02/09/05 $691,784 $1,753,117
Richard E. Jahnke 75,000(1) 10.7% 5.50 02/09/05 259,419 657,419
Kirk P. Hodgdon 50,000(1) 7.2% 5.50 02/09/05 172,946 438,279
Rihab Fitzgerald 50,000(1) 7.2% 5.50 02/09/05 172,946 438,279
Ronald D. Cox 40,000(2) 5.7% 5.50 02/09/05 138,357 350,623
</TABLE>
(1) The options vest as follows: 25% on each of February 9, 1995, 1996, 1997
and 1998.
(2) The option vested 50% on each of February 9, 1995 and 1996.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executives concerning the exercise of options during 1995 and unexercised
options held as of December 31, 1995:
AGGREGATED OPTION EXERCISES IN 1995 AND
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT DECEMBER 31, 1995 (#) AT DECEMBER 31, 1995 (1)
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Cohen -0- N/A 50,000 150,000 $ 481,250 $1,443,750
Richard E. Jahnke 6,000 $ 88,500 92,750 176,250 1,202,594 2,198,906
Kirk P. Hodgdon 6,000 75,375 18,500 85,500 190,063 918,937
Rihab Fitzgerald 1,100 13,681 55,400 43,500 695,394 437,812
Ronald D. Cox 10,000 162,500 44,000 26,000 512,500 269,375
</TABLE>
(1) Based on the closing sale price of $15.125 per share for the Common Stock
on December 31, 1995.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
the Company's Common Stock as of March 1, 1996, and as adjusted for the sale
of the Common Stock offered hereby, for (i) each person who is known to the
Company to beneficially own more than five percent (5%) of the outstanding
Common Stock, (ii) each director of the Company, (iii) each executive officer
named in the Summary Compensation Table above, (iv) all directors and
executive officers of the Company as a group, and (v) each Selling
Stockholder:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED NUMBER SHARES TO
PRIOR TO OFFERING OF SHARES BE BENEFICIALLY OWNED
(1)(2) BEING AFTER OFFERING (1) (2)
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED (3) NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Richard W. Perkins (4) 1,291,908 7.4% -0- 1,291,908 6.8%
Perkins Capital Management, Inc.
730 East Lake Street
Wayzata, MN 55391
Daniel E. Cohen, M.D. (5) 800,664 4.6% 50,000 750,664 4.0%
Richard E. Jahnke 151,500 * 20,000 131,500 *
Patrick Delaney 60,066 * -0- 60,066 *
R. Hunt Greene 40,000 * -0- 40,000 *
Andrew J. Greenshields (6) 34,000 * -0- 34,000 *
Kirk P. Hodgdon 43,000 * 5,000 38,000 *
Rihab Fitzgerald (7) 145,484 * 20,000 125,484 *
Ronald D. Cox 147,922 * -0- 147,922 *
William Doubek (8) 130,976 * 15,000 115,976 *
M. W. Anderson 86,798 * 5,000 81,798 *
Gerhard Tschautscher 50,500 * 10,000 40,500 *
All directors and officers as a group
(12 persons) (9) 2,844,996 15.7% 125,000 2,719,996 13.9%
</TABLE>
*Indicates ownership of less than one percent.
(1) Except as noted, all shares beneficially owned by each owner were owned
of record, and each owner held sole voting power and sole investment
power for all shares held.
(2) Includes the following number of shares which could be purchased under
stock options exercisable within sixty (60) days of the date hereof:
Mr. Perkins, 40,000 shares; Dr. Cohen, 100,000 shares; Mr. Jahnke,
151,500 shares; Mr. Greene, 40,000 shares; Mr. Delaney, 40,000 shares;
Mr. Greenshields, 30,000 shares; Mr. Hodgdon, 43,000 shares; Ms.
Fitzgerald, 67,900 shares; Mr. Cox, 70,000 shares; Mr. Doubek, 88,000
shares; Mr. Anderson, 54,000 shares; Mr. Tschautscher 50,500 shares;
and all directors and officers as a group, 714,900 shares. Does not
include stock options to purchase 20,000 shares of Common Stock held by
each of Messrs. Perkins, Delaney, Greene and Greenshields which will
vest if such individuals are re-elected to the Company's Board of
Directors at the Annual Meeting of Shareholders on April 24, 1996.
(3) Includes an aggregate of 40,000 shares of Common Stock issuable upon
exercise of currently exercisable stock options for the following
beneficial owners in the following amounts: Richard E. Jahnke, 20,000
shares; Kirk P. Hodgdon, 5,000 shares; Rihab Fitzgerald, 5,000 shares;
and Gerhard Tschautscher, 10,000 shares. In the event that the
over-allotment option is exercised in full, the Selling Stockholders
will offer to sell an aggregate of 95,000 shares of Common Stock.
(4) Includes 1,126,560 shares of Common Stock held for the accounts of
clients of Perkins Capital Management, Inc., a registered investment
advisor of which Mr. Perkins is the controlling shareholder, a director
and President. Perkins Capital Management has the right to sell the
shares but does not have power to vote the shares. Mr. Perkins and
Perkins Capital Management disclaim beneficial ownership of such
shares. This total also includes 37,500 shares held in a trust created
by Mr. Perkins for his benefit, 10,000 shares held by a profit sharing
plan of which Mr. Perkins is a trustee, 4,000 shares held by a
corporation of which Mr. Perkins is sole shareholder, and 73,848 shares
held by a partnership of which Mr. Perkins is a general partner.
(5) Includes 327,332 shares of Common Stock owned by Dr. Cohen's spouse,
for which he has no voting or investment power.
(6) Includes 4,000 shares of Common Stock held by Mr. Greenshields jointly
with his spouse for which he has shared voting and dispositive power.
(7) Includes 1,442 shares of Common Stock held by Ms. Fitzgerald jointly with
her spouse for which she has shared voting and dispositive power.
(8) Includes 11,680 shares of Common Stock owned by Mr. Doubek's spouse for
which he has no voting or dispositive power.
(9) Includes 339,012 shares of Common Stock owned by spouses and 5,442 shares
owned jointly with spouses.
DESCRIPTION OF CAPITAL STOCK
The Company is currently authorized to issue 50,000,000 shares of Common
Stock, $.01 par value per share, 1,000,000 shares of Series A Junior
Participating Preferred Stock, par value $.01 per share (which may only be
issued upon a triggering event under the Rights Agreement described below
under "Rights Plan"), and 7,483,589 shares of undesignated Preferred Stock,
$.01 par value per share. As of March 1, 1996, 17,436,052 shares of Common
Stock, the only outstanding class of securities of the Company, were issued
and outstanding. All shares of Common Stock presently outstanding are, and
all shares of Common Stock being sold in this offering will be, legally
issued, fully paid and nonassessable.
COMMON STOCK
Holders of the Common Stock do not have preemptive rights to purchase
additional shares or other subscription rights. The Common Stock carries no
conversion rights and is subject neither to redemption nor to any sinking
fund provisions. All shares of Common Stock are entitled to share ratably in
dividends from sources legally available therefor when, as and if declared by
the Board of Directors, and upon liquidation or dissolution of the Company,
whether involuntary or voluntary, to share equally in the assets of the
Company available for distribution to common stockholders. The dividend and
liquidation rights of common stockholders are subordinate to those of
preferred stockholders.
RIGHTS PLAN
Each share of Common Stock has one Preferred Stock Purchase Right ("Right")
attached. Each whole Right entitles the holder to buy one-one hundredth of
the Company's Series A Junior Participating Preferred Stock at an initial
exercise price of $120 (subject to adjustment). The Rights will become
exercisable only if, with certain exceptions, a person or group becomes an
"Acquiring Person" by acquiring 17% or more of the outstanding Common Stock
or announcing a tender offer of 17% or more of the Common Stock. If the
Rights become exercisable, a holder generally will be entitled to purchase
for the exercise price of $120 the number of shares of Common Stock subject
to the Rights at a price per share equal to one-half of the then-current
market price per share of Common Stock. If the Company is acquired in a
merger or other business combination transaction, each Right will entitle its
holder to purchase, at the Right's exercise price, that number of shares of
the acquiring company's common stock having a then current market value of
twice the Right's exercise price.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 17% or more of the outstanding
Common Stock and prior to the acquisition by such person or group of 50% or
more of the outstanding Common Stock, the Board of Directors may exchange the
Rights (other than Rights owned by such person or group which have become
void), in whole or in part, at an exchange ratio per Right equal to the
result obtained by dividing the exercise price of a Right by the current per
share market price of the Common Stock, subject to adjustment. In addition,
the Company will be entitled to redeem the Rights, upon approval of a
majority of the independent directors of the Company, at $.001 per Right
(subject to adjustment) at any time prior to the twentieth day after a public
announcement that a person or group has acquired beneficially 17% or more of
the Common Stock. The Rights will expire on July 20, 2005 if not previously
redeemed or exercised.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including without limitation, the right to
vote or to receive dividends. The Rights have certain anti-takeover effects.
The Rights will cause substantial dilution to a person or group that attempts
to acquire the Company unless the offer is conditional on a substantial
number of Rights being acquired. The Rights, however, should not affect any
prospective offeror willing to make an offer at an equitable price and which
is otherwise in the best interests of the Company and its stockholders, as
determined by the Board of Directors. The Rights should not interfere with
any merger or other business combination approved by the Board of Directors
since the Board of Directors may, at its option, redeem the Rights at any
time until there is an Acquiring Person.
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement, a copy of which is
incorporated by reference as an exhibit to the Registration Statement.
PREFERRED STOCK
The Board of Directors is authorized to determine, without any further action
by the stockholders of the Company, the rights, preferences and privileges of
7,483,589 shares of authorized but unissued shares of Preferred Stock. Should
the Board of Directors elect to exercise its authority, the rights,
preferences and privileges of holders of the Company's Common Stock would be
made subject to the rights, preferences and privileges of the Preferred Stock
which could adversely affect the rights of holders of Common Stock and could
defer or prevent a change in control of the Company.
DELAWARE CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the Board of Directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote of at least two-thirds of the outstanding voting stock which is not
owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit
to the stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of the corporation's voting stock.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Norwest Bank Minnesota,
N.A.
UNDERWRITING
The Company and the Selling Stockholders have entered into a Purchase
Agreement (the "Purchase Agreement") with the underwriters listed in the
table below (the "Underwriters"), for whom Piper Jaffray Inc. and Montgomery
Securities are acting as representatives (the "Representatives"). Subject to
the terms and conditions set forth in the Purchase Agreement, the Company and
the Selling Stockholders have agreed to sell to the Underwriters, and each of
the Underwriters has severally agreed to purchase, the number of shares of
Common Stock set forth opposite such Underwriter's name in the table below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Piper Jaffray Inc.
Montgomery Securities
Total 1,500,000
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement if any is purchased (excluding shares
covered by the over-allotment option granted therein). In the event of a
default by any Underwriter, the Purchase Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or decreased or the Purchase Agreement may be terminated.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the Common Stock to the public
initially at the Price to Public set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share. Additionally, the Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share on
sales to certain other brokers and dealers. After the offering, the Price to
Public, concession and reallowance may be changed by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters
options, exercisable by the Representatives during the 30 day period after
the date of this Prospectus, under which the Underwriters may purchase up to
an additional 130,000 and 95,000 shares of Common Stock, respectively, at the
Price to Public less the Underwriting Discount set forth on the cover page of
this Prospectus. If the Underwriters purchase any of such additional shares
pursuant to this option, each Underwriter will be committed to purchase such
additional shares in approximately the same proportion as set forth in the
table above. The Underwriters may exercise the option only to cover
over-allotments, if any.
The Company, the Selling Stockholders and the officers and directors of the
Company have agreed that they will not, without the prior written consent of
Piper Jaffray Inc., sell, offer to sell, or otherwise dispose of any shares
of Common Stock or any options or rights to purchase any shares of Common
Stock for a period of 90 days after the date of this Prospectus.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of market makers not connected with
this offering and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified period prior to
the filing of this Prospectus with the Commission and must be discontinued
when such limit is reached. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise
prevail, and, if commenced, may be discontinued at any time.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or to contribute to payments which the Underwriters may
be required to make in respect thereof.
Piper Jaffray Inc. has periodically provided investment banking services to
the Company.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota. Patrick Delaney, a partner in Lindquist & Vennum P.L.L.P., is a
Director, the Secretary and a holder of Common Stock and options to purchase
Common Stock of the Company. Certain legal matters will be passed upon for
the Underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The financial statements and financial statement schedules of the Company
included or incorporated by reference in the Registration Statement of which
this Prospectus is a part have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as indicated in their reports
accompanying such financial statements and financial statement schedules, and
are included or incorporated herein in reliance upon such reports given upon
the authority of said firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors --
Dependence on Patents, Trademarks and Proprietary Rights" and "Business --
Patents, Trademarks, and Proprietary Rights," except as such statements
pertain to the License Agreement, have been reviewed and approved by Kinney &
Lange, patent counsel for the Company, as experts in such matters, and are
included herein in reliance upon such review and approval.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy and information
statements and other information can be inspected and copied at the public
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C., and the Commission's regional offices at Northwestern
Atrium Center, 5007 World Trade Center, 13th Floor, New York, New York 10048,
and 500 West Madison, 14th Floor, Chicago, Illinois 60604. Copies of such
material can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company's Common Stock is quoted on the Nasdaq National Market of the
National Association of Securities Dealers Automated Quotations system
("Nasdaq"), and such reports, proxy statements and other information
regarding the Company can be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement under the
Securities Act of 1933 with respect to the shares offered hereby. This
Prospectus does not contain all information set forth in such registration
statement. For further information with respect to the Company and the shares
offered hereby, reference is made to such registration statement, including
the exhibits and financial schedules filed as part thereof. Such information
may be inspected in the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies thereof may be obtained
from the Commission at prescribed prices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31, 1995,
as amended, and the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders are hereby incorporated by reference in this Prospectus. In
addition, all documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of any such person,
a copy of any or all of the documents incorporated hereby by reference, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such
copies should be directed to David J. Byrd, Chief Financial Officer, CNS,
Inc., P.O. Box 39802, Minneapolis, Minnesota 55439. Telephone requests may be
directed to Mr. Byrd at (612) 820-6696.
CNS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
Independent Auditors' Report F-2
Balance Sheets as of December 31, 1994 and 1995 F-3
Statements of Operations for the Years Ended December 31, 1993, 1994, and 1995 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994, and 1995 F-5
Statements of Cash Flows for the Years Ended December 31, 1993, 1994, and 1995 F-6
Notes to Financial Statements F-7
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CNS, Inc.:
We have audited the accompanying balance sheets of CNS, Inc. as of December
31, 1994 and 1995 and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CNS, Inc. as of December 31,
1994 and 1995 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1996
CNS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 783,704 $ 8,551,919
Marketable securities 5,240,662 1,950,354
Accounts receivable, net of allowance for doubtful accounts 936,279 7,830,793
of $55,000 in 1994 and $201,000 in 1995
Inventories 1,125,009 11,100,909
Prepaid expenses and other current assets 245,619 997,674
Deferred income taxes 0 879,000
Net assets of discontinued operations 2,865,520 0
Total current assets 11,196,793 31,310,649
Property and equipment, net 303,574 558,999
Patents and trademarks, net 112,504 126,887
Certificate of deposit, restricted 0 320,000
Deferred income taxes 0 24,000
$ 11,612,871 $32,340,535
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 272,039 $ 3,778,077
Accrued expenses 134,297 1,169,116
Accrued income taxes 0 508,000
Total current liabilities 406,336 5,455,193
Stockholders' equity:
Common stock--$.01 par value:
Authorized 50,000,000 shares; issued and outstanding 170,416 173,878
17,041,656 shares in 1994 and 17,387,852 shares in 1995
Additional paid-in capital 24,229,583 25,828,434
Retained earnings (deficit) (13,193,464) 883,030
Total stockholders' equity 11,206,535 26,885,342
Commitments (notes 10 and 11) $ 11,612,871 $32,340,535
</TABLE>
The accompanying notes are an integral part of the financial statements.
CNS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 1993, 1994, AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Net sales $ 93,352 $ 2,798,174 $48,631,855
Cost of goods sold 48,512 1,789,545 17,554,413
Gross profit 44,840 1,008,629 31,077,442
Operating expenses:
Marketing and selling 0 3,099,806 16,695,428
General and administrative 440,394 666,459 1,983,928
Total operating expenses 440,394 3,766,265 18,679,356
Operating income (loss) (395,554) (2,757,636) 12,398,086
Other income (expense):
Interest income 21,801 207,480 583,919
Interest expense (15,000) (7,945) (12,500)
Other income 90,000 0 0
Other income, net 96,801 199,535 571,419
Income (loss) from continuing operations (298,753) (2,558,101) 12,969,505
before income taxes
Income tax benefit 0 0 341,000
Income (loss) from continuing operations (298,753) (2,558,101) 13,310,505
Loss from operations of discontinued sleep division (1,132,020) (309,314) (459,901)
(less applicable income tax benefit of $0, $0, and
$259,000 in 1993, 1994, and 1995, respectively)
Gain on sale of sleep division (less applicable 0 0 1,225,890
income taxes of $0, $0, and $690,000 in 1993, 1994,
and 1995, respectively)
Net income (loss) $(1,430,773) $(2,867,415) $14,076,494
Net income (loss) per common and common equivalent
share:
From continuing operations $ (0.02) $ (0.16) $ 0.72
From discontinued operations (0.09) (0.02) 0.04
Net income (loss) per share $ (0.11) $ (0.18) $ 0.76
Weighted average number of common and common
equivalent shares outstanding 13,145,276 15,754,586 18,375,525
</TABLE>
The accompanying notes are an integral part of the financial statements.
CNS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL RETAINED TOTAL
NUMBER PAR PAID-IN EARNINGS STOCKHOLDERS'
OF SHARES VALUE CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 13,124,202 $131,242 $13,964,561 $ (8,895,276) $ 5,200,527
Stock issued in connection with 21,502 216 32,165 0 32,381
Employee Stock Purchase Plan
Stock options exercised 57,400 574 68,797 0 69,371
Net loss for the year 0 0 0 (1,430,773) (1,430,773)
Balance at December 31, 1993 13,203,104 132,032 14,065,523 (10,326,049) 3,871,506
Proceeds from public stock 3,450,000 34,500 9,627,382 0 9,661,882
offering less issuance costs of
$1,119,368
Stock issued in connection with 15,552 154 33,676 0 33,830
Employee Stock Purchase Plan
Stock options exercised 133,000 1,330 163,352 0 164,682
Warrants exercised 240,000 2,400 339,600 0 342,000
Warrants issued 0 0 50 0 50
Net loss for the year 0 0 0 (2,867,415) (2,867,415)
Balance at December 31, 1994 17,041,656 170,416 24,229,583 (13,193,464) 11,206,535
Stock issued in connection with 5,365 54 22,377 0 22,431
Employee Stock Purchase Plan
Stock options exercised 129,870 1,299 379,034 0 380,333
Tax benefit from stock options 0 0 485,000 0 485,000
exercised
Warrants exercised, less 210,961 2,109 712,440 0 714,549
issuance costs of $35,438
Net income for the year 0 0 0 14,076,494 14,076,494
Balance at December 31, 1995 17,387,852 $173,878 $25,828,434 $ 883,030 $26,885,342
</TABLE>
The accompanying notes are an integral part of the financial statements.
CNS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(1,430,773) $(2,867,415) $14,076,494
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Net gain on sale of assets of discontinued 0 0 (1,915,890)
operations
Depreciation and amortization 3,886 59,707 184,135
Deferred income taxes 0 0 (418,000)
Loss on sale of fixed assets 0 0 3,293
Changes in operating assets and liabilities:
Accounts receivable (191,727) (744,552) (6,894,514)
Inventories (407,383) (717,626) (9,975,900)
Prepaid expenses and other current assets (50,135) (195,484) (752,055)
Net assets of discontinued operations 890,745 205,433 (814,201)
Accounts payable 235,879 36,160 3,506,038
Accrued expenses 115,502 18,795 1,034,819
Accrued income taxes 0 0 508,000
Net cash used in operating activities (834,006) (4,204,982) (1,457,781)
Investing activities:
Change in marketable securities 0 (5,240,662) 3,290,308
Payments for purchases of property and equipment (99,215) (229,414) (383,810)
Payments for patents and trademarks (60,136) (90,906) (73,426)
Purchase of certificate of deposit, restricted 0 0 (320,000)
Net proceeds from promissory note 0 0 595,611
Net cash provided by (used in) investing activities (159,351) (5,560,982) 3,108,683
Financing activities:
Net proceeds from sale of discontinued operations 0 0 5,000,000
Net proceeds from public stock offering 0 9,661,932 0
Proceeds from the issuance of common stock 32,381 33,830 22,431
under Employee Stock Purchase Plan
Proceeds from the exercise of stock options 69,371 164,682 380,333
Proceeds from exercise of common stock warrants 0 342,000 714,549
Net cash provided by financing activities 101,752 10,202,444 6,117,313
Net (decrease) increase in cash and (891,605) 436,480 7,768,215
cash equivalents
Cash and cash equivalents:
Beginning of year 1,238,829 347,224 783,704
End of year $ 347,224 $ 783,704 $ 8,551,919
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 10,000 $ 12,945 $ 12,500
</TABLE>
Supplemental schedule of noncash operating and investing activities:
A note receivable of $595,611 was obtained in 1995 as a result of the sale
of the Sleep Products
Disorder Diagnostic Division.
The accompanying notes are an integral part of the financial statements.
CNS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
CNS, Inc. (the "Company"), designs, manufactures and markets consumer
products, primarily the Breathe Right nasal strip. The Breathe Right nasal
strip is a nonprescription, single use, disposable device that can reduce or
eliminate snoring by improving nasal breathing and temporarily relieve nasal
congestion. The Breathe Right nasal strip is sold over-the-counter in retail
outlets, including drug, grocery and mass merchant stores, primarily in the
U.S. During 1995, the Company signed an international distribution agreement
with 3M Company to market Breathe Right nasal strips outside the U.S. and
Canada.
REVENUE RECOGNITION
Revenue from sales is recognized at the time products are shipped.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments requires disclosure of the fair value of all
financial instruments to which the company is a party. All financial
instruments are carried at amounts that approximate estimated fair value.
CASH EQUIVALENTS
Cash equivalents at December 31, 1995 consist primarily of U.S. Treasury
bills.
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
MARKETABLE SECURITIES
The Company classifies its marketable debt securities as available-for-sale
and records these securities at fair market value. Net realized and
unrealized gains and losses are determined on the specific identification
cost basis. Any unrealized gains and losses are reflected as a separate
component of stockholders' equity. A decline in the market value of any
available-for-sale or held-to-maturity security below cost that is deemed
other than temporary, results in a charge to operations resulting in the
establishment of a new cost basis for the security.
INVENTORIES
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment is depreciated using the
straight-line method over five years. Leasehold improvements are amortized
over the lesser of the estimated useful life of the improvement or the term
of the lease.
PATENTS AND TRADEMARKS
Patents and trademarks are stated at cost and are amortized over three years
using the straight-line method.
FOREIGN SALES
Foreign sales are made in U.S. dollars only. There are no currency
conversions.
ADVERTISING
The Company adopted Statement of Position No. 93-7, Reporting on Advertising
Costs, January 1, 1995. This SOP requires that all advertising costs be
expensed as incurred or the first time the advertising takes place, except
for direct response advertising, which can be capitalized and written off
over the period during which the benefits are expected. The adoption did not
have a material effect on the financial statements of the Company.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under
this method, deferred tax liabilities and assets and the resultant provision
for income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
Net income per share has been computed based upon the weighted average number
of common and common equivalent shares outstanding during the year. Net loss
per common share has been computed using the weighted average number of
common shares outstanding during the year.
All share and per share amounts in the accompanying financial statements have
been retroactively adjusted to reflect a two-for-one stock split to
stockholders of record on June 1, 1995, which was distributed on June 22,
1995. The par value remained at $.01 per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995 the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121). SFAS No. 121 prescribes accounting
and reporting standards when circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company adopted SFAS No. 121 during
1995, which had no impact on the financial statements.
In October 1995 the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation. In 1996 the Company intends to
adopt the disclosure provisions of the statement while continuing to account
for options and other stock-based compensation using the intrinsic
value-based method.
2. SALE OF DIVISION
On June 1, 1995 the Company completed the sale of all the assets of its Sleep
Disorder Diagnostic Products Division ("Sleep"). Net sale proceeds of
$5,000,000 cash and a note receivable of $595,611 resulted in a gain on the
sale of discontinued operations of $1,915,890. The net loss of this operation
is shown on the statement of operations as the loss from discontinued
operations. The net assets of Sleep were $2,865,520 at December 31, 1994.
3. MARKETABLE SECURITIES
Marketable securities consist of U.S. Treasury bills and a U.S. Government
money market fund. Investments are recorded at cost plus accrued interest
earned. Due to the short-term maturity of the Company's marketable
securities, the market value approximates their carrying value.
4. ADVERTISING
The Company expenses the production costs of advertising the first time the
advertising takes place.
At December 31, 1994 and 1995 $226,969 and $561,493, respectively, of
advertising costs were reported as assets. Advertising expense was $0,
$2,429,205, and $11,839,033 in 1993, 1994, and 1995, respectively.
5. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
DECEMBER 31,
1994 1995
Inventories:
Finished goods $ 932,407 $ 9,364,102
Work in process 171 199,765
Raw materials and component parts 192,431 1,537,042
Total inventories $1,125,009 $11,100,909
Property and equipment:
Production equipment $ 248,368 $ 526,717
Office equipment 68,135 127,491
Leasehold improvements 12,126 46,105
328,629 700,313
Less accumulated depreciation and 25,055 141,314
amortization
Property and equipment, net $ 303,574 $ 558,999
Patents and trademarks:
Patents and trademarks $ 151,042 $ 224,468
Less accumulated amortization (38,538) (97,581)
Patents and trademarks, net $ 112,504 $ 126,887
Accrued expenses:
Royalty and commissions (draws) $ (10,901) $ 643,008
Promotions 29,950 385,657
Vacations 61,692 102,221
Other 53,556 38,230
Total accrued expenses $ 134,297 $ 1,169,116
6. LINE OF CREDIT
The Company has a $1.25 million bank line of credit. Borrowings are due on
demand, bear interest at 1% over a defined base rate (8.5% at December 31,
1995), are secured by substantially all assets of the Company, and are
subject to certain restrictive covenants. Borrowings are limited to
$1,250,000 or 75% of eligible accounts receivable. There were no borrowings
against this line of credit as of December 31, 1995. The line of credit
expires on March 31, 1996.
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company's stock option plans allow for grant of options to officers,
directors, and employees to purchase up to 2,200,000 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.
Stock option activity under these plans is summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 1.155 - 2.125 353,400 717,222
Granted 1.3125 - 2.3125 386,000 (386,000)
Exercised 1.155 - 2.125 (57,400) 0
Balance at December 31, 1993 1.155 - 2.3125 682,000 331,222
1994 plan - 0 1,000,000
Granted 3.095 - 4.125 530,000 (530,000)
Exercised 1.155 - 2.3125 (133,000) 0
Canceled 1.47 - 2.3125 (31,400) 31,400
Balance at December 31, 1994 1.155 - 3.50 1,047,600 832,622
Granted 4.50 - 16.125 698,000 (698,000)
Exercised 1.155 - 11.375 (129,870) 0
Canceled 2.125 - 5.50 (107,430) 107,430
Balance at December 31, 1995 $ 1.155 - 16.125 1,508,300 242,052
</TABLE>
Currently exercisable options aggregated 263,040 shares and 653,000 shares of
common stock at December 31, 1994 and 1995, respectively.
The 1990 stock option plan allows for the grant of shares of restricted
common stock. No shares of restricted common stock have been granted under
this plan as of December 31, 1995.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan allows eligible employees to purchase shares
of the Company's common stock through payroll deductions. The purchase price
is the lower of 85% of the fair market value of the stock on the first or
last day of each six-month period during which an employee participated in
the plan. The Company has reserved 200,000 shares under the plan of which
135,493 shares have been purchased by employees as of December 31, 1995.
WARRANTS
During 1995 warrants to purchase 200,000 shares at $3.75 were exercised. The
warrants had been issued in 1994 to the underwriter of the Company's 1994
public stock offering.
In connection with an agreement to license a product to be marketed as the
Breathe Right device, the licenser was issued a warrant to purchase 100,000
shares of the Company's common stock exercisable at a price of $2.75 per
share which expires March 1997. During 1995 a total of 12,500 shares were
exercised.
During 1994 warrants to purchase 240,000 shares at $1.425 were exercised. The
warrants had been issued in 1992 to the underwriter of the Company's 1992
public stock offering.
PREFERRED STOCK
At December 31, 1995, 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 7,483,589 shares of undesignated
preferred stock.
8. INCOME TAXES
Income tax expense (benefit), from continuing operations, for the three years
ended December 31, 1995, excluding tax on discontinued operations, is as
follows (in thousands):
CURRENT DEFERRED TOTAL
1995:
Federal $532 $(853) $(321)
State 30 (50) (20)
$562 $(903) $(341)
There was no tax expense in 1994 and 1993.
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by applying the U.S. federal
income tax rate of 35% as a result of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1993 1994 1995
<S> <C> <C> <C>
Computed tax expense (benefit) $(105) $(895) $ 4,539
State taxes, net of federal benefit 0 0 389
Change in income tax benefit resulting from tax benefit of 105 895 0
net operating loss not recognized for financial statement
purposes
Change in deferred tax asset valuation allowance 0 0 (5,439)
Other 0 0 170
Actual tax expense (benefit) $ 0 $ 0 $ (341)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities calculated
using an effective tax rate of 40% and 37% for 1994 and 1995, respectively,
are presented below (in thousands):
DECEMBER 31,
1994 1995
Deferred tax assets:
Inventory items $ 214 $275
Accounts receivable allowance 53 74
Property and equipment 0 25
Accrued expenses 120 213
Deferred maintenance 113 0
contracts
Tax credits 312 316
Net operating loss 4,686 0
5,498 903
Less valuation allowance 5,439 0
59 903
Deferred tax liabilities:
Property and equipment (59) 0
Net deferred tax assets $ 0 $903
A valuation allowance is provided when there is some likelihood that all or a
portion of a deferred tax asset may not be realized. The Company has
determined that establishing a valuation allowance for the deferred tax
assets as of December 31, 1995 is not required since it is more likely than
not that the deferred tax assets will be realized principally through future
taxable income. Based on tax rates in effect at December 31, 1995
approximately $2,500,000 of future taxable income is required prior to
December 31, 2009 for full realization of the net deferred tax asset.
The Company has federal and state tax credit carryforwards of $316,000 at
December 31, 1995 which are available to reduce income taxes payable in
future years and expire between 1999 and 2009.
9. SALES
The Company had two significant customers who accounted for approximately 37%
of Breathe Right product sales for the year ended December 31, 1994 and had
one significant customer who accounted for approximately 13% of Breathe Right
product sales for the year ended December 31, 1995. Accounts receivable from
these customers as of December 31, 1994 and 1995 were $388,386 and
$1,319,137, respectively.
Foreign sales were not significant in 1993, 1994 or 1995.
10. LICENSE AGREEMENT
On January 30, 1992 the Company entered into an agreement to exclusively
license a product to be marketed as the Breathe Right device. Royalties due
under this agreement are based on a sliding percentage of sales beginning at
5% and declining to 3%. Future royalties will be at 3%. To maintain the
Company's license, it must make minimum royalty payments of $160,000 in 1996;
$300,000 in 1997; and $450,000 each year thereafter until the patent for the
product expires. Royalty expense in 1993, 1994, and 1995 was $20,000,
$110,844, and $1,458,473, respectively.
11. OPERATING LEASES
The Company leases equipment and office space under noncancelable operating
leases which expire over the next five years. Future minimum lease payments
due in accordance with these leases as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
1996 $ 319,028
1997 402,410
1998 402,410
1999 402,410
2000 368,876
$1,895,134
Total rental expense for operating leases was $351,659 in 1993, $350,859 in
1994, and $376,873 in 1995.
The Company's office space lease requires a $320,000 letter of credit to
remain with the lessor. The letter of credit is secured by a $320,000
certificate of deposit which bears interest at 5.75% per annum and matures on
April 30, 1998.
Inside Back Cover Graphics:
SIX PHOTOS OF ATHLETES WEARING A BREATHE RIGHT(R) NASAL STRIP:
Football player; Rollerblader;
Runner; Hockey player;
Cycler; Tennis player
TEXT: ATHLETIC
USE INCREASES
CONSUMER
AWARENESS
Widespread use by
prominent athletes has
resulted in increased
consumer awareness of the
product for both its
medical and athletic uses.
2 package boxes of Breathe Right(R) nasal strips shown:
small/medium quantity of 8
medium/large quantity of 8
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 10
Price Range of Common Stock 10
Dividend Policy 10
Capitalization 11
Selected Financial Data 12
Management's Discussion and Analysis of 13
Financial Condition and Results of
Operations
Business 17
Management 28
Principal and Selling Stockholders 32
Description of Capital Stock 33
Underwriting 35
Legal Matters 36
Experts 36
Available Information 36
Incorporation of Certain Documents by 37
Reference
Index to Financial Statements F-1
1,500,000 SHARES
[LOGO]
COMMON STOCK
P R O S P E C T U S
PIPER JAFFRAY INC.
MONTGOMERY SECURITIES
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee $ 11,564
NASD fee 3,853
Nasdaq listing fee 17,500
Accounting fees and expenses 35,000*
Legal fees and expenses 75,000*
Printing expenses 35,000*
Blue Sky fees and expenses 11,500*
Transfer agent and registrar fees 2,500*
Miscellaneous 33,083*
Total $225,000
*Except for the SEC, NASD and Nasdaq fees, all of the foregoing expenses have
been estimated.
ITEM 15: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes Delaware
corporations to indemnify directors and officers for actions taken in good
faith and in a manner such person reasonably believes to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceedings, that such person had no reasonable cause to believe
were unlawful.
Article 8 of the Company's Certificate of Incorporation reads as
follows:
"A director of this corporation shall not be liable to the corporation
or the shareholders of this corporation for monetary damages for a
breach of the fiduciary duty of care as a director, except to the
extent such exceptions from liability or limitation thereof is not
permitted under the Delaware General Corporation Law as the same exists
or hereafter is amended. The corporation shall, to the fullest extent
permitted under Delaware Corporation Law as the same currently exists
or hereafter is amended, indemnify the directors of this corporation."
The Company's Bylaws provide for the indemnification of its directors,
officers, employees, and agents in accordance with, and to the fullest extent
permitted by, the provisions of the Delaware General Corporation Law, as
amended from time to time.
The Company's Bylaws also grant the Board of Directors broad powers to manage
the Company. Pursuant to those powers, the Board of Directors may authorize
the purchase and maintenance of insurance on behalf of any of the Company's
officers and directors against any liability asserted against or incurred by
that person in such capacity or arising out of that person's status as such,
whether or not the Company would have the power to indemnify the person
against such liability under the provisions of Delaware or federal law. The
Company currently maintains such insurance.
Reference is made to Section 6 of the Purchase Agreement (Exhibit 1.1) which
provides certain indemnification rights to the directors and officers of the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
1.1 Form of Purchase Agreement
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P.*
23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants*
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5.1 above)
23.3 Consent of Kinney & Lange*
24 Powers of Attorney *
</TABLE>
*Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions
or otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
2. That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
3. That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe it meets all of the
requirements for filing a Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on the 13th day of
March, 1996.
CNS, INC.
By /s/ DANIEL E. COHEN
Daniel E. Cohen, M.D., Chairman of the Board,
Chief Executive Officer, Treasurer and Director
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons on March 13th, 1996 in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/S/ DANIEL E. COHEN Chairman of the Board, Chief Executive Officer,
Daniel E. Cohen, M.D. Treasurer and Director
(principal executive officer)
/S/ RICHARD E. JAHNKE President, Chief Operating Officer and Director
Richard E. Jahnke
/S/ DAVID J. BYRD Vice President of Finance and
David J. Byrd Chief Financial Officer
(principal financial and accounting officer)
/S/ R. HUNT GREENE* Director
R. Hunt Greene
/S/ ANDREW J. GREENSHIELDS* Director
Andrew J. Greenshields
/S/ PATRICK DELANEY* Director
Patrick Delaney
/S/ RICHARD W. PERKINS* Director
Richard W. Perkins
* By: /s/ DANIEL E. COHEN, M.D.
Daniel E. Cohen, M.D.
Attorney-in-fact
</TABLE>
CNS, INC.
EXHIBITS TO REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
<S> <C> <C>
1.1 Form of Purchase Agreement..........................................
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P.*
23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants*
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5.1 above)
23.3 Consent of Kinney & Lange*
24 Powers of Attorney (included on signature page hereof)
</TABLE>
*Previously filed.
EXHIBIT 1.1
1,500,000 SHARES(1)
CNS, INC.
COMMON STOCK, $.01 PAR VALUE
PURCHASE AGREEMENT
March __, 1996
PIPER JAFFRAY INC.
MONTGOMERY SECURITIES
As Representatives of the several
Underwriters named in Schedule II hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
CNS, Inc., a Delaware corporation (the "Company"), and the stockholders
of the Company listed in Schedule I hereto (the "Selling Stockholders")
severally propose to sell to the several Underwriters named in Schedule II
hereto (the "Underwriters") an aggregate of 1,500,000 shares (the "Firm Shares")
of Common Stock, $.01 par value (the "Common Stock"), of the Company. The Firm
Shares consist of 1,375,000 authorized but unissued shares of Common Stock to be
issued and sold by the Company and 125,000 outstanding shares of Common Stock to
be sold by the Selling Stockholders. The Company and certain Selling
Stockholders have also granted to the several Underwriters an option to purchase
up to 225,000 additional shares of Common Stock on the terms and for the
purposes set forth in Section 3 hereof (the "Option Shares"). The Firm Shares
and any Option Shares purchased pursuant to this Purchase Agreement are herein
collectively called the "Securities."
The Company and the Selling Stockholders hereby confirm their agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives").
1. Registration Statement. A registration statement on Form S-3 (File
No. 333-_____) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations ("Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder and has been filed with the Commission; one or
more amendments to such registration statement have also been so prepared and
have been, or will be, so filed. Copies of such registration statement and
amendments and each related preliminary prospectus have been delivered to you.
- --------
(1) Plus an option to purchase up to 225,000 additional shares to cover
over-allotments.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, together with (a) any registration statement filed by the Company
pursuant to Rule 462(b) under the Act and (b) the documents incorporated by
reference in the Prospectus contained in the Registration Statement at the time
such Registration Statement became effective, and, in the event of any amendment
thereto after the effective date and prior to the First Closing Date (as
hereinafter defined), such registration statement as so amended (but only from
and after the effectiveness of such amendment), including the information deemed
to be part of the registration statement at the time of effectiveness pursuant
to Rule 430A(b), if applicable, is hereinafter called the "Registration
Statement." The prospectus included in the Registration Statement at the time it
is or was declared effective by the Commission is hereinafter called the
"Prospectus," except that if any prospectus filed by the Company with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or any other
prospectus provided to the Underwriters by the Company for use in connection
with the offering of the Securities (whether or not required to be filed by the
Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was declared effective by the Commission, the term "Prospectus"
shall refer to such differing prospectus from and after the time such prospectus
is filed with the Commission or transmitted to the Commission for filing
pursuant to such Rule 424(b) or from and after the time it is first provided to
the Underwriters by the Company for such use. The term "Prospectus" may refer,
if applicable, to the term sheet or abbreviated term sheet filed by the Company
with the Commission pursuant to Rule 424(b)(7) together with the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act from
and after the time it is first provided to the Underwriters by the Company for
delivery to purchasers of the Securities. The term "Preliminary Prospectus" as
used herein means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the Act and any
prospectus subject to completion as described in Rule 430A of the Rules and
Regulations. Any reference herein to any Preliminary Prospectus or Prospectus
shall be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
Preliminary Prospectus or Prospectus, as the case may be; any reference to any
amendment or supplement to any Preliminary Prospectus or Prospectus shall be
deemed to refer to and include any documents filed after the date of such
Preliminary Prospectus or Prospectus, as the case may be, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by
reference in such Preliminary Prospectus or Prospectus, as the case may be; and
any reference to any amendment to the Registration Statement shall be deemed to
refer to and include any annual report of the Company filed pursuant to Section
13(a) or 15(d) of the Exchange Act after the effective date of the Registration
Statement that is incorporated by reference in the Registration Statement.
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each
Preliminary Prospectus, at the time of filing thereof, did not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; except that the foregoing shall not apply to statements
in or omissions from any Preliminary Prospectus in reliance upon, and
in conformity with, written information furnished to the Company by
you, or by any Underwriter through you, specifically for use in the
preparation thereof.
(ii) The documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and any further documents
so filed and incorporated by reference in the Prospectus or any further
amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through you expressly for use therein.
(iii) As of the time the Registration Statement (or any
post-effective amendment thereto) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of
the Prospectus (or any supplement to the Prospectus) and at the First
Closing Date and Second Closing Date (as hereinafter defined), (A) the
Registration Statement and Prospectus (in each case, as so amended
and/or supplemented) will conform or conformed in all material respects
to the requirements of the Act and the Rules and Regulations, (B) the
Registration Statement (as so amended) will not or did not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (C) the Prospectus (as so supplemented)
will not or did not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they are or were made, not misleading; except that the
foregoing shall not apply to statements in or omissions from any such
document in reliance upon, and in conformity with, written information
furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof. If the Registration
Statement has been declared effective by the Commission, no stop order
suspending the effectiveness of the Registration Statement has been
issued, and no proceeding for that purpose has been initiated or, to
the Company's knowledge, threatened by the Commission.
(iv) The financial statements of the Company, together with
the notes thereto, set forth in the Registration Statement and
Prospectus comply in all material respects with the requirements of the
Act and fairly present the financial condition of the Company as of the
dates indicated and the results of operations and changes in cash flows
for the periods therein specified in conformity with generally accepted
accounting principles consistently applied throughout the periods
involved (except as otherwise stated therein); and the supporting
schedule incorporated by reference in the Registration Statement
presents fairly the information required to be stated therein. No other
financial statements or schedules are required to be included in the
Registration Statement or Prospectus. KPMG Peat Marwick LLP, which has
expressed its opinion with respect to the financial statements and
schedules filed as a part of the Registration Statement and included in
the Registration Statement and Prospectus, are independent public
accountants as required by the Act and the Rules and Regulations.
(v) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company has full corporate power and
authority to own its properties and conduct its business as currently
being carried on and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its business makes such
qualification necessary and in which the failure to so qualify would
have a material adverse effect upon its business, condition (financial
or otherwise) or properties, taken as a whole.
(vi) Except as contemplated in the Prospectus, subsequent to
the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company has not incurred
any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any
dividends or made any distribution of any kind with respect to its
capital stock; and there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the
Company, or any material adverse change, or any development involving a
prospective material adverse change, in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects,
net worth or results of operations of the Company, taken as a whole.
(vii) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the Company is a
party before or by any court or governmental agency, authority or body,
or any arbitrator, which might result in any material adverse change in
the condition (financial or otherwise), business, prospects, net worth
or results of operations of the Company, taken as a whole.
(viii) There are no contracts or documents of the Company that
are required to be filed as exhibits to the Registration Statement by
the Act or by the Rules and Regulations that have not been so filed or
incorporated by reference.
(ix) This Agreement has been duly authorized, executed and
delivered by the Company. The execution, delivery and performance of
this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute,
any agreement or instrument to which the Company is a party or by which
it is bound or to which any of its property is subject, the Company's
charter or by-laws, or any order, rule, regulation or decree of any
court or governmental agency or body having jurisdiction over the
Company or any of its properties; no consent, approval, authorization
or order of, or filing with, any court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated
hereby, including the issuance or sale of the Securities by the
Company, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and
authority to enter into this Agreement and to authorize, issue and sell
the Securities as contemplated by this Agreement.
(x) All of the issued and outstanding shares of capital stock
of the Company, including the outstanding shares of Common Stock, are
duly authorized and validly issued, fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and the holders
thereof are not subject to personal liability by reason of being such
holders; the Securities which may be sold hereunder by the Company have
been duly authorized and, when issued, delivered and paid for in
accordance with the terms hereof, will have been validly issued and
will be fully paid and nonassessable, and the holders thereof will not
be subject to personal liability by reason of being such holders; and
the capital stock of the Company, including the Common Stock, conforms
to the description thereof in the Registration Statement and
Prospectus. Except as otherwise stated in the Registration Statement
and Prospectus, there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the Company's
charter, by-laws or any agreement or other instrument to which the
Company is a party or by which the Company is bound. Neither the filing
of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights
for or relating to the registration of any shares of Common Stock or
other securities of the Company, except for such rights as have been
waived. Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company any
shares of the capital stock of the Company. The Company has an
authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus.
(xi) The Company holds, and is operating in compliance in all
material respects with, all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and
in full force and effect; and the Company is in compliance in all
material respects with all applicable federal, state, local and foreign
laws, regulations, orders and decrees.
(xii) The Company has good and marketable title to all
property described in the Registration Statement and Prospectus as
being owned by it, in each case free and clear of all liens, claims,
security interests or other encumbrances except such as are described
in the Registration Statement and the Prospectus; the property held
under lease by the Company is held by it under valid, subsisting and
enforceable leases with only such exceptions with respect to any
particular lease as do not interfere in any material respect with the
conduct of the business of the Company; except as stated in the
Registration Statement, the Company owns, has an exclusive license
under a license agreement or possesses all patents, patent
applications, trademarks, service marks, tradenames, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights necessary for the conduct of the
business of the Company as currently carried on and as described in the
Registration Statement and Prospectus; except as stated in the
Registration Statement and Prospectus, no name which the Company uses
and no other aspect of the business of the Company will involve or give
rise to any infringement of, or license or similar fees for, any
patents, patent applications, trademarks, service marks, tradenames,
trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets or other similar rights of others
material to the business or prospects of the Company, and the Company
has not received any notice alleging any such infringement or fee.
(xiii) The Company is not in violation of its charter or
by-laws or in breach of or otherwise in default in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by which
it may be bound, or to which any of the material property or assets of
the Company is subject.
(xiv) The Company has filed all federal, state, local and
foreign income and franchise tax returns required to be filed and is
not in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto, other than any
which the Company is contesting in good faith.
(xv) The Company has not distributed and will not distribute
any prospectus or other offering material in connection with the
offering and sale of the Securities other than any Preliminary
Prospectus or the Prospectus or other materials permitted by the Act to
be distributed by the Company.
(xvi) The Securities have been approved for designation upon
notice of issuance on the Nasdaq National Market under the symbol
"CNXS."
(xvii) The Company owns no capital stock or other equity or
ownership or proprietary interest in any corporation, partnership,
association, trust or other entity.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xix) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's fee
or agent's commission in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated
hereby.
(xx) The conditions for use of Form S-3, as set forth in the
General Instructions thereto, have been satisfied.
(xxi) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any person
or affiliate located in Cuba.
(b) Each Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters as follows:
(i) Such Selling Stockholder is the record and beneficial
owner of, and has, and on the First Closing Date and/or the Second
Closing Date, as the case may be, will have, valid and marketable title
to the Securities to be sold by such Selling Stockholder, free and
clear of all security interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other encumbrances; and
upon delivery of and payment for such Securities hereunder, the several
Underwriters will acquire valid and marketable title thereto, free and
clear of any security interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other encumbrances. Such
Selling Stockholder is selling the Securities to be sold by such
Selling Stockholder for such Selling Stockholder's own account and is
not selling such Securities, directly or indirectly, for the benefit of
the Company, and no part of the proceeds of such sale received by such
Selling Stockholder will inure, either directly or indirectly, to the
benefit of the Company other than as described in the Registration
Statement and Prospectus.
(ii) Such Selling Stockholder has duly authorized, executed
and delivered a Letter of Transmittal and Custody Agreement ("Custody
Agreement"), which Custody Agreement is a valid and binding obligation
of such Selling Stockholder, to Norwest Bank Minnesota, N.A., as
Custodian (the "Custodian"); pursuant to the Custody Agreement the
Selling Stockholder has placed in custody with the Custodian, for
delivery under this Agreement, the certificates representing the
Securities to be sold by such Selling Stockholder; such certificates
represent validly issued, outstanding, fully paid and nonassessable
shares of Common Stock; and such certificates were duly and properly
endorsed in blank for transfer, or were accompanied by all documents
duly and properly executed that are necessary to validate the transfer
of title thereto, to the Underwriters, free of any legend, restriction
on transferability, proxy, lien or claim, whatsoever.
(iii) Such Selling Stockholder has the power and authority to
enter into this Agreement and to sell, transfer and deliver the
Securities to be sold by such Selling Stockholder; and such Selling
Stockholder has duly authorized, executed and delivered to Daniel E.
Cohen and Richard E. Jahnke, as attorneys-in-fact (the
"Attorneys-in-Fact"), an irrevocable power of attorney (a "Power of
Attorney") authorizing and directing the Attorneys-in-Fact, or either
of them, to effect the sale and delivery of the Securities being sold
by such Selling Stockholder, to enter into this Agreement and to take
all such other action as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or
on behalf of such Selling Stockholder and each constitutes a valid and
binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnity hereunder or
thereunder may be limited by federal or state securities laws and
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or laws affecting the rights of creditors generally and
subject to general principles of equity. The execution and delivery of
this Agreement, the Custody Agreement and the Power of Attorney and the
performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is
bound, or any law, regulation, order or decree applicable to such
Selling Stockholder; no consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is required
for the execution, delivery and performance of this Agreement, the
Custody Agreement and the Power of Attorney or for the consummation of
the transactions contemplated hereby and thereby, including the sale of
the Securities being sold by such Selling Stockholder, except such as
may be required under the Act or state securities laws or blue sky
laws.
(v) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with
the offering and sale of the Securities other than any Preliminary
Prospectus or the Prospectus or other materials permitted by the Act to
be distributed by such Selling Stockholder.
(vi) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(vii) Such Selling Stockholder has reviewed the Registration
Statement and the Prospectus and to the best knowledge of such Selling
Stockholder neither the Registration Statement nor the Prospectus
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading regarding such Selling Stockholder,
the other Selling Stockholders, the Company or otherwise.
(viii) To the best knowledge of such Selling Stockholder, the
representations and warranties of the Company contained in paragraph
(a) of this Section 2 are true and correct.
(c) Any certificate signed by any officer of the Company and delivered
to you or to counsel for the Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby;
any certificate signed by or on behalf of any Selling Stockholder as such and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by such Selling Stockholder to each Underwriter as
to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell 1,375,000 Firm Shares, and each Selling
Stockholder agrees, severally and not jointly, to sell the number of Firm Shares
set forth opposite the name of such Selling Stockholder in Schedule I hereto, to
the several Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholders the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule II
hereto. The purchase price for each Firm Share shall be $________ per share. The
obligation of each Underwriter to each of the Company and the Selling
Stockholders shall be to purchase from each of the Company and the Selling
Stockholders that number of Firm Shares (to be adjusted by the Representatives
to avoid fractional shares) which represents the same proportion of the number
of Firm Shares to be sold by each of the Company and the Selling Stockholders
pursuant to this Agreement as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule II hereto represents to the total number of
Firm Shares to be purchased by all Underwriters pursuant to this Agreement. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraph (c) of this Section 3 and in Section 8
hereof, the agreement of each Underwriter is to purchase only the respective
number of Firm Shares specified in Schedule II.
The Firm Shares will be delivered by the Company and the Custodian to
you for the accounts of the several Underwriters against payment of the purchase
price therefor by certified or official bank check or other next day funds
payable to the order of the Company and the Custodian, as appropriate, at the
offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable, at
9:00 a.m., Minneapolis time, on the fourth full business day following the date
hereof, or at such other time as you and the Company determine, such time and
date of delivery being herein referred to as the "First Closing Date." The Firm
Shares, in definitive form and in such denominations and registered in such
names as you may request upon at least two business days' prior notice to the
Company and the Custodian, will be made available for checking and packaging at
the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable, at
least one business day prior to the First Closing Date.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company, with respect to 130,000 of the Option Shares, and certain of the
Selling Stockholders, with respect to the number of Option Shares set forth
opposite the name of such Selling Stockholder in Schedule I hereto, hereby grant
to the several Underwriters an option to purchase all or any portion of the
Option Shares at the same purchase price as the Firm Shares, for use solely in
covering any over-allotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the effective date of
this Agreement upon notice (confirmed in writing) by the Representatives to the
Company and to the Attorneys-in-Fact setting forth the aggregate number of
Option Shares as to which the several Underwriters are exercising the option,
the names and denominations in which the certificates for the Option Shares are
to be registered and the date and time, as determined by you, when the Option
Shares are to be delivered, such time and date being herein referred to as the
"Second Closing" and "Second Closing Date," respectively; provided, however,
that the Second Closing Date shall not be earlier than the First Closing Date
nor earlier than the second business day after the date on which the option
shall have been exercised. If the option is exercised, the obligation of each
Underwriter shall be to purchase from the Company and each Selling Stockholder
granting an option to purchase the Option Shares, on a pro rata basis, that
number of Option Shares (to be adjusted by the Representatives to avoid
fractional shares) which represents the same proportion that the number of
Option Shares granted by the Company and each such Selling Stockholder bears to
the total number of Option Shares. The number of Option Shares to be purchased
by each Underwriter shall be the same percentage of the total number of Option
Shares to be purchased by the several Underwriters as the number of Firm Shares
to be purchased by such Underwriter is of the total number of Firm Shares to be
purchased by the several Underwriters, as adjusted by the Representatives in
such manner as the Representatives deem advisable to avoid fractional shares. No
Option Shares shall be sold and delivered unless the Firm Shares previously have
been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Custodian and the Company,
as appropriate, to you for the accounts of the several Underwriters against
payment of the purchase price therefor by certified or official bank check or
other next day funds payable to the order of the Custodian or the Company, as
appropriate, at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may be
mutually acceptable at 9:00 a.m., Minneapolis time, on the Second Closing Date.
The Option Shares in definitive form and in such denominations and registered in
such names as you have set forth in your notice of option exercise, will be made
available for checking and packaging at the office of Piper Jaffray Inc., Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other
location as may be mutually acceptable, at least one business day prior to the
Second Closing Date.
(c) It is understood that you, individually and not as Representatives
of the several Underwriters, may (but shall not be obligated to) make payment to
the Company or the Selling Stockholders, on behalf of any Underwriter for the
Securities to be purchased by such Underwriter. Any such payment by you shall
not relieve any such Underwriter of any of its obligations hereunder. Nothing
herein contained shall constitute any of the Underwriters an unincorporated
association or partner with the Company or any Selling Stockholder.
4. Covenants.
(a) The Company covenants and agrees with the several Underwriters as
follows:
(i) If the Registration Statement has not already been
declared effective by the Commission, the Company will use its best
efforts to cause the Registration Statement and any post-effective
amendments thereto to become effective as promptly as possible; the
Company will notify you promptly of the time when the Registration
Statement or any post-effective amendment to the Registration Statement
has become effective or any supplement to the Prospectus has been filed
and of any request by the Commission for any amendment or supplement to
the Registration Statement or Prospectus or additional information; if
the Company has elected to rely on Rule 430A of the Rules and
Regulations, the Company will file a Prospectus containing the
information omitted therefrom pursuant to such Rule 430A with the
Commission within the time period required by, and otherwise in
accordance with the provisions of, Rules 424(b) and 430A of the Rules
and Regulations; the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus that, in your opinion, may be
necessary or advisable in connection with the distribution of the
Securities by the Underwriters; and the Company will not file any
amendment or supplement to the Registration Statement or Prospectus or
any document incorporated by reference in the Prospectus to which you
shall reasonably object by notice to the Company after having been
furnished a copy a reasonable time prior to the filing. The Company
will file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or
sale of the Securities.
(ii) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such purpose; and
the Company will promptly use its best efforts to prevent the issuance
of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(iii) Within the time during which a prospectus relating to
the Securities is required to be delivered under the Act, the Company
will comply as far as it is able with all requirements imposed upon it
by the Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Securities as
contemplated by the provisions hereof and the Prospectus. If during
such period any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances then existing, not misleading, or if during such
period it is necessary to amend the Registration Statement or
supplement the Prospectus to comply with the Act, the Company will
promptly notify you and will amend the Registration Statement or
supplement the Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify the
Securities for sale under the securities laws of such jurisdictions as
you reasonably designate and to continue such qualifications in effect
so long as required for the distribution of the Securities, except that
the Company shall not be required in connection therewith to qualify as
a foreign corporation or to execute a general consent to service of
process in any state.
(v) The Company will furnish to the Underwriters copies of the
Registration Statement (two of which will be signed and will include
all exhibits), each Preliminary Prospectus, the Prospectus, and all
amendments and supplements to such documents, in each case as soon as
available and in such quantities as you may from time to time
reasonably request.
(vi) During a period of five years commencing with the date
hereof, the Company will furnish to the Representatives, and to each
Underwriter who may so request in writing, copies of all periodic and
special reports furnished to the stockholders of the Company and all
information, documents and reports filed with the Commission, the
National Association of Securities Dealers, Inc. (the "NASD"), Nasdaq
or any securities exchange.
(vii) The Company will make generally available to its
security holders as soon as practicable, but in any event not later
than 15 months after the end of the Company's current fiscal quarter,
an earnings statement (which need not be audited) covering a 12-month
period beginning after the effective date of the Registration Statement
that shall satisfy the provisions of Section 11(a) of the Act and Rule
158 of the Rules and Regulations.
(viii) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented
from becoming effective under the provisions of Section 9(a) hereof or
is terminated, will pay or cause to be paid (A) all expenses (including
transfer taxes allocated to the respective transferees) incurred in
connection with the delivery to the Underwriters of the Securities, (B)
all expenses and fees (including, without limitation, fees and expenses
of the Company's accountants and counsel but, except as otherwise
provided below, not including fees of the Underwriters' counsel) in
connection with the preparation, printing, filing, delivery, and
shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits
thereto), the Securities, each Preliminary Prospectus, the Prospectus,
and any amendment thereof or supplement thereto, and the printing,
delivery, and shipping of this Agreement and other underwriting
documents, including Blue Sky Memoranda, (C) any filing fees and fees
and disbursements of the Underwriters' counsel incurred in connection
with the qualifications of the Securities for offering and sale by the
Underwriters or by dealers under the securities or blue sky laws of the
states and other jurisdictions which you shall designate in accordance
with Section 4(d) hereof, (D) the fees and expenses of any transfer
agent or registrar, (E) the filing fees incident to any required review
by the NASD of the terms of the sale of the Securities, (F) listing
fees, if any, and (G) all other costs and expenses incident to the
performance of its obligations hereunder that are not otherwise
specifically provided for herein. If the sale of the Securities
provided for herein is not consummated by reason of action by the
Company pursuant to Section 9(a) hereof which prevents this Agreement
from becoming effective, or by reason of any failure, refusal or
inability on the part of the Company or the Selling Stockholders to
perform any agreement on its or their part to be performed, or because
any other condition of the Underwriters' obligations hereunder required
to be fulfilled by the Company or the Selling Stockholders is not
fulfilled, the Company will reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and disbursements of
counsel) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. The Company
shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of
the Securities to be sold by it hereunder for the purposes set forth in
the Prospectus.
(x) The Company will not, without the prior written consent of
Piper Jaffray Inc., offer for sale, sell, contract to sell, grant any
option for the sale of or otherwise issue or dispose of any Common
Stock or any securities convertible into or exchangeable for, or any
options or rights to purchase or acquire, Common Stock, except to the
Underwriters pursuant to this Agreement and pursuant to employee stock
option plans and options outstanding on the date of this Agreement for
a period of 90 days after the commencement of the public offering of
the Securities by the Underwriters.
(xi) The Company either has caused to be delivered to you or
will cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each of the Company's directors
and officers, Selling Stockholders and Bruce C. Johnson stating that
such person agrees that he or she will not, without your prior written
consent, offer for sale, sell, contract to sell or otherwise dispose of
any shares of Common Stock or rights to purchase Common Stock, except
to the Underwriters pursuant to this Agreement, for a period of 90 days
after commencement of the public offering of the Securities by the
Underwriters.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(xiii) Except as provided herein, the Company will not incur
any liability for any finder's or broker's fee or agent's commission in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
(xiv) The Company will inform the Florida Department of
Banking and Finance at any time prior to the consummation of the
distribution of the Securities by the Underwriters if it commences
engaging in business with the government of Cuba or with any person or
affiliate located in Cuba. Such information will be provided within 90
days after the commencement thereof or after a change occurs with
respect to previously reported information.
(xv) The Company will use its best efforts to maintain the
designation of the Common Stock on the Nasdaq National Market.
(b) Each Selling Stockholder covenants and agrees with the several
Underwriters as follows:
(i) Except as otherwise agreed to by the Company and the
Selling Stockholder, such Selling Stockholder will pay all taxes, if
any, on the transfer and sale, respectively, of the Securities being
sold by such Selling Stockholder, the fees of such Selling
Stockholder's counsel and such Selling Stockholder's proportionate
share (based upon the number of Securities being offered by such
Selling Stockholder pursuant to the Registration Statement) of all
costs and expenses (except for legal and accounting expenses and fees
of the registrar and transfer agent) incurred by the Company pursuant
to the provisions of Section 4(a)(viii) of this Agreement; provided,
however, that each Selling Stockholder severally agrees to reimburse
the Company for any reimbursement made by the Company to the
Underwriters pursuant to Section 4(a)(viii) hereof to the extent such
reimbursement resulted from the failure or refusal on the part of such
Selling Stockholder to comply under the terms or fulfill any of the
conditions of this Agreement.
(ii) If this Agreement shall be terminated by the Underwriters
because of any failure, refusal or inability on the part of such
Selling Stockholder to perform any agreement on such Selling
Stockholder's part to be performed, or because any other condition of
the Underwriters' obligations hereunder required to be fulfilled by
such Selling Stockholder is not fulfilled, such Selling Stockholder
agrees to reimburse the several Underwriters for all out-of-pocket
disbursements (including fees and disbursements of counsel for the
Underwriters) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. The Selling
Stockholder shall not in any event be liable to any of the Underwriters
for loss of anticipated profits from the transactions covered by this
Agreement.
(iii) The Securities to be sold by such Selling Stockholder,
represented by the certificates on deposit with the Custodian pursuant
to the Custody Agreement of such Selling Stockholder, are subject to
the interest of the several Underwriters and the other Selling
Stockholders; the arrangements made for such custody are, except as
specifically provided in the Custody Agreement, irrevocable; and the
obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or in the Custody
Agreement, by any act of such Selling Stockholder, by operation of law,
whether by the liquidation, dissolution or merger of such Selling
Stockholder, by the death of such Selling Stockholder, or by the
occurrence of any other event. If any Selling Stockholder should
liquidate, dissolve or be a party to a merger or if any other such
event should occur before the delivery of the Securities hereunder,
certificates for the Securities deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such liquidation, dissolution, merger or other
event had not occurred, whether or not the Custodian shall have
received notice thereof.
(iv) Such Selling Stockholder will not, without the prior
written consent of Piper Jaffray Inc., offer for sale, sell, contract
to sell, grant any option for the sale of or otherwise dispose of any
Common Stock or any securities convertible into or exchangeable for, or
any options or rights to purchase or acquire, Common Stock, except to
the Underwriters pursuant to this Agreement, for a period of 90 days
after the commencement of the public offering of the Securities by the
Underwriters.
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(vi) Such Selling Stockholder shall immediately notify you if
any event occurs, or of any change in information relating to such
Selling Stockholder or the Company or any new information relating to
the Company or relating to any matter stated in the Prospectus or any
supplement thereto, which results in the Prospectus (as supplemented)
including an untrue statement of a material fact or omitting to state
any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company and the Selling Stockholders contained
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such later
time and date as you, as Representatives of the several Underwriters, shall
approve and all filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that the Registration
Statement or the Prospectus, or any amendment thereof or supplement thereto,
contains an untrue statement of fact which, in your opinion, is material, or
omits to state a fact which, in your opinion, is material and is required to be
stated therein or necessary to make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, the Company shall not have incurred any material liabilities
or obligations, direct or contingent, or entered into any material transactions,
or declared or paid any dividends or made any distribution of any kind with
respect to its capital stock; and there shall not have been any change in the
capital stock (other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt of the
Company, or any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock of the Company, or any material adverse
change or any development involving a prospective material adverse change
(whether or not arising in the ordinary course of business), in the general
affairs, condition (financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company, taken as a whole,
that, in your judgment, makes it impractical or inadvisable to offer or deliver
the Securities on the terms and in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Lindquist & Vennum
P.L.L.P., counsel for the Company, dated such Closing Date and addressed to you,
to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company has full corporate power and
authority to own its properties and conduct its business as currently
being carried on and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which it
owns or leases real property or in which the conduct of its business
makes such qualification necessary and in which the failure to so
qualify would have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the Company, taken
as a whole.
(ii) The capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under
the caption "Description of Capital Stock." All of the issued and
outstanding shares of the capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and
the holders thereof are not subject to personal liability by reason of
being such holders. The Securities to be issued and sold by the Company
hereunder have been duly authorized and, when issued, delivered and
paid for in accordance with the terms of this Agreement, will have been
validly issued and will be fully paid and nonassessable, and the
holders thereof will not be subject to personal liability by reason of
being such holders. Except as otherwise stated in the Registration
Statement and Prospectus, there are no preemptive rights or other
rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument known
to such counsel to which the Company is a party or by which the Company
is bound. To the best of such counsel's knowledge, neither the filing
of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights
for or relating to the registration of any shares of Common Stock or
other securities of the Company, except for such rights as have been
waived.
(iii) To the best of such counsel's knowledge, except as
described in the Registration Statement and Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence
to purchase or acquire from the Company any shares of the capital stock
of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or, to
the knowledge of such counsel, threatened by the Commission.
(v) The descriptions in the Registration Statement and
Prospectus of statutes, legal and governmental proceedings, contracts
and other documents are accurate and fairly present the information
required to be shown; and such counsel does not know of any statutes or
legal or governmental proceedings required to be described in the
Prospectus that are not described as required, or of any contracts or
documents of a character required to be described in the Registration
Statement or Prospectus or included as exhibits to the Registration
Statement that are not described or included as required.
(vi) The Company has full corporate power and authority to
enter into this Agreement, and this Agreement has been duly authorized,
executed and delivered by the Company; the execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any
statute, rule or regulation, any agreement or instrument known to such
counsel to which the Company is a party or by which it is bound or to
which any of its property is subject, the Company's charter or by-laws,
or any order or decree known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any
of its respective properties; and no consent, approval, authorization
or order of, or filing with, any court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated
hereby, including the issuance or sale of the Securities by the
Company, except such as may be required under the Act or state
securities laws or blue sky laws.
(vii) To the best of such counsel's knowledge, the Company
holds, and is operating in compliance in all material respects with,
all franchises, grants, authorizations, licenses, permits, easements,
consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all
such franchises, grants, authorizations, licenses, permits, easements,
consents, certifications and orders are valid and in full force and
effect.
(viii) To the best of such counsel's knowledge, the Company is
not in violation of its charter or by-laws. To the best of such
counsel's knowledge, the Company is not in breach of or otherwise in
default in the performance of any material obligation, agreement or
condition contained in any bond, debenture, note, indenture, loan
agreement or any other material contract, lease or other instrument to
which it is subject or by which it may be bound, or to which any of the
material property or assets of the Company is subject.
(ix) The Registration Statement and the Prospectus, and any
amendment thereof or supplement thereto, comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; and on the basis of conferences with officers of the
Company, examination of documents referred to in the Registration
Statement and Prospectus and such other procedures as such counsel
deemed appropriate, nothing has come to the attention of such counsel
that causes such counsel to believe that the Registration Statement or
any amendment thereof, at the time the Registration Statement became
effective and as of such Closing Date, contained any untrue statement
of a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus (as of its date and as of such
Closing Date), as amended or supplemented, includes any untrue
statement of material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading; it being understood that such
counsel need express no opinion as to the financial statements or other
financial data included in any of the documents mentioned in this
clause.
(x) The documents incorporated by reference in the Prospectus
or any further amendment or supplement thereto made by the Company
prior to the First Closing Date or the Second Closing Date, as the case
may be, (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), when they
became effective or were filed with the Commission, as the case may be,
complied as to form in all material respects with the requirements of
the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder; such counsel has no reason to
believe that any of such documents, when such documents became
effective or were so filed, as the case may be, contained, in the case
of a registration statement which became effective under the Act, an
untrue statement of a material fact, or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or, in the case of other documents which were
filed under the Exchange Act with the Commission, an untrue statement
of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances
under which they were made when such documents were so filed, not
misleading.
(xi) The License Agreement, dated January 30, 1992, between
the Company and Creative Integration and Design, Inc. ("Creative"), has
been duly authorized by all requisite corporate action, executed and
delivered by the Company. The License Agreement constitutes the valid,
binding and enforceable obligation of the Company.
In rendering such opinion such counsel may rely (i) as to matters of
law other than Delaware and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company provided that the extent
of such reliance is specified in such opinion.
(e) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Kinney & Lange,
patent counsel for the Company, dated such Closing Date and addressed to you, to
the effect that:
(i) Creative is listed in the records of the U.S. Patent and
Trademark Office as the holder of record of each patent and patent
application listed on Schedule I thereto (the "U.S. Patents and
Applications"). To the best of such counsel's knowledge there are no
claims of third parties to any ownership interest or lien with respect
to any of the U.S. Patents and Applications. Such counsel has no reason
to believe that the Company does not possess sufficient licenses or
other rights to use all U.S. Patents and Applications, trade secrets,
trademarks, service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted
by the Company as described in the Prospectus.
(ii) Creative is listed in the records of the appropriate
foreign offices as the sole holder of record of each of the foreign
patents and patent applications listed on Schedule II thereto (the
"Foreign Patents and Applications"). To the best of such counsel's
knowledge, there are no claims of third parties to any ownership
interest in or lien with respect to any of the Foreign Patents and
Applications. Such counsel has no reason to believe that the Company
does not possess sufficient licenses or other rights to use all Foreign
Patents and Applications necessary to conduct the business now being or
proposed to be conducted by the Company as described in the Prospectus.
(iii) Such counsel has no knowledge of any reason why any
patent to be issued in respect of any U.S. patent application would not
be valid or would not afford the Company reasonable patent protection
with respect to the claims included in such U.S. patent applications.
Except as disclosed therein, to the best of such counsel's knowledge
there is no pending or threatened action, suit, proceeding or claim by
others challenging the validity or scope of the Company's U.S. Patents
and Applications.
(iv) To the best of such counsel's knowledge, no valid and
unexpired patent held by others (other than patents as to which the
Company possesses a valid license) is infringed by the activities of
the Company described in the Registration Statement or the Prospectus
and except as disclosed therein, such counsel does not know of any
pending or threatened action, suit, proceeding or claim by others that
the Company is infringing or otherwise violating any patents, trade
secrets, trademarks, service marks or other proprietary information or
materials.
(v) The statements in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Dependence on Patents,
Trademarks and Proprietary Rights" and "Business -Patents, Trademarks
and Proprietary Rights" (collectively, the Intellectual Property
Portion), at the time the Registration Statement became effective,
insofar as such statements constitute a summary of the Company's U.S.
Patents and Applications, Foreign Patents and Applications trade
secrets, trademarks, service marks or other proprietary information or
materials of the Company, are accurate summaries and fairly summarize
the legal matters, documents and proceedings relating thereto.
(vi) No facts have come to the attention of such counsel to
lead such counsel to believe that the information in the Intellectual
Property Portion insofar as it concerns matters relating to the U.S.
Patents and Applications, Foreign Patents and Applications, trade
secrets, trademarks, service marks or other proprietary information or
materials, at the time the Registration Statement became effective,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that, as of the date of such
opinion, the information contained in such sections of the Prospectus
contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading.
(f) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Lindquist & Vennum
P.L.L.P., counsel for the Selling Stockholders, dated such Closing Date and
addressed to you, to the effect that:
(i) Each of the Selling Stockholders is the sole record and
beneficial owner of the Securities to be sold by such Selling
Stockholder and delivery of the certificates for the Securities to be
sold by each Selling Stockholder pursuant to this Agreement, upon
payment therefor by the Underwriters, will pass marketable title to
such Securities to the Underwriters and the Underwriters will acquire
all the rights of such Selling Stockholder in the Securities (assuming
the Underwriters have no knowledge of an adverse claim), free and clear
of any security interests, claims, liens or other encumbrances.
(ii) Each of the Selling Stockholders has the power and
authority to enter into the Custody Agreement, the Power of Attorney
and this Agreement and to perform and discharge such Selling
Stockholder's obligations thereunder and hereunder; and this Agreement,
the Custody Agreements and the Powers of Attorney have been duly and
validly authorized, executed and delivered by (or by the
Attorneys-in-Fact, or either of them, on behalf of) the Selling
Stockholders and are valid and binding agreements of the Selling
Stockholders, enforceable in accordance with their respective terms
(except as rights to indemnity hereunder or thereunder may be limited
by federal or state securities laws and except as such enforceability
may be limited by bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally and subject to general
principles of equity).
(iii) The execution and delivery of this Agreement, the
Custody Agreement and the Power of Attorney and the performance of the
terms hereof and thereof and the consummation of the transactions
herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any statute, rule or regulation, or any agreement or
instrument known to such counsel to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to which any of
its property is subject, any such Selling Stockholder's charter or
by-laws, or any order or decree known to such counsel of any court or
government agency or body having jurisdiction over such Selling
Stockholder or any of its respective properties; and no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Custody Agreement and the Power of
Attorney or for the consummation of the transactions contemplated
hereby and thereby, including the sale of the Securities being sold by
such Selling Stockholder, except such as may be required under the Act
or state securities laws or blue sky laws.
In rendering such opinion such counsel may rely (i) as to matters of
law other than Delaware and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Selling Stockholders provided
that the extent of such reliance is specified in such opinion.
(g) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, such opinion or opinions from
Dorsey & Whitney LLP, counsel for the several Underwriters, dated such Closing
Date and addressed to you, with respect to the formation of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as you reasonably may request, and such counsel shall have
received such papers and information as they request to enable them to pass upon
such matters.
(h) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of KPMG Peat Marwick LLP, dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission, and stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter.
(i) On each Closing Date, there shall have been furnished to you, as
Representatives of the Underwriters, a certificate, dated such Closing Date and
addressed to you, signed by the chief executive officer and by the chief
financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at
and as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness
of the Registration Statement or any amendment thereof or the
qualification of the Securities for offering or sale has been issued,
and no proceeding for that purpose has been instituted or, to the best
of their knowledge, is contemplated by the Commission or any state or
regulatory body; and
(iii) The signers of said certificate have carefully examined
the Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto, and any documents incorporated by
reference therein, and (A) such documents contain all statements and
information required to be included therein, the Registration
Statement, or any amendment thereof, does not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented,
does not include any untrue statement of material fact or omit to state
a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and any
documents incorporated by reference do not contain an untrue statement
of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under
which they were made when such documents were so filed, not misleading,
(B) since the effective date of the Registration Statement there has
occurred no event required to be set forth in an amended or
supplemented prospectus which has not been so set forth, (C) subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company has not incurred
any material liabilities or obligations, direct or contingent, or
entered into any material transactions, not in the ordinary course of
business, or declared or paid any dividends or made any distribution of
any kind with respect to its capital stock, and except as disclosed in
the Prospectus, there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the
Company or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the
ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects,
net worth or results of operations of the Company, taken as a whole,
and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the
Company is a party before or by any court or governmental agency,
authority or body, or any arbitrator, which might result in any
material adverse change in the condition (financial or otherwise),
business, prospects or results of operations of the Company, taken as a
whole.
(j) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, a certificate or certificates,
dated such Closing Date and addressed to you, signed by each of the Selling
Stockholders or either of such Selling Stockholder's Attorneys-in-Fact to the
effect that the representations and warranties of such Selling Stockholder
contained in this Agreement are true and correct as if made at and as of such
Closing Date, and that such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on such Selling Stockholder's part
to be performed or satisfied at or prior to such Closing Date.
(k) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.
(l) The Securities to be sold by the Company and the Selling
Stockholders shall have been duly accepted for listing, subject to notice of
issuance, through the Nasdaq National Market.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and counsel for the Underwriters. The Company will furnish you
with such conformed copies of such opinions, certificates, letters and other
documents as you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company and each Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company and/or such Selling Stockholders, as the case may be), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, including the information
deemed to be a part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A, if applicable, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or any document incorporated
by reference in any of the foregoing, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending against such loss,
claim, damage, liability or action; provided, however, that neither the Company
nor any Selling Stockholder shall be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by you, or by any Underwriter
through you, specifically for use in the preparation thereof; and further
provided, however, that in no event shall any Selling Stockholder be liable
under the provisions of this Section 6 for any amount in excess of the aggregate
amount of proceeds such Selling Stockholder received from the sale of the
Securities pursuant to this Agreement.
In addition to their other obligations under this Section 6(a), the
Company and each Selling Stockholder, jointly and severally, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 6(a), they will
reimburse each Underwriter on a monthly basis for all reasonable legal fees or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's and/or the Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter that received such payment shall promptly return it to
the party or parties that made such payment, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by Norwest Bank Minnesota, N.A. (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
which the Company or the Selling Stockholders may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company and the Selling Stockholders may become subject, under the Act
or otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by such Underwriter through you,
specifically for use in the preparation thereof, and will reimburse the Company
and the Selling Stockholders for any legal or other expenses reasonably incurred
by the Company or any such Selling Stockholder in connection with investigating
or defending against any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve the indemnifying party from any liability that it may have to any
indemnified party. In case any such action shall be brought against any
indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above, (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and Selling Stockholders bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties' relevant
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this subsection (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending against any
action or claim which is the subject of this subsection (d). Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount of the total underwriting
discounts and commissions received by such Underwriter in connection with the
Securities underwritten by it and distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 1 l(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters obligations in this subsection
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and the Selling Stockholders under
this Section 6 shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 6
shall be in addition to any liability that the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company (including any person who, with his consent, is named in
the Registration Statement as about to become a director of the Company), to
each officer of the Company who has signed the Registration Statement and to
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company and Selling
Stockholders herein or in certificates delivered pursuant hereto, and the
agreements of the several Underwriters, the Company and the Selling Stockholders
contained in Section 6 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person thereof, or the Company or any of its officers,
directors, or controlling persons, or any Selling Stockholders or any
controlling person thereof, and shall survive delivery of, and payment for, the
Securities to and by the Underwriters hereunder.
8. Substitution of Underwriters.
(a) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule II
hereto, the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule II hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased aggregates more than
10% of the total amount of Firm Shares set forth in Schedule II hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination neither the Company nor any Selling
Stockholder shall be under any liability to any Underwriter (except to the
extent provided in Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof)
nor shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
amount of Firm Shares agreed by such Underwriter to be purchased hereunder) be
under any liability to the Company or the Selling Stockholders (except to the
extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by the
non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at 10:00 a.m., Minneapolis
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you, as Representatives of the
several Underwriters, or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
an times be effective.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the First Closing Date, and the option referred to in
Section 3(b), if exercised, may be canceled at any time prior to the Second
Closing Date, if (i) the Company shall have failed, refused or been unable, at
or prior to such Closing Date, to perform any agreement on its part to be
performed hereunder, (ii) any other condition of the Underwriters' obligations
hereunder is not fulfilled, (iii) trading on the New York Stock Exchange or the
American Stock Exchange or in the national market system or over-the-counter
market by the NASD shall have been wholly suspended, (iv) minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York Stock Exchange or the
American Stock Exchange or in the national market system or over-the-counter
market by the NASD, by such exchange or by order of the Commission or any other
governmental authority having jurisdiction, (v) a banking moratorium shall have
been declared by Federal, New York or Minnesota authorities, or (vi) there has
occurred any material adverse change in the financial markets in the United
States or an outbreak of major hostilities (or an escalation thereof) in which
the United States is involved, a declaration of war by Congress, any other
substantial national or international calamity or any other event or occurrence
of a similar character shall have occurred since the execution of this Agreement
that, in your judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such termination
shall be without liability of any party to any other party except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company and an
Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified
promptly by you by telephone or telegram, confirmed by letter. If the Company
elects to prevent this Agreement from becoming effective, you and an
Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by
the Company by telephone or telegram, confirmed by letter.
10. Default by One or More of the Selling Stockholders or the Company.
If one or more of the Selling Stockholders shall fail at the First Closing Date
to sell and deliver the number of Securities which such Selling Stockholder or
Selling Stockholders are obligated to sell hereunder, and the remaining Selling
Stockholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number of Securities to be sold by all Selling Stockholders as set forth in
Schedule I, then the Underwriters may at your option, by notice from you to the
Company and the non-defaulting Selling Stockholders, either (a) terminate this
Agreement without any liability on the part of any non-defaulting party or
(b) elect to purchase the Securities which the Company and the non-defaulting
Selling Stockholders have agreed to sell hereunder.
In the event of a default by any Selling Stockholder as referred to in
this Section, either you or the Company or, by joint action only, the
non-defaulting Selling Stockholders shall have the right to postpone the First
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
If the Company shall fail at the First Closing Date to sell and deliver
the number of Securities which it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any
non-defaulting party.
No action taken pursuant to this Section shall relieve the Company or
any Selling Stockholders so defaulting from liability, if any, in respect of
such default.
11. Information Furnished by Underwriters. The statements set forth in
the last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to the Representatives c/o Piper Jaffray
Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402
(except that notices given to an Underwriter pursuant to Section 6 hereof shall
be sent to such Underwriter at the address stated in the Underwriters'
Questionnaire furnished by such Underwriter in connection with this offering),
with a copy to Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth
Street, Minneapolis, Minnesota 55402, Attention: Jonathan B. Abram; if to the
Company, shall be mailed, telegraphed or delivered to it at 4400 West 78th
Street, Bloomington, Minnesota 55435, Attention: Daniel E. Cohen, M.D., with a
copy to Lindquist & Vennum P.L.L.P., 4200 IDS Center, 80 South Eighth Street,
Minneapolis, Minnesota 55402, Attention: Patrick Delaney; if to any of the
Selling Stockholders, at the address of the Attorneys-in-Fact as set forth in
the Powers of Attorney, or in each case to such other address as the person to
be notified may have requested in waiting. All notices given by telegram shall
be promptly confirmed by letter. Any party to this Agreement may change such
address for notices by sending to the parties to this Agreement written notice
of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company, the Selling Stockholders and the several Underwriters in accordance
with its terms.
Very truly yours,
CNS, INC.
By: _______________________
Daniel E. Cohen, M.D.
Chairman of the Board, Chief
Executive Officer and
Treasurer
SELLING STOCKHOLDERS
Named in Schedule I hereto
By ________________________
Daniel E. Cohen, M.D.
Attorney-in-Fact
Confirmed as of the date first above
mentioned, on behalf of themselves and
the other several Underwriters named in
Schedule II hereto.
PIPER JAFFRAY INC.
MONTGOMERY SECURITIES
By PIPER JAFFRAY INC.
By ________________________
Managing Director
SCHEDULE I
Selling Stockholders
Number of Maximum Number of
Firm Shares Option Shares
Name to be Sold Subject to Option
---------- ----------
Total .................
========== ==========
SCHEDULE II
Number of
Underwriter Firm Shares (1)
-------------
Total ................................
=============
- -------------
(1) The Underwriters may purchase up to an additional 225,000 Option
Shares, to the extent the option described in Section 3 of the
Agreement is exercised, in the proportions and in the manner described
in the Agreement.
