SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from _________ to __________
COMMISSION FILE NUMBER: 0-16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MN 55439
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 820-6696
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE OF $.01 PER SHARE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, PAR VALUE OF
$.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1996, assuming as market value the price of $20.75 per share, the
closing sale price of the Company's Common Stock on the Nasdaq National Market,
the aggregate market value of shares held by non-affiliates was $317,598,587.
As of March 5, 1996, the Company had outstanding 17,436,052 shares of Common
Stock of $.01 par value per share.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held in April 1996, a definitive copy of
which will be filed with the Commission within 120 days of December 31, 1995, is
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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Page
PART I
<S> <C> <C>
Item 1. Business........................................................................................3
Item 2. Properties.......................................................................................
Item 3. Legal Proceedings................................................................................
Item 4. Submission of Matters to a Vote of Security Holders..............................................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................
Item 6. Selected Financial Data..........................................................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................
Item 8. Financial Statements and Supplementary Data......................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant...............................................
Item 11. Executive Compensation...........................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................
Item 13. Certain Relationships and Related Transactions...................................................
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................................................
SIGNATURES...................................................................................................
FINANCIAL STATEMENTS.........................................................................................F-1
FINANCIAL STATEMENT SCHEDULES................................................................................S-1
</TABLE>
This Form 10-K 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
in the Company's Registration Statement on Form S-3 filed with the Commission on
March 8, 1996 (the "Form S-3"). In connection with the forward-looking
statements which appear in these disclosures, investors should carefully review
the factors set forth in the Form S-3 under "Risk Factors."
PART I
ITEM 1. BUSINESS
BREATHE RIGHT NASAL STRIPS
CNS, Inc., (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 $13.3 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 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.
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:
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NAME TEAM/SPORT
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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 racers
Mountain Bike Team
Manuel Lagos Minnesota Thunder soccer team
Eddy Matzger In-line speed skater
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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
of stores in which the Breathe Right nasal strip is sold as a percentage of
total sales volume of all stores in that category. The following table shows ACV
distribution of the Breathe Right nasal strip for the four-week periods ended:
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1/1/95 3/26/95 7/16/95 10/8/95 12/31/95
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Drug store ACV 65% 86% 94% 98% 98%
Grocery store ACV 20% 33% 53% 61% 71%
Mass merchant ACV 10% 85% 94% 97% 99%
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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 are performed each year in the U.S., which
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 pharmaceutical 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.
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.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's
Executive Officers together with all positions and offices held with the Company
by such Executive Officers. Officers are appointed to serve until the meeting of
the Board of Directors following the next Annual Meeting of Shareholders and
until their successors have been elected and have qualified.
Name and Age Office
------------ ------
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
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.
ITEM 2. PROPERTIES
The Company leases approximately 80,000 square feet of office,
manufacturing and warehouse space in Bloomington, Minnesota. The lease expires
in December 2000.
ITEM 3. LEGAL PROCEEDINGS
Except as otherwise disclosed in this Form 10-K, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 SmallCap Market and sets forth the high and low last sale
prices for the periods for which it has been traded on the 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
On March 1, 1996, the last sale price of the Common Stock as reported
on the Nasdaq National Market was $18.875. 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.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<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.
ITEM 7. 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 Form 10-K. 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 contained
elsewhere in this Form 10- K.
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 its existing funds and funds generated from
operations, together with any proceeds received in its pending public offering
of Common Stock, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a listing of the financial information filed with this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required under this Item with respect to directors
is contained in the Section "Election of Directors" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held in April 1996 (the
"1996 Proxy Statement"), a definitive copy of which will be filed with the
Commission within 120 days of the close of the past fiscal year, and is
incorporated herein by reference.
Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the section
entitled "Executive Compensation" in the 1996 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required under this item is contained in the section
entitled "Security Ownership of Principal Shareholders and Management" in the
Company's 1996 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
a. Documents filed as part of this Report:
1. Financial Statements. At page F-1, see Index to Financial
Statements which are attached hereto beginning at page F-2.
2. Financial Statement Schedules. At page S-1, see Index to
Financial Statement Schedules which are attached hereto
beginning on page S-2.
3. Exhibits. See "Exhibit Index" on the page following the
Financial Statement Schedules.
b. Reports on Form 8-K. The Company did not file a report on Form 8-K
during the fourth quarter ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNS, INC.
("Registrant")
Dated: March 8, 1996 By /s/ Daniel E. Cohen, M.D.
--------------------------
Daniel E. Cohen, M.D.
Chairman of the Board, Chief
Executive Officer, Treasurer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on March 8, 1996 on behalf
of the Registrant in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
DANIEL E. COHEN, M.D. and PATRICK DELANEY as his true and lawful
attorneys-in-fact and agents, each acting alone, with the full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ Daniel E. Cohen, M.D.
Daniel E. Cohen, M.D.
Chairman of the Board and Chief Executive
Officer, Treasurer and Director
(Principal Executive Officer)
/s/ Richard E. Jahnke
Richard E. Jahnke
Director, President and
Chief Operating Officer
/s/ David J. Byrd
David J. Byrd
Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
/s/ Patrick Delaney
Patrick Delaney
Director
/s/ R. Hunt Greene
R. Hunt Greene
Director
/s/ Andrew J. Greenshields
Andrew J. Greenshields
Director
/s/ Richard W. Perkins
Richard W. Perkins
Director
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
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1995:
Federal $532 $(853) $(321)
State 30 (50) (20)
$562 $(903) $(341)
</TABLE>
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):
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1996 $ 319,028
1997 402,410
1998 402,410
1999 402,410
2000 368,876
$1,895,134
</TABLE>
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.
CNS, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule
Designation
(if applicable) Description Page
- --------------- ----------- ----
Independent Auditors' S-2
Report on Financial Statement
Schedules
II Valuation and Qualifying S-3
Accounts
All other schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related notes.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
CNS, Inc.:
Under date of January 26, 1996, we reported on the balance sheets of CNS, Inc.
as of December 31, 1995 and 1994, 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, as contained in the 1995 annual report on Form
10-K to stockholders. These financial statements and our report thereon are
included in the 1995 annual report on Form 10-K. In connection with our audits
of the aforementioned financial statements, we also have audited the related
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsiblity of the Company's management. Our
responsiblity is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1996
Schedule II
CNS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Balance
at the Additions at the
beginning charged to end
of period expense Deductions of period
--------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts $ 0 0 0 $ 0
Year ended December 31, 1994:
Allowance for doubtful accounts $ 0 54,600 0 $ 54,600
Year ended December 31, 1995:
Allowance for doubtful accounts $54,600 154,502 8,113 $200,989
</TABLE>
CNS, INC.
EXHIBIT INDEX
Exhibit No. Description
3.1 Company's Certificate of Incorporation as amended to date.
3.1.1 Certificate of Retirement for the Preferred Stock of the
Company which was redeemed and converted to Common Stock on
April 16, 1992 (incorporated by reference to Exhibit 3.1.1 to
the Company's Registration Statement on Form S-2 filed with
the Commission on March 2, 1994 (the "1994 Form S-2")).
3.1.2 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (incorporated by
reference to Exhibit 1 to the Company's Form 8-A dated July
21, 1995).
3.2 Company's Amended By-Laws (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 (the "1991 Form 10-K")).
10.1 CNS, Inc. 1987 Employee Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-18, Commission File No.
33-14052C (the "Form S-18")).
10.2 Employment Agreement between the Company and Dr. Daniel E.
Cohen dated February 13, 1984 (incorporated by reference to
Exhibit 10.6 to the Form S-18.)
10.2.1 Memorandum dated February 7, 1991 amending Employment
Agreement between the Company and Dr. Daniel E. Cohen
(incorporated by reference to Exhibit 10.5.1 to the 1991 Form
10-K).
10.2.2 Amendment dated as of January 1, 1994 to Employment Agreement
between the Company and Dr. Daniel E. Cohen (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 (the "March 31,
1995 Form 10- Q)).
10.3 Loan Agreement with Riverside Bank dated March 31, 1995
(incorporated by reference to Exhibit 10.3 to the March 31,
1995 Form 10-Q).
10.4 CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-8, Commission File No. 33-29454).
10.5 CNS, Inc. 1990 Stock Plan (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990).
10.6 Employment Agreement dated February 22, 1988 between the
Company and William Doubek (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form
S-2, Commission File No. 33-46120 (the "1992 Form S-2")).
10.7 License Agreement dated January 30, 1992 between the Company
and Creative Integration and Design, Inc. (incorporated by
reference to Exhibit 10.11 to the 1992 Form S-2).
10.8 Employment Agreement dated March 8, 1993 between the Company
and Richard E. Jahnke (incorporated by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.8.1 Amendment dated as of January 1, 1994 to Employment Agreement
between the Company and Richard E. Jahnke (incorporated by
reference to Exhibit 10.1 to the March 31, 1995 Form 10- Q).
10.9 Employment Agreement dated February 21, 1994 between the
Company and Kirk Hodgdon (incorporated by reference to Exhibit
10.18 to the 1994 Form S-2).
10.10 CNS, Inc. 1994 Stock Plan (incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.11 Distribution Agreement dated August 2, 1995 between the
Company and Minnesota Mining and Manufacturing Company
(certain information has been omitted from this exhibit and
filed separately with the SEC pursuant to a request for
confidential treatment under Rule 24b-2).
10.12 Supply Agreement dated May 17, 1995 between the Company and
Minnesota Mining and Manufacturing Company (certain
information has been omitted from this exhibit and filed
separately with the SEC pursuant to a request for confidential
treatment under Rule 24b-2).
10.13 Asset Purchase Agreement dated May 8, 1995 between the Company
and Aequitron Medical, Inc. (incorporated by reference to
Exhibit 10.4 to the March 31, 1995 Form 10-Q).
10.14 Non-Exclusive Distributorship Agreement dated May 8, 1995
between the Company and Aequitron Medical, Inc. (incorporated
by reference to Exhibit 10.5 to the March 31, 1995 Form 10-Q).
10.15 License Agreement dated January 24, 1996 between the Company
and Ronald S. Nietupsky (certain information has been omitted
from this exhibit and filed separately with the SEC pursuant
to a request for confidential treatment under Rule 24b-2).
10.16 License Agreement dated February 26, 1996 between the Company
and Scott Dahlbeck, M.D. (certain information has been omitted
from this exhibit and filed separately with the SEC pursuant
to a request for confidential treatment under Rule 24b-2).
10.17 Option Agreement dated October 5, 1995 between the Company and
TruTek Corp. (certain information has been omitted from this
exhibit and filed separately with the SEC pursuant to a
request for confidential treatment under Rule 24b-2).
10.18 Marketing and Distribution Agreement dated as of January 11,
1996 between the Company, Natus Corporation and LecTec
Corporation (certain information has been omitted from this
exhibit and filed separately with the SEC pursuant to a
request for confidential treatment under Rule 24b-2).
11 Computation of Net Earnings (Loss) Per Share of Common Stock.
23.1 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule.
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
CNS, INC.
AS AMENDED
ARTICLE I
NAME
1.1) The name of the corporation is CNS, Inc.
ARTICLE 2
REGISTERED OFFICE
2.1) The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE 3
PURPOSES
3.1) The nature of the business or purposes to be conducted or promoted
is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
ARTICLE 4
CAPITAL STOCK
4.1) Authorized Capital Stock. The total number of shares of stock
which the corporation shall have authority to issue is Fifty-Eight Million, Four
Hundred Eighty-Three Thousand Five Hundred Eighty-Nine (58,483,589) shares,
divided into Fifty Million (50,000,000) shares of Common Stock, $.01 par value
per share, and Eight Million Four Hundred Eighty-Three Thousand Five Hundred
Eighty-Nine (8,483,589) shares of Preferred stock, $.01 par value per share. The
designations and the powers, preferences and rights, and the qualifications,
limitations or restrictions of the corporation's capital stock are to be
determined by resolution of the Board of Directors and a certificate setting
forth such resolutions and the number of shares of such class or series must be
filed and recorded pursuant to Delaware law.
4.2) Voting Rights. Each holder of record of the common stock of the
corporation shall be entitled to one (1) vote for each share of common stock
held by him or her at each meeting of the shareholders and in respect to any
matter on which the shareholders have a right to vote. The right to vote shall
be subject to the provisions of the by-laws of the corporation in effect and
fixing a record date for the determination of shares entitled to vote.
4.3) Preemptive Rights. Unless otherwise provided by the Board of
Directors, the shareholders of the corporation shall not have the preemptive
right of subscription to any shares of common stock of preferred stock of the
corporation to be issued or sold, or hereafter authorized, or any obligations or
securities exchangeable for or convertible into stock of the corporation which
has not yet been authorized.
4.4) Stock Rights and Options. The Board of Directors shall have the
power to create and issue rights, warrants, or options entitling the holders
thereof to purchase from the corporation any shares of its capital stock of any
class or series, upon such terms and conditions and at such times and prices as
the Board of Directors may provide, which terms and conditions shall be
incorporated in an instrument or instruments evidencing such rights.
4.5) Dividends. The holders of the common stock and preferred stock
shall be entitled to receive, when and as declared by the Board of Directors,
out of earnings or surplus legally available therefor, dividends, payable either
in cash, in property, or in shares of the capital stock of the corporation.
ARTICLE 5
INCORPORATOR
5.1) The name and mailing address of each incorporator is as follows:
NAME MAILING ADDRESS
Daniel E. Cohen, M.D. 7090 Shady Oak Road
Eden Prairie, MN 55344
ARTICLE 6
INCORPORATOR
6.1) The corporation is to have perpetual existence.
ARTICLE 7
DIRECTORS
7.1) In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or repeal
by by-laws of the corporation.
7.2) Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
ARTICLE 8
EXCULPATION AND INDEMNIFICATION
8.1) A director of this corporation shall not be liable to the
corporation or the stockholders of this corporation for monetary damages for a
breach of the fiduciary duty of care as a director, except to the extent such
exception from liability or limitation thereof is not permitted under the
Delaware General Corporation Law as the same currently 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.
ARTICLE 9
AMENDMENT OF CERTIFICATE
9.1) The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE 10
STOCKHOLDERS MEETING AND BOOKS
10.1) Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provisions contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the corporation.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed, and the facts herein stated are true, and
accordingly have hereunto set my hand this 5th day of March, 1987.
/s/ Daniel E. Cohen, M.D.
Daniel E. Cohen, M.D.
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
On this 5th of March, 1987, before me, a notary public, within and for
said county, personally appeared Daniel E. Cohen, M.D., to me known to be the
person described and who executed the foregoing instrument and acknowledged that
he executed the same as his free act and deed.
/s/ Glen H. Brown
Notary Public
Exhibit 10.11
(Certain information has been omitted from this exhibit and filed separately
with the SEC pursuant to a request for confidential treatment under Rule 24b-2)
3M - CNS
DISTRIBUTION AGREEMENT
EFFECTIVE DATE: AUGUST 2, 1995
1. Parties
A. Minnesota Mining and Manufacturing Company
Consumer and Professional Health Care
Medical-Surgical Markets Division
275-5SW 3M Center
St. Paul, MN 55144
B. CNS, Inc.
1250 Park Road
Chanhassen, MN 55317
2. Purpose
A. 3M will be CNS's exclusive distributor of CNS's nasal dilator
outside of the US and Canada.
B. CNS will provide product with 3M's label, either in bulk or
packaged in 3M's packaging.
C. 3M will license the 'Breathe Right' trademark but will use 3M
trade dress.
3. Term and Termination
A. Term Initial term: 5 years. After 5 years, the agreement
continues until terminated.
B. Termination for cause
Either 3M or CNS may terminate this agreement if the other
materially breaches it by giving 90 days' written notice
within 90 days opportunity to cure the breach.
C. Termination without cause
1) CNS may
a. terminate the EXCLUSIVITY of this agreement
without cause after the third year of the
initial term by giving one year written
notice. Notice may be given prior to the end
of the third year.
i. As of the termination date, 3M will
no longer be the exclusive
distributor outside the United
States and Canada, and will no
longer have a license to use the
Breathe Right trademark;
ii. However, 3M may continue to sell
product with the Breathe Right
trademark which was manufactured
prior to the termination date and
use its inventory of packaging with
the Breathe Right trademark;
iii. All other terms and conditions of
this agreement will continue to
apply, except for the minimum
purchase requirements, which will
no longer apply;
AND/OR
b. terminate this agreement after the fifth
year of the initial term by
i. giving one year written notice.
Notice may be given prior to the
end of the fifth year; AND
ii. paying to 3M. [Confidential
Treatment Requested]
iii. 3M will give to CNS information
about its sales of Product by
customer after it receives the
payment described above.
iv. NONCOMPETE. 3M will not sell other
nasal dilator devices for two years
after the date of termination. 3M
may sell non-mechanical nasal
dilators, such as pharmaceutical
nasal dilators.
2) 3M. 3M may terminate this agreement without cause after the
initial term by giving one year written notice. Notice may be
given prior to the end of the initial term.
a NONCOMPETE. 3M will not sell other nasal dilator
devices for three years from the date the agreement
is terminated. 3M may sell non-mechanical nasal
dilators, such as pharmaceutical nasal dilators.
4. Product
CNS's nasal dilator packaged with 3M's labeling ('Product'). Product
and package specifications stated in Exhibit A. 3M may not alter
Products or change its package specifications without CNS's approval.
CNS will not withhold its approval unreasonably.
5. Prices
A. Exhibit B. Prices in US $. FOB CNS or assignee facility.
B. Prices will be effective for 1995 and 1996. After 1996, CNS
may change its prices as follows:
1) 3M components. CNS may increase its prices at anytime
by the amount of any increase in prices of 3M
components.
2) All other costs. CNS may increase its prices once per
calendar year after 1996 to reflect an increase in
the cost of producing the Products, excluding the
cost of 3M components, by giving 3M 90 days' written
notice of the price change.
a. CNS will not increase the price by more than
the increase in the consumer price index for
the previous year times [1 minus the
fraction whose numerator is 3M component
costs and whose denominator is the price].
C. Cost reductions. 3M and CNS will establish targets for cost
reductions and identify possible sources of reductions. CNS
will determine feasibility of the cost reduction projects
before implementing. CNS will lower its prices to reflect cost
reductions achieved through joint cost reduction programs.
D. Competitive prices. 3M and CNS will discuss price reductions
to meet competitive situations in specific countries.
6. Markets
A. 3M is the exclusive distributor of CNS's nasal dilator outside
of the US (including its territories, such as Puerto Rico) and
Canada. 3M will use reasonable efforts to promote the Product.
("Reasonable efforts" shall mean efforts consistent with 3M's
efforts relating to other products in the Consumer and
Professional Health Care business unit.) CNS will not sell the
nasal dilator to customers outside the US and Canada directly
or through other another party.
B. 3M will comply with all material laws and regulations
applicable to the sale of the Product outside of the US and
Canada. 3M is responsible for obtaining appropriate approvals
to sell the Product in countries outside of the US and Canada.
It will obtain those approvals in 3M's name. CNS will
reasonably cooperate at its own expense.
C. 3M will not manufacture similar nasal dilators or purchase
them from other vendors during this agreement, unless CNS is
unable to supply at least 75% of 3M's forecasted quantities
for any reason for more than 90 days. 3M may manufacture or
purchase similar nasal dilators only during the period that
CNS is unable to supply them.
D. 3M and CNS will cooperate to prevent the resale of
1) CNS's nasal dilator (under any label besides 3M's)
outside of the US and Canada; and
2) the Product (under 3M's label) in the US or Canada.
E. CNS may request that 3M discontinue selling Product within a
country in which a claim has been made that the Product
infringes anyone else's intellectual property rights. If 3M
continues to sell Product within that country, it shall be in
default hereunder and shall waive its right to indemnification
(see paragraph 12) for its sales subsequent to CNS's request.
7. Minimum Purchases
A. Minimum purchases: See Exhibit B.
1) The minimums stated in Exhibit B will be
appropriately reduced if CNS
a. does not use reasonable efforts to defend
its patents or tradenames;
b. does not have certifications (e.g. CE mark)
needed to market the product competitively;
or where 3M cannot obtain timely regulatory or other
governmental approval to sell the Product despite its
reasonable efforts (as defined in 6.A.) to obtain the
approvals, and these situations would have a material
effect on 3M's ability to meet the minimums.
2) CNS's exclusive remedy in case 3M fails to meet its
minimum purchases requirement is to terminate this
agreement. It will not be entitled to any damages.
3) CNS must give 3M its notice of termination and
opportunity to cure by January 31 of the year
following 3M's failure to meet its minimum
requirements. 3M will have 90 days to purchase the
amount needed to meet the minimum. These quantities
will not count toward the next year's minimum.
B. 3M will roll-out sales globally as described in Exhibit B.
8. Forecasts, Orders, Deliveries
A. Forecasts
1) 3M will give monthly 12 month rolling forecasts. The
first three months of the forecast is 3M's order. In
the next month's forecast, 3M may change the forecast
for the second three months of the previous forecast
by 5% and may change the previous forecast for the
last six months by 15%.
2) For example, if in December 3M forecasts that it will
purchase 100 units per month during the next twelve
months, then
a. The forecast for January, February and March
are 3M's firm orders for those months;
b. In the January forecast,
i. The January forecast for February
and March are firm orders from the
December forecast;
ii. the January forecast for April may
be increased to 105 units, which
becomes 3M's firm order;
iii. the January forecast for May and
June may be increased to 105 units,
but these are not a firm orders;
iv. the January forecast for
July-December may be increased to
115 units per month, and these are
not firm orders.
3) CNS will promptly notify 3M if it is unable to meet
3M's forecast.
B. 3M will order using a blanket purchase order. The quantities
stated are non-binding estimates. 3M will only be obligated
for the first three months of each rolling forecast.
C. Delivery by dates stated in purchase order releases. However,
the delivery dates must give CNS reasonable time to acquire
packaging.
D. CNS will ship Product in containers that meet international
shipping requirements. 3M will have the risk of loss when
Product is delivered to its carrier at CNS's facility, except
where damage is due to the use of containers that do not meet
international shipping requirements.
E. Payment due net 30 from the date of delivery.
F. In case of backorder, CNS will allocate to 3M the same percent
of production that 3M's sales represent of CNS's total sales
of nasal dilators.
9. Manufacturing
A. CNS will comply with all material laws and regulations,
including FDA GMPs.
B. CNS will use its best efforts to become certified where
certification by authorities outside of the US is needed to
market the product (e.g., CE mark in Europe).
C. CNS will manufacture and package the Product in conformance
with Product and packaging specifications. CNS will not change
any specifications, processes, raw materials, or components
that could affect the performance or appearance of the nasal
dilator or its packaging without 3M's approval. 3M will not
unreasonably withhold its approval.
D. CNS will continue to use the 3M components it currently uses,
unless 3M stops offering those components to CNS or if 3M is
unable to supply CNS's requirements.
E. 3M will provide camera-ready artwork for labels and packaging.
F. Master file. CNS is responsible for maintaining master files
and ensuring products are manufactured according to the
documentation.
G. Quality testing. CNS will certify that its products and
packaging pass all QC tests.
H. Audits. 3M may periodically audit procedures, processes,
process controls, and manufacturing records of CNS and its
subcontractors. CNS remains responsible for those functions
and records.
I. 3M suggestions. 3M may make suggestions regarding operations,
quality assurance, cost reductions and other matters. CNS will
independently determine whether to implement any of those
suggestions and will be responsible for them.
J. Inability to supply. CNS hereby grants to 3M a royalty-free
license to make or have made the Product for sale outside the
US and Canada for the duration of CNS's inability to supply at
least 75% of 3M's forecast. 3M may exercise its rights under
this license only if CNS is unable to supply 75% of 3M's
forecasted quantities for any reason (other than 3M's
inability to supply components) for more than 90 days.
10. Intellectual Property
A. CNS trade name and patents.
1) CNS hereby licenses to 3M the use of the CNS "Breathe
Right" trademark for use outside of the US and Canada
during this agreement.
2) 3M will use the 'Breathe Right' trademark where it is
registered and/or reasonable to do so until it
receives notice of termination of 3M's exclusivity or
this agreement. It will use another name where it is
not reasonable to use "Breathe Right," for example,
where another company claims it infringes their
trademark, where "Breathe Right" cannot be protected
as a trademark, or where "Breathe Right" is
culturally inappropriate. From the time 3M receives
notice of termination, 3M may continue to use the
"Breathe Right" trademark or, at 3M's discretion, use
another name for the Product.
3) 3M will discontinue the use of the 'Breathe Right'
trade name at the end of this agreement.
4) 3M will notify CNS if it believes another party is
infringing CNS's patents or trademarks in any country
outside of the United States and Canada. CNS will
promptly notify 3M whether it intends to defend its
patents or trademarks. If it decides not to do so, 3M
may defend them at its own cost.
B. 3M trademarks, trade names and trade dress.
1) Packaging and labels will include 3M trademarks,
trade names and trade dress.
2) CNS has no right or interest in 3M's trademarks,
trade names or trade dress. It will only use them on
packages it sells to 3M. It will discontinue using
them at the end of this agreement or upon 3M's
request.
11. Warranties and Remedies
A. Warranty
1) CNS warrants that its products and packages
a. are free from material defects in material
and manufacture;
b. are fit to be used as indicated in the
Product labeling;
c. meet all specifications and performance
claims;
d. are not adulterated or misbranded (as
defined by the FDA).
2) CNS warrants that it has the exclusive license to
make, use and sell the nasal dilator for the duration
of the applicable patents in the countries where the
patents apply.
3) CNS warrants that it has the exclusive right to use
its trademark in those countries in which the
trademark is registered.
B. Remedies. If a product does not meet its warranty, CNS will
repair, replace or refund 3M's purchase price, at CNS's cost.
In case of a recall in any country, CNS will reimburse 3M for
its reasonable costs in assisting in the recall, unless the
recall is caused by defective components provided by 3M.
C. Returned Goods. 3M will obtain CNS's authorization prior to
returning any products. CNS has the right to appropriately
inspect the returned goods.
12. Indemnification
A. CNS will indemnify and defend 3M against any claim that its
products infringe anyone else's intellectual property rights
(e.g., patent, copyright, trademark).
B. CNS will indemnify and defend 3M against any claim that its
products caused personal injury or property damage, unless the
injury or property damage is caused by components provided by
3M.
C. CNS's obligations to indemnify and defend 3M are conditioned
upon 3M giving CNS prompt notice of the claim, giving the
defense of the claim to CNS and reasonably cooperating with
CNS in the defense.
D. 3M will indemnify and defend CNS against any claim that arises
from statements 3M makes about the Product which are not
approved by CNS. 3M's obligations to indemnify and defend CNS
are conditioned upon CNS giving 3M prompt notice of the claim,
giving the defense of the claim to 3M and reasonably
cooperating with 3M in the defense.
13. No Consequential Damages
A. 3M and CNS recognize that this agreement involves risk.
Neither company guarantees that their efforts will be
successful.
B. Neither 3M nor CNS will be liable to the other for any
consequential damages (for example, lost profits, business
opportunities or investments) that arise as a result of this
agreement or its termination.
14. Confidential Information
A. 3M and CNS may exchange information each considers
confidential ('Confidential Information').
B. Neither party will disclose Confidential Information it
receives from the other that is in writing and labeled
'Confidential.'
1) marketing information: for one year from the date it
receives the information;
2) process information: for three years from the date it
receives the information.
There is no restriction on the internal use of the
Confidential Information.
C. The obligation not to disclose does not apply to information
that
1) is or becomes publicly available;
2) is in the possession of the receiving party prior to
receipt;
3) is developed by the receiving party independently of
the Confidential Information;
4) is given to the receiving party by someone else who
has the right to do so.
D. The CNS, Inc. Standard Confidential Disclosure Agreement,
dated July 19, 1994, will continue to apply to Confidential
Information CNS disclosed to 3M prior to the expiration of
that agreement or the effective date of this agreement,
whichever is earlier. The CNS, Inc. Standard Confidential
Disclosure Agreement is attached as Exhibit C.
15. Notices
3M will send notices to:
Richard E. Jahnke
President and COO
CNS, Inc.
1250 Park Road
Chanhassen, MN 55317
cc: Patrick Delaney
Lindquist & Vennum P.L.L.P.
4200 IDS Center
Minneapolis, MN 55402
CNS will send notices to:
David Reynolds-Gooch
Consumer and Personal Health Care
Medical-Surgical Markets Division
Minnesota Mining and Manufacturing Company
275-5SW 3M Center
St. Paul, MN 55144
16. CNS Discussions with other Parties.
CNS will notify 3M if it enters any significant discussions with other
parties regarding the sale of CNS or the nasal dilator business or
assets.
17. Additional Terms and Conditions
A. Force Majeure. Neither party is in breach if it cannot perform
for reasons beyond its control.
B. Independent Contractors. 3M and CNS are independent
contractors. They are not agents of each other, partners,
joint-venturers, or franchisor/franchisee. Neither has the
right to bind or commit the other or act on the other's
behalf.
C. Assignment. Neither party will assign this agreement without
the consent of the other, except to a successor of the nasal
dilator business.
D. Dispute resolution
1) Both parties will try to amicably resolve all
disputes.
2) If they are unable to do so, a manager from each
company with full authority to resolve the dispute
will meet with a mediator.
3) If mediation is unsuccessful within 6 months from the
date CNS or 3M requests mediation in writing, either
party may initiate binding arbitration. If a party
needs to preserve its rights by commencing
arbitration prior to the end of the 6 month period,
it may do so, but will continue the arbitration until
the parties attempt to mediate the dispute.
4) Arbitration will be held in Minnesota before a single
arbitrator selected by mutual agreement from the
panel of the Center for Public Resources. It will be
governed by the US Arbitration Act and held in
accordance with the rules of the Center for Public
Resources. The arbitrator will apply Minnesota law.
5) Judgment of the arbitrator may be entered by any
court with appropriate jurisdiction.
F. No waiver. Neither 3M nor CNS waives any of its rights
provided by this agreement because it fails to enforce them.
G. Entire agreement. This agreement and its exhibits are the
entire agreement between 3M and CNS regarding the distribution
of CNS's nasal dilator by 3M. They supersede all previous
agreements. They may be modified only by written agreement.
MINNESOTA MINING AND CNS, Inc.
MANUFACTURING COMPANY
By By /s/ Richard E. Jahnke
J. David Berkley Richard E. Jahnke
Title Vice President Title President and COO
Medical Surgical Markets Division
By /s/ Frederick J. Palensky
Frederick J. Palensky
Title Vice President
Medical Products Technology Division
Exhibit A: Products and package specs
Exhibit B: Prices, minimum purchase requirements
Exhibit C: CNS, Inc. Standard Confidential Disclosure Agreement
3M - CNS
DISTRIBUTION AGREEMENT
EXHIBIT A
PRODUCT AND PACKAGING SPECIFICATIONS
Product and Packaging specifications: CNS specifications for
its current product and packaging. To be provided by CNS
promptly after signing.
All packaging (including shipping cartons) must meet
international shipping requirements. CNS will supply to 3M
results of tests validating that the packaging meets those
requirements, upon request by 3M.
EXHIBIT B
PRICING
[Confidential Treatment Requested]
VOLUME COMMITMENTS
<TABLE>
<CAPTION>
YEAR '95 '96 '97 '98 '99 2000
- ---- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C>
Volume
[Confidential Treatment Requested]
</TABLE>
REGION ROLL-OUT PLAN:
'95
[Confidential Treatment Requested]
'96
PRICING
1995 1996
---- ----
Bulk
[Confidential Treatment Requested]
Finished Goods*
EXHIBIT C
CNS, INC.
STANDARD CONFIDENTIAL
DISCLOSURE AGREEMENT
This agreement and entered into as of this 19th day of July, 1994, by
and between CNS, Inc., which has an office at 1250 Park Road, Chanhassen,
Minnesota 55317 (hereinafter referred to as "CNS"), and 3M Company, which has an
office at 3M Center, St. Paul, Minnesota, (hereinafter referred to as
"Recipient").
WHEREAS, both parties for their mutual benefit, desire that CNS
disclose certain technical and business information relating to CNS and its
products.
NOW, THEREFORE, it is agreed:
Definition: Confidential and Proprietary Information - The term
"Confidential and Proprietary (C/P) Information" shall mean information not
generally known, including trade secrets, about CNS's methods, processes, and
products, including but not limited to, information relating to such matters as
research and development, manufacturing methods, regulatory matters, processes,
techniques, applications for particular technologies, materials or designs,
vendor names, customer lists, management systems, and sales and marketing plans.
All information disclosed by CNS to the Recipient which is marked or described
as C/P Information within 30 days of disclosure, shall be C/P Information.
Handling of Confidential and Proprietary Information:
Recipient agrees to treat such Confidential/Proprietary Information as
such for a period of five years from the date received, and will handle such C/P
Information with the same degree of care it uses to handle its own C/P
Information, but with no less than a reasonable degree of care. There shall be
no restrictions on the handling of information which is not
Confidential/Proprietary Information, which includes information that:
1. was in possession of Recipient prior to receiving it from CNS,
or
2. is or becomes part of the public knowledge or literature by
acts other than those of Recipient after receiving it, or
3. is or becomes available to Recipient from a source other than
CNS that is not under a duty of confidentiality to CNS, or
4. is or becomes available to a third party from CNS on an
unrestricted basis, or
5. is transmitted by CNS after receiving notification in writing
from Recipient that it does not desire to receive any further
Proprietary Information, or
6. is independently developed by Recipient without the use of
CNS's C/P Information, or
7. is transmitted after the expiration of this agreement.
Limitation on Disclosure:
Recipient shall not divulge, in whole or in part, such
Confidential/Proprietary Information to any third party without the prior
written consent of CNS, but only to the extent and during the period of time
that such Information is to be treated as Confidential/Proprietary under the
foregoing provisions of this Agreement.
Limitation of Use:
Recipient shall make no commercial use, in whole or in part, of any
such Confidential/Proprietary Information without the prior written consent of
CNS, but only to the Extent, and during the period, of time such information is
to be treated as Confidential/Proprietary under the foregoing provisions of this
Agreement. Recipient of C/P Information may retain in the offices of its legal
counsel one copy of any written C/P Information for record purposes only.
Term:
The term of this Agreement shall be for an original period of one year
commencing on the date recited in the first paragraph of this Agreement;
however, Recipient's obligations with respect to Confidential/Proprietary
Information disclosed to it prior to termination shall not be affected by the
termination of this Agreement.
Mutual Disclaimers:
No rights or obligations other than those expressly recited herein are
to be implied from this Agreement. In particular, no license is hereby granted
directly or indirectly under any patent now held by, or which may be obtained
by, or which is or may be licensable by either party.
CNS, Inc. 3M
By: /s/ Richard E. Jahnke By: /s/ J. David Berkley
Title: President & COO Title: General Manager
Date 7/22/94 Date 7/19/94
Exhibit 10.12
(Certain information has been omitted from this exhibit and filed seperately
with the SEC pursuant to a request for confidential treatment under Rule 24b-2)
SUPPLY AGREEMENT
1. PARTIES: This Agreement is between the Medical Specialties
Department of Minnesota Mining and Manufacturing Company ("3M") and CNS, Inc.
("CNS"). This Agreement only applies to Medical Specialties Department of 3M and
does not bind any other part of 3M unless otherwise agreed to in writing by 3M.
2. PURPOSE: This Agreement authorizes CNS to (a) purchase the 3M
products listed in Exhibit A ("Products") or (b) exclusively specify the
components for assigned converters for the purposes set forth therein.
Notwithstanding the foregoing language, this exclusivity requirement will not
apply to the product application set forth on Exhibit A-1 until such time as 3M
can provide said product or a comparable product. CNS shall have the right to
deplete the inventory of the product application set forth on Exhibit A-1 before
using the 3M product. Products will meet the product specifications attached
thereto as Exhibit A-2.
3. EXCLUSIVITY; RIGHT OF FIRST REFUSAL: CNS agrees that during the term
of this Agreement it will purchase all of its requirements of Product from 3M
provided, however, that:
a) If CNS is offered a product of substantially higher performance
under similar terms and conditions and gives 3M written notice of the offer,
then 3M shall notify CNS in writing within ninety (90) calendar days after
receipt of the notice as follows:
1) 3M agrees to sell CNS a product of equal performance
to the competitive product under similar terms and
conditions; or
2) 3M will permit CNS to purchase the product from the
third party while the substantially higher
performance product is available.
If 3M informs CNS that 3M is willing to sell Product or a product of equal
performance to the competitive product offered to CNS, then CNS will agree to
purchase Product or the new product from 3M.
b) As long as CNS is purchasing Product exclusively from 3M, then 3M
will not supply Product to any other company in the external nasal dilation
market. Notwithstanding the foregoing language, 3M's obligation as set forth in
the preceding sentence shall cease if 3M is presented with a product opportunity
with a third party offering higher performance and greater value to the
consumer. If 3M is offered said product opportunity, then CNS will be given the
opportunity to respond to the product opportunity within ninety (90) days.
Except as set forth herein, 3M reserves the right to sell the Products in any
other lawful manner.
c) If CNS is offered a substantially lower price, 3M will be given the
opportunity to respond to the comparative value of 3M and the competitive
offering within ninety (90) days.
4. TERM, NO AUTOMATIC RENEWAL: The term of this Agreement begins on the
date 3M signs this Agreement and ends on December 31st of 2000. This Agreement
can be renewed only if both parties agree in writing to the renewal. Both CNS
and 3M understand that each party has the right, in its sole discretion, to
decide whether to renew this Agreement. Both 3M and CNS will plan accordingly.
5. ORDER AFTER EXPIRATION: Any order placed and filled after the
expiration of this Agreement is governed by the provisions of this Agreement,
but the placing or filling of postexpiration orders does not otherwise extend
the term of this Agreement.
6. PRODUCT IMPROVEMENT DEVELOPMENT: 3M will work with CNS to
investigate and develop mutually agreed upon product component improvements in
an effort to enhance performance, aesthetics, and/or cost reductions.
7. OTHER TERMS AND CONDITIONS: Other terms and conditions of sale
(including prices, payment terms, F.O.B. Point, and return goods policy) are
stated on Exhibit B. CNS acknowledges that it has received a copy of Exhibit B
as of the date CNS signs this Agreement. 3M may change any part of Exhibit B by
written notice at any time, but the change will not affect any order properly
placed before the effective date of the change. Exhibit B is based upon
forecasted volumes and quantity purchases as provided by CNS. 3M agrees to keep
the price schedule, forecasted volumes and quantity purchases set forth in
Exhibit B confidential during the term of the Agreement.
8. FORECASTS: CNS shall provide 3M monthly a "rolling" forecasted
volume of Products for a six-month period into the future. Each month CNS will
be providing specific purchase order releases detailing product/size breakdown
and ship dates for requirements for the upcoming month. In the rolling forecast,
the first three (3) months shall be considered as FIRM requirements and the
subsequent three (3) months shall be viewed as forecasted quantities. Based on
such firm forecasted requirements, CNS' purchase history and 3M's experience, 3M
shall maintain an inventory of the Products which will be sufficient to meet the
reasonably anticipated needs of CNS not to exceed five percent (5%) overage of
the firm forecasted requirements. If 3M is unable to produce the forecasted
volumes of Product in a timely manner, then CNS shall be free to seek an
alternative source until such time as 3M shall be capable of meeting CNS's
needs. 3M shall be given thirty (30) days to respond to any such Product
concerns before CNS seeks the alternative source.
9. SHIPMENT DEADLINES; RISK OF LOSS; TITLE: 3M will make reasonable
efforts to meet any shipping dates specified in CNS' purchase orders, but 3M
does not guarantee to meet any particular shipping deadlines. Risk of loss
passes to CNS at the point of shipment. For all Products contained in any single
shipment, title passes to CNS only when CNS has fully paid for the shipment.
10. EXCUSABLE DELAY: 3M is not responsible for delays in production,
shipping or delivery due to any cause beyond 3M's reasonable control.
11. WARRANTIES LIMITED: 3M warrants only that the Products will meet
the specification set forth in Exhibit A-1 at the time of shipment to CNS. THIS
WARRANTY IS MADE IN PLACE OF ANY OTHER WARRANTIES. 3M NEITHER EXPRESSES NOR
IMPLIES ANY WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE.
12. LIMITATION OF REMEDIES: If properly and promptly notified (see
Paragraph 13), 3M will, at its option, either replace any product which 3M
determines was defective at the time of shipment or refund the purchase price
paid by CNS and/or its assignee. THIS REPLACEMENT REMEDY IS CNS' AND/OR ITS
ASSIGNEE'S EXCLUSIVE REMEDY AGAINST 3M FOR ANY DEFECT OR OTHER FAILURE IN THE
PRODUCTS OR IN 3M'S PERFORMANCE. UNDER NO CIRCUMSTANCES IS 3M LIABLE FOR ANY
DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES IN ANY WAY
RELATED TO THE PRODUCTS OR TO THIS AGREEMENT.
13. CNS' AND/OR ITS ASSIGNEE'S DUTY TO INSPECT; RETURNS: CNS and/or its
assignees will promptly inspect any shipment of Products received from 3M and
will promptly notify 3M in writing to any defects. The notice must specify the
defects in detail; any defect not specified is waived. Any goods not rejected
within thirty (30) days of delivery are accepted. After sending the notice, CNS
and/or its assignee will follow 3M's return goods policy then in effect, or any
specific and reasonable instructions which 3M may issue. CNS and/or its assignee
will allow 3M to inspect any allegedly defective goods at CNS' and/or its
assignee's site. For any goods which 3M determines are defective, CNS and/or its
assignee will follow 3M's instructions and either return the goods to 3M, with
3M responsible for the return freight, or dispose of the goods in a safe manner
approved by 3M and at no charge to 3M.
14. PROPER USE OF PRODUCTS: CNS will not process or package the
Products in any way which might compromise the Products' efficacy or safety. CNS
will not misuse the Products or treat or deal with Products in any way which
might prejudice 3M's reputation.
15. USE OF 3M NAME AND TRADEMARKS: CNS will not make use whatsoever of
3M's name without 3M's written permission. The decision to grant or withhold
permission is within 3M's sole discretion. CNS will not use or reproduce any of
3M's trademarks in any manner without 3M's prior written approval. To request
this approval CNS must forward to 3M a complete and accurate specimen copy of
the proposed use. If in its sole discretion 3M chooses to approve the use, the
use is subject to any revision which 3M may choose to make on the specimen. Any
permitted use extends only to the identification of 3M materials included in
CNS' composite product and not to the identification of the CNS composite
product itself.
16. PRODUCT DISCONTINUANCE: 3M may discontinue its production or sale
of any Products at any time during the term of this Agreement. 3M will give CNS
at least ninety (90) days notice of discontinuing the sale of a Product, unless
the discontinuance is due to an alleged health, safety or environmental risk. To
the extent possible, 3M will exercise reasonable efforts to present a comparable
substitute product; provided that such efforts will not require 3M to
manufacture or develop a comparable substitute product.
17. TERMINATION FOR CAUSE: If CNS fails to fulfill any of the
representations, promises or terms stated in this Agreement, 3M may terminate
this Agreement on thirty (30) days written notice. If 3M fails to fulfill any of
the representations, promises or terms stated in this Agreement, CNS may
terminate this Agreement on thirty (30) days written notice. Either of the
parties intending to terminate the Agreement under this section shall give
written notice of its intention to do so to the other party stating its
rationale and giving detailed description of the cause. The party giving notice
shall grant the other party a reasonable period of time (but in no event more
than thirty (30) days) to remedy the cause for termination. During this grace
period, the parties shall make a good-faith effort to assist one another in the
remedying of any problems surrounding this Agreement. Termination of this
Agreement shall not terminate any obligation set forth in the Agreement which
are incurred prior to such termination.
18. FORCE MAJEURE: Neither of the parties shall be responsible for any
delay or failure of performance hereunder due to, including, but not limited to,
strikes, lockout, shortage of labor or other labor disturbances, riots,
invasion, war, fire, explosion, sabotage, storm, flood, earthquake, inability to
obtain suitable material, fuel, power, or transportation, or any other causes
whatsoever beyond the reasonable control of the parties.
19. NO ASSIGNMENT OR DELEGATION: CNS may not assign any of its rights
or delegate any of its duties under this Agreement.
20. NOTICES: Any notice, order or other communication required by this
Agreement must be in writing, sent by first class mail or faster written means,
and addressed to the address listed on the signature page. A party may designate
in writing a substitute address.
21. ENTIRE AGREEMENT; NO WAIVER; GOVERNING LAW: This Agreement and the
exhibits hereto state the complete understanding between 3M and CNS on this
subject and replace any previous statements, communications or understandings,
whether oral or written. CNS may place orders under this Agreement using CNS'
regular purchase order form. However, any provision of that form, or of any
other CNS document, which conflicts with or differs from the provisions or
intent of this Agreement or the most current issue of Exhibit B is void. This
Agreement cannot be modified except by a writing signed by the party to be
bound, or through 3M's revision of Exhibit B. A course of dealing or of
performance does not effect a waiver or modification unless ratified in writing.
A party's failure to exercise a right in one instance does not waive that
party's right to later exercise that right. Any questions, claims or disputes
concerning or related to this Agreement are governed by the laws of Minnesota.
ACCEPTED AND AGREED TO:
MEDICAL SPECIALTIES DEPARTMENT
MINNESOTA MINING AND CNS, INC.
MANUFACTURING COMPANY 1250 PARK ROAD
3M CENTER CHANHASSEN, MINNESOTA 55317
ST. PAUL, MINNESOTA 55144
By: /s/ Paul Quinlan By: /s/ William J. Doubek
Title: Sales Marketing Manager Title: Vice President of Operations
Date: 4/21/95 Date: 5/17/95
EXHIBIT A
Products and Specifications
(Confidential Treatment Requested)
EXHIBIT B
Other Terms and Conditions of Sale
(Confidential Treatment Requested)
Exhibit 10.15
(Certain information has been omitted from the this exhibit and filed
separately with the SEC pursuant to a request for confidential treatment under
Rule 24b-2.)
LICENSE AGREEMENT
AGREEMENT made and effective as of the 24th day of January, 1996, by
and between CNS, Inc., a Delaware corporation ("Licensee"), and Ronald S.
Nietupski ("Licensor").
R E C I T A L S
WHEREAS, Licensor is now and has been engaged in developing certain
Products (as defined in Subsection 1.1) for use as diet and/or smoking
alternative/suppression/cessation aids;
WHEREAS, the Products embody inventions and designs owned by Licensor
and Licensor has available certain know-how relating to the Products;
WHEREAS, Licensor owns or controls, or may hereafter own or control,
certain know-how, trademarks, patents or patent applications relating to the
Products;
WHEREAS, Licensor desires to license to Licensee and Licensee desires
to license from Licensor certain trademarks, know-how, patents and patent
applications of Licensor relating to the Products.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements hereinafter set forth and other good consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. GENERAL DEFINITIONS. As used herein, the following terms shall be
defined in the manner set forth below:
1.1 Products. The term "Products" shall mean (i) the diet aid known as
"WILL- POWER" and any other diet aid developed by Licensor containing
2-Acetylpyridine and (ii) the smoking alternative/suppression/cessation aid
known as "QUIT'M" and any other smoking alternative/suppression/cessation aid
developed by Licensor containing 2-Acetylpyridine; the term "Products" shall
also include all parts and components thereof.
1.2 Know-how. The term "Know-how" shall mean any and all tangible and
intangible information, technology, documents and materials in the possession
and control of Licensor, necessary in order to enable Licensee to utilize fully
the rights granted by Licensor to Licensee hereunder and shall include, without
limiting the foregoing, the ideas, concepts, confidential information, trade
secrets and techniques, as well as all the materials, documents, manuals,
schematics, blueprints, specifications, patterns, art work, bills of materials
and technical specifications and other information of Licensor relating to the
Products.
1.3 Licensed Patents. The Term "Licensed Patents" shall mean the
following: (i) the United States patents listed on Exhibit 1.3 attached hereto;
(ii) the rights, patents and patent applications, if any, in any country or
jurisdiction in the world corresponding to the United States patents listed on
Exhibit 1.3 attached hereto; and (iii) any division, continuation,
continuation-in-part, divisional, reissued or extended letters patent,
applications and petty patents, utility models, utility model conversions,
inventor's certificates relating to any of the foregoing United States patents
and patents pending and foreign patent rights, which may be developed, acquired
or controlled by Licensor and which relate to the Products during the term of
this Agreement and with respect to which Licensor shall have the right to grant
the license hereinafter provided.
1.4 Contract Year and Quarter. The term "Contract Year" shall mean each
period of twelve consecutive months commencing on January 1 of each year during
the term of this Agreement. The term "Contract Quarter" shall mean each period
of three consecutive months commencing January 1, April 1, July 1 and October 1
during the term of this Agreement.
1.5 Net Sales. The term "Net Sales" shall mean the net amount collected
by Licensee from any end-user, sublicensee, assignee or other person relating to
or arising from the sale of Products after the deduction of (i) any amounts
repaid or credited by reason of rejections or returns and (ii) trade and
quantity discounts actually allowed and taken.
1.6 Earned Royalty. The term "Earned Royalty" shall mean the royalty
payable to Licensor on Products.
1.7 Licensed Trademarks. The term "Licensed Trademarks" shall mean
Licensor's trademarks "WILL-POWER" and "QUIT'M".
2. GRANT OF LICENSES.
2.1 Patent, Trademark and Know-how License. Licensor hereby grants to
Licensee an exclusive, worldwide, transferable (subject to the terms of
Subsection 2.2) license to manufacture, have manufactured, use, sell and
otherwise practice the Products, Licensed Patents, Licensed Trademarks and all
Know-how and any invention disclosed or claimed in any of the Licensed Patents.
2.2 Sublicenses and Assignments. Subject to the further provisions of
this Subsection 2.2, Licensee may sublicense and/or assign to any third party,
including affiliates of Licensee, any and all rights granted hereunder. For any
sublicense and/or assignment granting rights to sell Products to parties other
than Licensee to be valid, Licensee shall, prior to any such assignment or
sublicense, enter into a written assignment and/or sublicense agreement with
such proposed sublicensee and/or assignee under which the assignee and/or
sublicensee agrees (i) that payments of fees, royalties and other fixed payments
shall be made 50% to Licensee and 50% to Licensor at commercially reasonable
rates based upon the sale of Products, and (ii) to provide Licensee and Licensor
records, data and other information necessary to verify the assignee's and/or
sublicensee's performance of its obligations under such sublicense and/or
assignment agreement. Licensee agrees that it shall take all such action as is
reasonable in order to fully enforce the obligations of any such sublicensee
and/or assignee under any such sublicense and/or assignment agreement.
2.3 Patent Costs. Licensor shall be responsible for and pay all patent
costs and expenses to be incurred in obtaining, prosecuting, owning and
maintaining any of the Licensed Patents issued or to be issued under the law of
any jurisdiction, including filing, prosecution, working and maintenance costs
and taxes; provided, however, that Licensee shall, at Licensor's request, be
responsible for and pay all costs and expenses to be incurred in maintaining any
of the Licensed Patents issued or to be issued in a foreign jurisdiction, which
payments will be deducted from any future royalty payments on foreign sales of
the Products.
2.4 Exploitation. Except as set forth in Section 8, Licensee shall not
be under any obligation to use, exploit, develop or market any license under
this Agreement. Licensee shall be entitled to use its sole business judgment in
deciding the manner and extent, if any, of any exploitation of any licenses
granted hereunder and in deciding whether to use any other products, devices,
techniques or technology competing therewith in any field of use.
2.5 Right of First Refusal. In the event Licensor conceives of or
develops any other product that is a medical device, Licensee shall have right
of first refusal to manufacture and market such product. Licensor shall give
written notice of such product to Licensee, and Licensee shall have three months
to exercise its right by written notice to Licensor. If such right is exercised,
Licensor and Licensee shall negotiate in good faith and enter into a license
agreement for such product. If such right is not timely exercised, Licensor may
manufacturer and market the product or enter into an agreement with a third
party.
3. REPRESENTATIONS AND WARRANTIES.
3.1 Licensor's Representations and Warranties. Licensor hereby warrants
and represents to Licensee as follows:
(a) This Agreement has been duly authorized, executed and delivered by
Licensor and constitutes a valid and binding obligation of Licensor, enforceable
in accordance with its terms. The execution, delivery and performance of this
Agreement by Licensor and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in any material breach of any
of the provisions of, or constitute a material default under, or result in a
material violation of, or require any authorization, consent or approval, under
the provisions of any agreement or instrument to which Licensor is bound or
affected, or any law, statute, rule, regulation, judgment order or decree to
which Licensor is subject.
(b) Licensor owns the exclusive rights to the Products, Licensed
Patents, Licensed Trademarks and Know-how and Licensor has not previously
granted any of such rights to a third party.
(c) To Licensor's knowledge, the Products, Licensed Patents, Licensed
Trademarks and Know-how do not infringe on any patent, trademark, copyright or
other intellectual property right of any third party.
(d) Licensor has not received notice of any claims, actions, suits or
proceedings pending or threatened affecting Licensor, the Licensed Patents, the
Licensed Trademarks or Knowhow, which, if adversely determined, would have an
adverse effect upon Licensee's ability to manufacture, have manufactured, use or
sell the Products or otherwise practice the rights and technology licensed to
Licensee by Licensor under this Agreement, and to Licensor's knowledge, there is
no reasonable basis for anyone to bring such claims, actions, suits or
proceedings.
(e) Licensor has not received any claim from any third-party
proceedings relating to the Licensed Patents, Licensed Trademarks, Know-how, or
the Products which are based upon infringement of any patent or trademark or
misappropriation or misuse of trade secrets.
(f) The Products are effective for their intended uses of appetite and
smokingdesire suppressant and the concentrations of the active and inactive
ingredients are at levels that the Flavor and Extract Manufacturers Association
generally regards as safe, and, to Licensor's knowledge, the Products are safe
for their intended uses.
(g) Licensor has disclosed all information in its possession or control
which, in his reasonable opinion, would be material to Licensee entering into
this Agreement, and to the best of his information does not contain any untrue
statements of a material fact or omit to state a material fact.
3.2 Licensee's Representations and Warranties. Licensee hereby warrants
and represents to Licensor as follows:
(a) Licensee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) This Agreement has been duly authorized, executed and delivered by
Licensee and constitutes a valid and binding obligation of Licensee, enforceable
in accordance with its terms. The execution, delivery and performance of this
Agreement by Licensee and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in any material breach
of any of the provisions of, or constitute a material default under, or result
in a material violation of, or require any authorization, consent or approval,
under the provisions of Licensee's Certificate of Incorporation or Bylaws or any
other agreement or instrument to which Licensee is bound or affected, or any
law, statute, rule, regulation, judgment order or decree to which Licensee is
subject.
4. CONSIDERATION AND REPORTS.
4.1 Fixed License Fees. Licensee agrees to pay to Licensor the
following amounts: (a) $50,000 within ten (10) days of the execution of this
Agreement; (b) $25,000 within ten (10) days of Licensee obtaining all necessary
regulatory approvals to market the Product currently known as "WILL-POWER"; and
(c) $25,000 within ten (10) days of Licensee obtaining all necessary regulatory
approvals to market the Product currently known as "QUIT'M"; provided, however,
that if "QUIT'M" is marketed as both an appetite and smoking suppressant, both
the amounts due under (b) and (c) shall be due.
4.2 Stock Options. Within thirty (30) days after the execution of this
Agreement, and in partial consideration of consulting services Licensor will
provide to Licensee regarding the Products, Licensee shall execute and deliver
to Licensor options to purchase an aggregate of 100,000 shares of Licensee's
Common Stock in substantially the form and on the terms of the Non-Qualified
Stock Options attached hereto as exhibit 4.2.
4.3 Royalties. Licensee agrees to pay to Licensor royalties at the rate
of 6% of Net Sales on each Product (i.e., the WILL-POWER and QUIT'M Products)
during the period commencing upon receiving all necessary regulatory approvals
to market such Product and terminating upon the expiration or invalidation of
the Licensed Patent applicable to such Product. The royalty provided for in this
Section 4 shall be terminated as to a particular Product if and when the
Licensed Patents relating to such product are invalidated or expire. The Earned
Royalty due hereunder shall be payable each Contract Quarter as set forth in
Subsection 4.5.
4.4 Minimum Royalties. To maintain its rights hereunder, Licensee shall
pay to Licensor minimum royalties during the term Licensor is obligated to make
royalty payments to Licensee for each Product under Section 4.3 above at the
rate of [Confidential Treatment Requested] per Contract Year (or a pro-rated
amount if the term is shorter than a Contract Year) for each Product (i.e.,
WILL-POWER and QUIT'M Products). Such royalties shall be paid each Contract
Quarter as follows: (i) [Confidential Treatment Requested]; (ii) less the
aggregate amount of Earned Royalties actually paid to Licensor for the Contract
Quarter then ended; (iii) less the amount of royalties paid to Licensor in any
Contract Quarter for that Contract Year which exceeded [Confidential Treatment
Requested]; and (iv) less the aggregate amount of royalties paid by any
sublicensee or assignee of this Agreement; provided, however, that in no event
shall aggregate royalty payments to Licensor hereunder be less than
[Confidential Treatment Requested] for any Contract Year. Licensee's failure to
pay any and all amounts payable under the preceding sentence within forty-five
(45) days after receipt of written notice from Licensor that such amounts have
not been timely paid shall render the licenses granted hereunder void and
thereupon, Licensee shall have no further rights or interests of any kind or
nature with respect to the Products, Know-how, Licensed Trademarks or Licensed
Patents and Licensee shall take any and all action that Licensor may request to
further document the provisions hereof. In the event that Licensee complies with
Section 4.3 but fails to pay the minimum royalties due under this Section 4.4,
Licensor's exclusive remedy is to terminate this Agreement, and Licensor will
not be entitled to any damages or injunctive or mandatory relief.
4.5 Quarterly Payments and Reports. All royalties due Licensor from
Licensee hereunder shall be payable on a Contract Quarterly basis. Within thirty
(30) days after the end of each Contract Quarter during the term of this
Agreement, Licensee shall pay to Licensor the royalty due Licensor under
Subsections 4.3 and 4.4 through the end of the preceding Contract Quarter and
shall furnish Licensor with a written statement within forty-five days after the
end of each Contract Quarter setting forth the number of Products sold and the
Net Sales received during such Contract Quarter, and the resulting amount of the
royalty due Licensor under Subsections 4.3 and 4.4.
4.6 Late Payment. Licensee shall pay a late payment fee to Licensor
calculated at a variable rate of 2% over the prime per annum interest rate as
set from time to time by Norwest Bank Minneapolis, N.A., Minneapolis, Minnesota
(the "Interest Rate"), on any and all amounts that are at any time overdue and
payable to Licensor under this Agreement, such interest being calculated on each
such overdue amount from the date when such amount became due to the date of
actual payment thereof. Such late payment fee shall be in addition to and not in
lieu of any and all other rights or remedies that Licensor may have under this
Agreement or law relating to a default by Licensee under this Agreement.
4.7 Records. During the term of this Agreement and for three (3) years
after termination of this Agreement, Licensee shall at all times maintain
accurate and up-to-date records containing complete data from which amounts due
to Licensor under this Agreement may be readily calculated. Further, Licensee
shall preserve and permit examination of such records by Licensor's
representatives at reasonable intervals and under reasonable conditions during
the term of this Agreement and for three (3) years thereafter and, upon request,
shall supply to Licensor's representatives all information useful in making a
proper audit and verification of Licensee's performance of its obligations under
this Agreement.
5. INDEMNIFICATION.
5.1 Indemnification by Licensor. Licensor shall indemnify and hold
Licensee harmless from and against any and all claims, damages, costs (including
reasonable attorneys' fees), judgments and liabilities of any kind or nature
arising out of the breach by Licensor of any of his warranties, representations
and covenants under this Agreement.
5.2 Indemnification by Licensee. Licensee shall indemnify and hold
Licensor harmless from and against any and all claims, damages, costs (including
reasonable attorneys' fees), judgments and liabilities of any kind or nature (a)
arising out of the breach by Licensee of any of its covenants under this
Agreement or (b) arising out of or related to the use, development,
manufacturing or marketing of the Products, Licensed Trademarks, Know-how or
Licensed Patents, including but not limited to, product liability claims.
6. PROTECTION AGAINST INFRINGEMENT. In the event that either party
becomes aware of activity on the part of any, or claim made by a, third party
which may constitute or relate to an infringement of the Licensed Patents, or
any other intellectual property rights with respect to which Licensee is granted
a license hereunder, such party shall give the other party written notice
thereof. At Licensee's sole discretion, Licensee may, at its sole expense,
initiate and thereafter diligently maintain reasonable efforts to prevent and
abate such infringement, including the initiation of an appropriate civil action
for infringement and the taking of such other action as may be necessary or
appropriate, to enforce the Licensed Patents or other intellectual property
rights with respect to which Licensee is granted a license hereunder or to
defend any similar action initiated by a third party. In such event, (i)
Licensor will cooperate fully in all respects and permit the use of his name in,
and as a party to, all such suits and execute all pleadings, documents and other
papers necessary or appropriate in conjunction therewith and (ii) Licensee shall
receive the full benefits of any action it takes pursuant to this subsection,
including retaining all sums recovered in any such suit or in settlement
thereof, and if such proceeds do not fully reimburse Licensee for its legal
expenses incurred in connection with such litigation, Licensee may deduct such
amount from future royalty payments to Licensor. Licensor may, at his option and
his cost and expense, participate in meetings with Licensee and/or its counsel
and receive all pleadings, documents and other related papers useful for the
purpose of keeping Licensor informed of the status of any proceedings commenced
by Licensee pursuant to this Section 6. Licensor may, at his option, join
Licensee in the defense of the intellectual property rights by agreeing to pay
Licensee a minimum of six percent of Licensee's legal costs; provided, however,
that if Licensee and Licensor are successful in such joint defense, then any
damages awarded shall be divided as follows: (a) reimbursement to Licensor and
Licensee for legal expenses (pro rata to actual expenses in the event that the
damages awarded or actually collected are insufficient to cover 100% of the
parties' total legal expense); (b) if any award remains after such payments,
Licensor shall receive six percent of the full amount of the award, but not to
exceed amounts paid by Licensor to Licensee for legal expenses; and (c) if any
award remains after such payments, such remaining amount shall be allocated 75%
to Licensee and 25% to Licensor.
7. TERM AND TERMINATION.
7.1 Term. This Agreement shall commence on the effective date hereof
and shall expire, unless earlier terminated pursuant to the terms of this
Agreement, upon the expiration of the last of the Licensed Patents to expire.
Notwithstanding the above, royalties shall not be due on any Product where any
Licensed Patent covering such Product has expired.
7.2 Termination. (a) If either party defaults in any of its obligations
under this Agreement, the other party shall have the right to terminate this
Agreement by giving ninety (90) days' written notice of termination specifying
the reason for termination, provided that such notice will be of no effect and
termination will not occur if the specified default is cured prior to the
expiration of said ninety (90) day notice period.
(b) Upon the termination of any license granted under this Agreement,
Licensee may, after the effective date of such termination, sell any of its (i)
completed Products, (ii) Products then in the process of manufacture and (iii)
Products with respect to which manufacture has been committed at the time of
termination by reason of either (x) any contracts for the purchase of materials
to be used in the manufacture of such Products or (y) any contract for the sale
of such Products. All such sales and uses shall be subject to the royalty
provisions of Section 4 of this Agreement as though the termination of this
Agreement had not occurred.
(c) Except as expressly provided in Subsection 7.2(b), after
termination of this Agreement, Licensee may not use, develop, market or sell the
Products, Licensed Trademarks, Know-how, or Licensed Patents in any way or
manner and Licensee shall take any and all steps reasonably requested by
Licensor to fully document the complete vesting of all rights licensed hereunder
to Licensee in Licensor upon any such termination.
7.3 Continuing Obligations. Termination shall not relieve or release
either party from its obligations to make any payment which may be owing to the
other under the terms of this Agreement or from any other liability which either
party may have to the other arising out of the terms of this Agreement.
Additionally, notwithstanding anything contained herein to the contrary,
Sections 3 and 5, and Subsections 4.3, 4.5, 4.6 and 4.7 shall survive
termination of this Agreement and remain in full force and effect; provided,
that Licensor and Licensee hereby acknowledge that they may not bring claims
against one another based upon the representations and warranties contained in
Section 3, except to the extent such representations and warranties are not
accurate as of the date hereof.
8. ADDITIONAL AGREEMENTS.
8.1 Pre-IND Meeting. Licensee shall meet with the FDA to discuss
procedures and specific requirements necessary to obtain approval to market the
Product currently known as QUIT'M.
8.2 Preliminary Clinical Study. Licensee shall conduct at its expense a
preliminary clinical study on the Product currently known as QUIT'M to determine
its efficacy for smoking alternative/suppression/cessation as established by the
FDA in the Pre-IND meeting and whether it achieves a minimum cessation success
rate of 20%. Licensee shall commence such study no later than May 1, 1996.
8.3 Regulatory Filing. Upon successful completion of the preliminary
clinical study referenced in Subsection 8.2 above, Licensee shall promptly
conduct further clinical studies, if any such studies are necessary to obtain
FDA approval, and prepare and submit at its expense the necessary regulatory
filings to the FDA for the purpose of satisfying federal requirements before
sale of the Products may begin. Licensor shall at Licensee's request provide any
necessary background information, knowledge or test results in his possession to
assist in this area.
8.4 Non-Compete. Licensor agrees to not manufacture, market or license
the rights to manufacture and/or market to any other party any other product
designed as a diet aid or smoking alternative/suppression/cessation aid during
the term of this Agreement.
8.5 Cooperation. Licensor agrees to cooperate with and assist Licensee
in developing and marketing the Products. Licensor shall enter into a Consulting
Agreement in the form attached hereto as Exhibit 8.5.
9. MISCELLANEOUS.
9.1 Force Majeure. Neither party shall be responsible for any delay or
failure in the performance of any obligation hereunder due to strikes, lockouts,
fires, floods, acts of God, embargoes, wars, riots, or act or order of any
government or governmental agency; provided, however, nothing set forth in this
Subsection 9.1 shall be construed to relieve Licensee of the requirement that it
pay minimum royalties pursuant to Subsection 4.4 hereof or suffer a loss of the
licenses herein granted.
9.2 Waiver. The waiver or failure of either party to enforce the terms
of this Agreement in one instance shall not constitute a waiver of said party's
right under this Agreement with respect to other violations.
9.3 Remedies. Except as otherwise provided herein, the election by
either party of any particular right or remedy shall not be deemed to exclude
any other right or remedy and all rights and remedies of either party shall be
cumulative. Except as otherwise provided herein, the parties agree that, in
addition to any other relief afforded under the terms of this Agreement or by
law, each party shall have the right to enforce this Agreement by injunctive or
mandatory relief to be issued against the other party, it being understood that
both damages and specific performance shall be proper modes of relief and are
not to be considered as alternative remedies.
9.4 Notices. All notices and replies thereto required hereunder shall
be in writing, signed by the party giving notice, placed in an envelope and
either delivered by hand or sent by facsimile or registered mail, postage
prepaid, return receipt requested, and properly addressed to the other party.
Notices sent by mail shall be deemed received on the date of receipt indicated
by the receipt verification provided by the United States Postal Service.
Notices sent by facsimile shall be deemed received on the date indicated on the
sender's confirmation report. Notice shall be given, mailed or sent to the other
party at the following addresses or at such other address as may be given by
proper notice:
If to Licensor: Ronald S. Nietupski Ronald S. Nietupski
948 Monty Cristo Blvd. 16500 Spaniel Drive
Tierra Verde, FL 33715 Lockport, IL 60441-9091
Fax No.: 813-866-8667 Fax No.: 708-301-3295
With a copy to: Gardner, Carton & Douglas
321 N. Clark St., Suite 3400
Chicago, IL 60610-4795
Attn: Todd S. Parkhurst
Fax No.: 312-644-3381
If to Licensee: CNS, Inc.
P.O. Box 39802
Minneapolis, MN 55439
Attn: Richard E. Jahnke
Fax No.: 612-835-5229
With a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2205
Attn: Patrick Delaney
Fax No.: 612-371-3207
Either party hereto may designate any other address for notices given
hereunder by written notice to the other party given at least ten (10) days
prior to the effective date of such change.
9.5 Entire Agreement. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof; there are no oral
promises, representations or warranties. No modification of this Agreement or
waiver of any of its terms shall be binding upon the parties unless said
modification or waiver is in writing, signed by both parties, and states that it
is an amendment to this Agreement.
9.6 Parties in Interest. This Agreement shall inure to the benefit of,
be binding upon, and be enforceable against the parties hereto, their respective
heirs, successors and assigns.
9.7 Governing Law. This Agreement shall be governed by, construed and
enforced under the internal laws (and not the laws of conflicts) of the State of
Minnesota.
9.8 Severability. If any portion of this Agreement is held invalid by
the final judgment of any court of competent jurisdiction, such portion shall be
deemed revised or "blue lined" so that it is enforceable to the fullest extent
possible under applicable law and the remaining provisions shall remain in full
force and effect as if such invalid provision had not been included herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNS, INC.
/s/ Ronald S. Nietupski By: /s/ Richard E. Jahnke
Ronald S. Nietupski Its: President
LIST OF EXHIBITS
Number Description
1.3 Licensed Patents
4.2 Stock Option Agreement
8.5 Consulting Agreement
EXHIBIT 1.3
LICENSED PATENTS
1. U.S. Patent No. 4,521,427 (for the product currently known as
"WILL-POWER").
2. U.S. Patent No. 5,336,680 (for the product currently known as
"QUIT'M").
EXHIBIT 4.2
CNS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT is made as of the ____ day of January, 1996,
between CNS, INC., a Delaware corporation (the "Company"), and Ronald S.
Nietupski, a non-employee consultant/advisor to the Company (the "Advisor").
Advisor will assist the Company in the development and marketing of the
products currently known as "WILL-POWER" and "QUIT'M" (the "Products"). The
Company desires to afford Advisor an opportunity to purchase shares of its
common stock, of the par value of One Cent ($.01) per share (the "Common
Stock"), as hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the parties hereto have
agreed, and do hereby agree, as follows:
1. Grant of Option. The Company hereby grants to the Advisor the right
and option (the "Option") to purchase from the Company all or any part of an
aggregate amount of 100,000 shares of the Common Stock of the Company on the
terms and conditions herein set forth.
2. Purchase Price. The purchase price of the shares of the Common Stock
covered by this Option shall be $____ per share.
3. Term of Option. The term of the Option shall be for a period of five
(5) years from the date set forth above, subject to earlier termination as
hereinafter provided.
4. Termination of License or Consulting Agreements. If the License
Agreement dated the date hereof by and between the parties hereto (the "License
Agreement") or the Consulting Agreement dated the date hereof between the
parties hereto (the "Consulting Agreement") is terminated for any reason, the
Option may be exercised (to the extent that Advisor shall have been entitled to
exercise the Option under Paragraph 5 of this Agreement prior to the date of the
termination of the License Agreement or Consulting Agreement) by the Advisor for
a period of 12 months.
5. Exercise of Option. The Option may be exercised by the Advisor as
set forth below:
a. 50,000 shares upon the successful completion of a preliminary
clinical study to confirm the efficacy for smoking cessation.
The study will be deemed to be "successful" if (i) the
Company, in its sole discretion, determines that the study is
sufficient and (ii) the study satisfies the requirements of
the Food and Drug Association (the "FDA") for such study,
based upon the Company's Pre-IND meeting with the FDA.
b. 25,000 shares upon the Company's marketing of or receipt of
all necessary regulatory approvals to market either of the
Products as a smoking alternative/suppression/cessation aid.
c. 25,000 shares upon the Company's marketing of or receipt of
all necessary regulatory approvals to market either of the
Products as a dietary aid.
Notwithstanding the foregoing, the Option shall be exercisable in full,
without regard to any installment exercise provisions, for a period of sixty
(60) days prior to or subsequent to the occurrence of any of the following
events: (i) dissolution or liquidation of the Company other than in conjunction
with a bankruptcy of the Company or any similar occurrence, (ii) any merger,
consolidation, acquisition, separation, reorganization, or similar occurrence,
where the Company will not be the surviving entity or (iii) the transfer of
substantially all of the assets of the Company or 70% or more of the outstanding
Common Stock of the Company.
6. Non-Transferability. The Option shall be transferable only by will
or the laws of descent and distribution, and the Option may be exercised, during
the lifetime of the Advisor, only by the Advisor.
7. Method of Exercising Option. Subject to the terms and conditions of
this Option Agreement, the Option may be exercised by written notice to the
Secretary of the Company at the principal office of the Company. Such notice
shall (i) state the election to exercise the Option and the number of shares in
respect of which it is being exercised, (ii) be signed by the person so
exercising the Option, and (iii) be accompanied by payment of the full purchase
price of such shares. The purchase price shall be payable in cash or by check or
bank draft payable to the Company. In the event the Option shall be exercised by
any person other than the Advisor, such notice shall be accompanied by
appropriate proof of the right of such person to exercise the Option. All shares
that shall be purchased upon the exercise of the Option as provided herein shall
be fully paid and nonassessable.
8. General. The Company shall at all times during the term of the
Option reserve and keep available such number of shares of Common Stock as will
be sufficient to satisfy the requirements of this Option Agreement, shall pay
all original issue and transfer taxes with respect to the issue and transfer of
shares pursuant hereto and all other fees and expenses necessarily incurred by
the Company in connection therewith, and laws and regulations which, in the
opinion of counsel for the Company, shall be applicable thereto. Upon Advisor's
exercise of the Option, the Company shall cause the Company's stock transfer
agent to promptly issue to the Advisor certificates evidencing shares purchased
by Advisor from time to time pursuant to this Option Agreement.
9. Status. Neither the Advisor nor the Advisor's executor,
administrator, heirs, or legatees, shall be or have any rights or privileges of
a shareholder of the Company in respect of the shares transferable upon exercise
of the Option granted hereunder, unless and until certificates representing such
shares shall be endorsed, transferred, and delivered and the transferee has
caused the Advisor's name to be entered as the shareholder of record on the
books of the Company.
10. Company Authority. The existence of the Option herein granted shall
not affect in any way the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations, reorganizations or
other changes in the Company's capital structure of its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock of the Company or
the rights thereof, or dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
11. Disputes. As a condition of the granting of the Option herein
granted, the Advisor agrees, for the Advisor and the Advisor's personal
representatives and successors, that any dispute or disagreement which may arise
under or as a result of or pursuant to this Agreement shall be determined by the
Compensation Committee of the Board of Directors of the Company, in its sole
discretion and acting in good faith, and that any interpretation by said
Committee of the terms of this Agreement shall be final, binding and conclusive.
12. Taxes. Advisor shall, no later than the date as of which any part
of the value of the Option first becomes includible as compensation in his gross
income for Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any Federal, state, or local
taxes of any kind required by law to be withheld with respect to the award. The
obligations of the Company shall be conditional on such payment or arrangements
and the Company shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the participant.
13. Binding Effect. This Agreement shall be binding upon the heirs,
executors, administrators and successor of the parties hereto.
IN WITNESS WHEREOF, the Company and the Advisor have executed this
Agreement as of the day and year first above written.
CNS, INC.
By:_____________________________
Its:__________________________
ADVISOR:
_____________________________
Ronald S. Nietupski
EXHIBIT 8.5
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and entered into as of
this ____ day of January, 1996 by and between CNS, Inc., a Delaware corporation
("CNS"), and Ronald S. Nietupski ("Consultant").
R E C I T A L S:
A. Consultant has developed certain products containing
2-Acetylpyridine to be used as a dietary aid and a smoking
alternative/suppression/cessation aid (the "Products").
B. CNS is acquiring, as of the effective date of this Agreement, a
license to manufacture and sell the Products pursuant to a License Agreement
between the parties hereto (the "License Agreement").
C. CNS and Consultant mutually desire to enter into an agreement
whereby Consultant shall render consulting services as provided herein to CNS
and CNS shall pay Consultant as provided herein.
AGREEMENT
In consideration of the foregoing and of the covenants and agreements
hereinafter contained, CNS and Consultant agree as follows:
i. CONSULTATION PERIOD.
CNS hereby retains Consultant for the period commencing on the date
hereof and terminating upon the termination of the License Agreement. Consultant
accepts such consultancy upon the terms and conditions hereinafter set forth.
ii. DUTIES OF CONSULTANT.
Upon reasonable notice (not less than 21 days), Consultant will, at
such times and places as requested by CNS, advise, consult with and render
services and assistance to CNS in connection with the design, testing,
manufacture, regulatory approval, marketing and sale of the Products, and the
development of improvements and enhancements of the Products, all as further
specified by CNS from time to time. At CNS's request, during any calendar year,
Consultant shall devote up to thirty days to fulfilling his duties and
responsibilities under this Agreement and shall arrange his schedule to be
reasonably available to CNS upon reasonable notice during normal business hours
during the term of this Agreement.
iii. COMPENSATION.
3.1 As compensation for services rendered and performed and
Consultant's other obligations hereunder, CNS shall grant Consultant an option
to purchase 100,000 shares of the Common Stock of CNS at an option price equal
to the closing price of CNS's stock on the Nasdaq National Market on the date
hereof.
3.2 In addition, CNS shall pay Consultant $1,500 for the first day of
services and $500 for each day of services thereafter as compensation for
services rendered and performed by Consultant on assignments that require
Consultant to travel outside of Tierra Verde, Florida or Lockport, Illinois.
Such fees shall be payable within 30 days of receipt of Consultant's invoice for
services rendered.
3.3 Consultant shall be responsible for all travel and other expenses
incurred by Consultant in the performance of his services hereunder.
iv. INDEPENDENT CONTRACTOR.
It is understood and agreed by the parties that the consulting service
hereunder shall be provided by Consultant as an independent contractor and not
as an employee or agent of Partnership.
v. CONFIDENTIALITY.
5.1 Consultant acknowledges that CNS holds as confidential certain
information and knowledge respecting the intimate and confidential affairs of
CNS in the various phases of its business, including, but not limited to, trade
secrets, processes, formulae, data and know-how, improvements, inventions,
techniques, marketing plans, strategy, forecasts and customer lists as it
relates to the Products and its other products ("Proprietary Information").
Consultant acknowledges that CNS may disclose certain Proprietary Information to
Consultant during the term of this Agreement to enable Consultant to perform
Consultant's duties hereunder. To assure that CNS will disclose to Consultant
all of the Proprietary Information necessary for Consultant to perform his
duties hereunder, Consultant hereby agrees not to disclose to any person other
than an employee of CNS, or use in other than CNS's business, any Proprietary
Information or material relating to the business of CNS, such as, but not
limited to, trade secrets, mailing lists, customer lists, pricing information,
manufacturing processes, distribution systems, computer systems or programs,
algorithms, etc., either during or after the termination of this Consulting
Agreement, except with the express written permission of CNS which will detail
the confidential information or material so authorized. Consultant also
understands that information and materials received in confidence by Consultant
from third parties either within or outside of CNS with regard to CNS or its
business is included within the meaning of this paragraph. Upon termination,
Consultant agrees not to disclose such confidential information or to make
copies of such written confidential information or material and Consultant
agrees to return all written confidential information to CNS.
5.2 Consultant represents that his performance of all of the terms of
this Agreement as a Consultant to CNS does not and will not breach any agreement
to keep in confidence Proprietary Information acquired by him in confidence or
in trust prior to his engagement as a consultant by CNS. Consultant has not
entered into, and agrees that he will not enter into, any agreement either
written or oral in conflict herewith.
6. GENERAL PROVISIONS.
6.1 Waiver. The failure to enforce any provision of this Agreement
shall not be construed as a waiver of any such provision nor prevent a party
thereafter from enforcing that provision or any other provision of this
Agreement. The rights granted the parties are cumulative, and the election of
one shall not constitute a waiver of such party's right to assert all other
legal and equitable remedies available under the circumstances.
6.2 Notices. All notices, requests, demands and other communications
hereunder shall be in writing, and shall be deemed to have been duly given on
the date of service if served personally on the party to whom notice is given or
within seventy-two (72) hours after mailing if mailed, certified mail, first
class, postage prepaid, as follows:
TO CNS: CNS, Inc.
P.O. Box 39802
Minneapolis, Minnesota 55439
Attention: Richard E. Jahnke
Fax No.: 612-835-5229
COPY TO: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Attention: Patrick Delaney
Fax No.: 612-371-3207
TO CONSULTANT: Ronald S. Nietupski Ronald S. Nietupski
948 Monty Cristo Blvd. 16500 Spaniel Drive
Tierra Verde, FL 33715 Lockport, IL 60441-9091
Fax No.: 813-866-8667 Fax No.: 708-301-3295
COPY TO: Gardner, Carton & Douglas
321 N. Clark St., Suite 3400
Chicago, IL 60610-4795
Attn: Todd S. Parkhurst
Fax No.: 312-644-3381
6.3 Assignment. No rights or obligations under this Agreement shall be
assignable or delegable by Consultant. The rights and duties under this
Agreement may be assignable by CNS to its successor. Except as provided in the
immediately preceding sentence, this Agreement shall be binding upon and shall
inure to the benefit of the respective successors and assigns of the parties
hereof.
6.4 Severability. The provisions of this Agreement are severable. If
any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions or
enforceable parts hereof shall not be affected thereby and shall be enforced to
the fullest extent permitted by law.
6.5 Prior Agreements - Modifications. This Agreement supersedes all
prior agreements and understandings between the parties, oral or written with
respect to the subject matter hereof. No modification, termination or attempted
waiver shall be valid unless in writing and signed by the party against whom
such modification, termination or waiver is sought to be enforced.
6.6 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.7 Attorneys' Fees. If any party to this Agreement shall bring any
action for any relief against the other, declaratory or otherwise, arising out
of this Agreement, the losing party shall pay to the prevailing party a
reasonable sum for attorney fees incurred in bringing such suit and/or enforcing
any judgment granted therein, all of which shall be deemed to have accrued upon
the commencement of such action and shall be paid whether or not such action is
prosecuted to judgment. Any judgment or order entered in such action shall
contain a specific provision providing for the recovery of attorney fees and
costs incurred in enforcing such judgment. For the purpose of this section,
attorney fees shall include, without limitation, fees incurred in the following:
(1) postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and
debtor and third party examinations; (4) discovery; and (5) bankruptcy
litigation.
6.8 Termination. CNS may terminate this Agreement in the event of death
or disability of Consultant, or in the event Consultant breaches any provision
of this Agreement and such breach remains uncured thirty (30) days after written
notice from CNS explaining the nature of such breach.
6.9 Governing Law. This Agreement shall be construed and enforced in
accordance with the substantive laws of the State of Minnesota, excluding its
choice of law provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CNS, INC.
By:_____________________________
Its:__________________________
_____________________________
Ronald S. Nietupski
(Certain information has been omitted from this exhibit and filed separetly with
the SEC pursuant to a request for confidential treatment under Rule 24b-2)
Exhibit 10.16
LICENSE AGREEMENT
AGREEMENT made and effective as of the 26th day of February, 1996, by
and between CNS, Inc., a Delaware corporation ("Licensee"), and Scott Dahlbeck,
M.D. ("Licensor").
R E C I T A L S
WHEREAS, Licensor is now and has been engaged in developing certain
Products (as defined in Subsection 1.1) for use in preventing dental damage;
WHEREAS, the Products embody inventions and designs owned by Licensor
and Licensor has available certain know-how relating to the Products;
WHEREAS, Licensor owns or controls, or may hereafter own or control,
certain know-how, patents or patent applications relating to the Products;
WHEREAS, Licensor desires to license to Licensee and Licensee desires
to license from Licensor certain know-how and patent applications of Licensor
relating to the Products.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements hereinafter set forth and other good consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. GENERAL DEFINITIONS. As used herein, the following terms shall be
defined in the manner set forth below:
1.1 Products. The term "Products" shall mean the Laryngoscope Dental
Warning System and parts, and components therefor and related thereto, all
improvements thereto, and any other products similar in function or purpose to
such product developed by Licensor during the term of this Agreement using any
Licensed Patents or Know-how.
1.2 Know-how. The term "Know-how" shall mean any and all tangible and
intangible information, technology, documents and materials in the possession
and control of Licensor, necessary in order to enable Licensee to utilize fully
the rights granted by Licensor to Licensee hereunder and shall include, without
limiting the foregoing, the ideas, concepts, confidential information, trade
secrets and techniques, as well as all the materials, documents, manuals,
schematics, blueprints, specifications, patterns, art work, bills of materials
and technical specifications and other information of Licensor relating to the
Products.
1.3 Licensed Patents. The Term "Licensed Patents" shall mean the
following: (i) the United States patent applications listed on Schedule 1.3
attached hereto and any patents arising therefrom; (ii) the rights, patents and
patent applications, if any, in any country or jurisdiction in the world
corresponding to the United States patent applications listed on Schedule 1.3
attached hereto; and (iii) any division, continuation, continuation-in-part,
divisional, reissued or extended letters patent, applications and petty patents,
utility models, utility model conversions, inventor's certificates relating to
any of the foregoing United States patents and patents pending and foreign
patent rights, which may be developed, acquired or controlled by Licensor during
the term of this Agreement and with respect to which Licensor shall have the
right to grant the license hereinafter provided.
1.4 Contract Year and Quarter. The term "Contract Year" shall mean each
period of twelve consecutive months commencing on January 1 of the year
designated in Subsection 4.2. The term "Contract Quarter" shall mean each period
of three consecutive months commencing each January 1, April 1, July 1 and
October 1.
1.5 Net Sales. The term "Net Sales" shall mean the net amount collected
by Licensee from any end-user, sublicensee, assignee or other person relating to
or arising from the sale of Products after the deduction of (i) any amounts
repaid or credited by reason of rejections or returns and (ii) trade and
quantity discounts actually allowed and taken.
1.6 Earned Royalty. The term "Earned Royalty" shall mean the royalty
payable to Licensor on Products.
2. GRANT OF LICENSES.
2.1 Patent and Know-how License. Licensor hereby grants to Licensee an
exclusive, worldwide, transferable license to manufacture, have manufactured,
use, lease, sell and otherwise practice the Products and all Know-how and any
invention disclosed or claimed in any of the Licensed Patents.
2.2 Sublicenses and Assignments. Subject to the further provisions of
this Subsection 2.2, Licensee may sublicense and/or assign to any third party,
including affiliates of Licensee, any and all rights granted hereunder. For any
sublicense and/or assignment granting rights to sell Products to parties other
than Licensee to be valid, Licensee shall, prior to any such assignment or
sublicense, enter into a written assignment and/or sublicense agreement with
such proposed sublicensee and/or assignee under which the assignee and/or
sublicensee agrees to (i) make payments of royalties to Licensee at commercially
reasonable rates based upon the sale of Products, and (ii) provide Licensee
records, data and other information necessary to verify the assignee's and/or
sublicensee's performance of its obligations under such sublicense and/or
assignment agreement. Licensee agrees that it shall take all such action as is
reasonable in order to fully enforce the obligations of any such sublicensee
and/or assignee under any such sublicense and/or assignment agreement.
2.3 Patent Costs. Licensor shall be responsible for and pay all patent
costs and expenses to be incurred in obtaining, prosecuting, owning and
maintaining any of the Licensed Patents issued or to be issued under the law of
any jurisdiction, including filing, prosecution, working and maintenance costs
and taxes; provided, however, that Licensee shall, at Licensor's request, be
responsible for and pay all costs and expenses to be incurred in maintaining any
of the Licensed Patents issued or to be issued in a foreign jurisdiction, which
payments will be deducted from any future royalty payments on foreign sales of
the Products.
2.4 Exploitation. Except as set forth in Section 8, Licensee shall not
be under any obligation to use, exploit, develop or market any license under
this Agreement. Licensee shall be entitled to use its sole business judgment in
deciding the manner and extent, if any, of any exploitation of any licenses
granted hereunder and in deciding whether to use any other products, devices,
techniques or technology competing therewith in any field of use.
3. REPRESENTATIONS AND WARRANTIES.
3.1 Licensor hereby warrants and represents to Licensee as follows:
(a) This Agreement has been duly authorized, executed and delivered by
Licensor and constitutes a valid and binding obligation of Licensor, enforceable
in accordance with its terms. The execution, delivery and performance of this
Agreement by Licensor and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in any material breach of any
of the provisions of, or constitute a material default under, or result in a
material violation of, or require any authorization, consent or approval, under
the provisions of any agreement or instrument to which Licensor is bound or
affected, or any law, statute, rule, regulation, judgment order or decree to
which Licensor is subject.
(b) Licensor owns all the rights with respect to the Products, Licensed
Patents and Know-how.
(c) To Licensor's knowledge, there is no reason that enforceable
patents will not issue in the United States from the applications listed on
Schedule 1.3, or in any other jurisdiction where corresponding rights are
sought.
(d) To Licensor's knowledge, the Products, Licensed Patents and
Know-how do not infringe on any patent, copyright or other intellectual property
right of any third party.
(e) Licensor has not received notice of any claims, actions, suits or
proceedings pending or threatened effecting Licensor, the Licensed Patents or
Know-how, which, if adversely determined, would have a material adverse effect
upon Licensee's ability to manufacture, have manufactured, use or sell the
Products or otherwise practice the rights and technology licensed to Licensee by
Licensor under this Agreement, and to Licensor's knowledge, there is no
reasonable basis for anyone to bring such claims, actions, suits or proceedings.
(f) Licensor has not received any claim from any third-party
proceedings relating to the Licensed Patents, Know-how, or the Products which
are based upon infringement of any patent or misappropriation or misuse of trade
secrets.
3.2 Licensee hereby warrants and represents to Licensor as follows:
(a) Licensee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) This Agreement has been duly authorized, executed and delivered by
Licensee and constitutes a valid and binding obligation of Licensee, enforceable
in accordance with its terms. The execution, delivery and performance of this
Agreement by Licensee and the consummation of the transactions contemplated
hereby do not and will not conflict with or result in any material breach of any
of the provisions of, or constitute a material default under, or result in a
material violation of, or require any authorization, consent or approval, under
the provisions of Licensee's Certificate of Incorporation or Bylaws or any other
agreement or instrument to which Licensee is bound or affected, or any law,
statute, rule, regulation, judgment order or decree to which Licensee is
subject.
4. CONSIDERATION AND REPORTS.
4.1 Fixed License Fees. Licensee agrees to pay to Licensor the
following amounts: (a) $15,000 upon the execution of this Agreement; and (b)
$35,000 upon receiving clearance to market the Products from the Food and Drug
Administration, which amount will be credited as a prepayment of royalties.
4.2 Royalties. Licensee agrees to pay to Licensor royalties as follows
based on the Net Sales of Products: (a) 5% of Net Sales of the Products; and (b)
3% of Net Sales of any disposable blade products which are manufactured by
Licensee and which incorporate the Product into the blade. The royalty provided
for in this Section 4 shall be terminated if and when the Licensed Patents are
invalidated or expire. The Earned Royalty due hereunder shall be payable each
Contract Quarter as set forth in Subsection 4.4.
4.3 Minimum Royalties. To maintain its rights hereunder, Licensee shall
pay to Licensor minimum royalties beginning in the first complete calendar
quarter after FDA approval of the Products. Within forty-five (45) days after
the end of each Contract Quarter after the commencement of the minimum royalties
and during the remaining term of this Agreement, Licensee shall pay Licensor the
minimum royalties specified on Schedule 4.3 less (i) the aggregate amount of
Earned Royalties actually paid to Licensor for the Contract Quarter ended, (ii)
the amount of royalties paid to Licensor in any Contract Quarter for that
Contract Year which exceeded the minimum royalties for that Contract Quarter
(iii) the aggregate amount of royalties paid by any sublicensee or assignee of
this Agreement. Licensee's failure to pay any and all amounts payable under the
preceding sentence within forty-five (45) days after receipt of written notice
from Licensor that such amounts have not been timely paid shall render the
licenses granted hereunder void, and thereupon Licensee shall have no further
rights or interests of any kind or nature with respect to the Products, Knowhow,
Licensed Trademarks or Licensed Patents and Licensee shall take any and all
action that Licensor may request to further document the provisions hereof. In
the event that Licensee complies with Section 4.2 but fails to pay the minimum
royalties due under this Section 4.3, Licensor's exclusive remedy is to
terminate this Agreement, and Licensor will not be entitled to any damages or
injunctive or mandatory relief relating to Licensee's obligations under this
Section 4.3.
4.4 Quarterly Payments. All royalties due Licensor from Licensee
hereunder shall be payable on a Contract Quarterly basis. Within forty-five (45)
days after the end of each Contract Quarter during the term of this Agreement,
Licensee shall pay to Licensor the royalty due Licensor under Subsections 4.2
and 4.3 through the end of the preceding Contract Quarter and shall furnish
Licensor with a written statement setting forth the number of Products sold and
the Net Sales received during such Contract Quarter, and the resulting amount of
the royalty due Licensor under Subsections 4.2 and 4.3.
4.5 Late Payment. Licensee shall pay a late payment fee to Licensor
calculated at a variable rate of 2% over the prime per annum interest rate as
set from time to time by Norwest Bank Minneapolis, N.A., Minneapolis, Minnesota
(the "Interest Rate"), on any and all amounts that are at any time overdue and
payable to Licensor under this Agreement, such interest being calculated on each
such overdue amount from the date when such amount became due to the date of
actual payment thereof. Such late payment fee shall be in addition to and not in
lieu of any and all other rights or remedies that Licensor may have under this
Agreement or law relating to a default by Licensee under this Agreement.
4.6 Records. During the term of this Agreement and for three (3) years
after termination of this Agreement, Licensee shall at all times maintain
accurate and up-to-date records containing complete data from which amounts due
to Licensor under this Agreement may be readily calculated. Further, Licensee
shall preserve and permit examination of such records by Licensor's
representatives at reasonable intervals and under reasonable conditions during
the term of this Agreement and for three (3) years thereafter and, upon request,
shall supply to Licensor's representatives all information useful in making a
proper audit and verification of Licensee's performance of its obligations under
this Agreement.
5. INDEMNIFICATION.
5.1 Indemnification by Licensor. Licensor shall indemnify and hold
Licensee harmless from and against any and all claims, damages, costs (including
reasonable attorneys' fees), judgments and liabilities of any kind or nature
arising out of the breach by Licensor of any of its warranties, representations
and covenants under this Agreement.
5.2 Indemnification by Licensee. Licensee shall indemnify and hold
Licensor harmless from and against any and all claims, damages, costs (including
reasonable attorneys' fees), judgments and liabilities of any kind or nature:
(a) arising out of the breach by Licensee of any of its covenants under this
Agreement; or (b) arising out of or related to the use, development,
manufacturing or marketing of the Products, Know-how or Licensed Patents,
including but not limited to, product liability claims.
6. PROTECTION AGAINST INFRINGEMENT. In the event that either party
becomes aware of activity on the part of any, or a claim made by a, third party
which may constitute or relate to infringement of the Licensed Patents, or any
other intellectual property rights with respect to which Licensee is granted a
license hereunder, that party shall give the other party written notice thereof.
Licensee shall, at its option and at its sole expense, initiate and thereafter
diligently maintain reasonable efforts to prevent and abate such infringement,
including the initiation of an appropriate civil action for infringement and the
taking of such other action as may be necessary or appropriate, to enforce the
Licensed Patents or other intellectual property rights with respect to which
Licensee is granted a license hereunder. In such event, (i) Licensor will permit
the use of its name in, and as a party to, all such suits and execute all
pleadings, documents and other papers necessary or appropriate in conjunction
therewith and (ii) Licensee shall receive the full benefits of any action it
takes pursuant to this subsection, including retaining all sums recovered in any
such suit or in settlement thereof after paying Licensor the Earned Royalties
which shall be calculated from the amount of Net Sales, if any, imputed to
support any award of compensatory damages (as opposed to punitive or any other
damages). Licensor may, at its option and its cost and expense, participate in
meetings with Licensee and/or its counsel and receive all pleadings, documents
and other related papers useful for the purpose of keeping Licensor informed of
the status of any proceedings commenced by Licensee pursuant to this Section 6.
7. TERM AND TERMINATION.
7.1 Term. This Agreement shall commence on the effective date hereof
and shall expire, unless earlier terminated pursuant to the terms of this
Agreement, upon the expiration of the last of the Licensed Patents to expire.
7.2 Termination. (a) If either party defaults in any of its obligations
under this Agreement, the other party shall have the right to terminate this
Agreement by giving ninety (90) days' written notice of termination specifying
the reason for termination, provided that such notice will be of no effect and
termination will not occur if the specified default is cured prior to the
expiration of said ninety (90) day notice period.
(b) Upon the termination of any license granted under this Agreement,
Licensee may, after the effective date of such termination, sell any of its (i)
completed Products, (ii) Products then in the process of manufacture and (iii)
Products with respect to which manufacture has been committed at the time of
termination by reason of either (x) any contracts for the purchase of materials
to be used in the manufacture of such Products or (y) any contract for the sale
of such Products. All such sales and uses shall be subject to the royalty
provisions of Section 4 of this Agreement as though the termination of this
Agreement had not occurred.
(c) Except as expressly provided in Subsection 7.2(b), after
termination of this Agreement, Licensee may not use, develop, market or sell the
Products, Licensed Trademarks, Know-how, or Licensed Patents in any way or
manner and Licensee shall take any and all steps reasonably requested by
Licensor to fully document the complete vesting of all rights licensed hereunder
to Licensee from Licensor upon any such termination.
7.3 Continuing Obligations. Termination shall not relieve or release
either party from its obligations to make any payment which may be owing to the
other under the terms of this Agreement or from any other liability which either
party may have to the other arising out of the terms of this Agreement.
Additionally, notwithstanding anything contained herein to the contrary,
Sections 3 and 5, and Subsections 4.2, 4.3, 4.4, 4.5 and 4.6 shall survive
termination of this Agreement and remain in full force and effect; provided,
that Licensor and Licensee hereby acknowledge that they may not bring claims
against one another based upon the representations and warranties contained in
Section 3, except to the extent such representations and warranties are not
accurate as of the date hereof.
8. REGULATORY APPROVALS. Licensee shall submit a 510(k) notification
filing to the FDA, prior to June 30, 1996, for the purpose of satisfying the
required premarket notification before sale of the Products may begin.
9. MISCELLANEOUS.
9.1 Force Majeure. Neither party shall be responsible for any delay or
failure in the performance of any obligation hereunder due to strikes, lockouts,
fires, floods, acts of God, embargoes, wars, riots, or act or order of any
government or governmental agency; provided, however, nothing set forth in this
Subsection 9.1 shall be construed to relieve Licensee of the requirement that it
pay minimum royalties pursuant to Subsection 4.3 hereof or suffer a loss of the
licenses herein granted.
9.2 Waiver. The waiver or failure of either party to enforce the terms
of this Agreement in one instance shall not constitute a waiver of said party's
right under this Agreement with respect to other violations.
9.3 Remedies. Except as otherwise provided herein, the election by
either party of any particular right or remedy shall not be deemed to exclude
any other right or remedy and all rights and remedies of either party shall be
cumulative. Except as otherwise provided herein, the parties agree that, in
addition to any other relief afforded under the terms of this Agreement or by
law, each party shall have the right to enforce this Agreement by injunctive or
mandatory relief to be issued against the other party, it being understood that
both damages and specific performance shall be proper modes of relief and are
not to be considered as alternative remedies.
9.4 Notices. All notices and replies thereto required hereunder shall
be in writing, signed by the party giving notice, placed in an envelope and
either delivered by hand or sent by facsimile or registered mail, postage
prepaid, return receipt requested, and properly addressed to the other party.
Notices sent by mail shall be deemed received on the date of receipt indicated
by the receipt verification provided by the United States Postal Service.
Notices sent by facsimile shall be deemed received on the date indicated on the
sender's confirmation report. Notice shall be given, mailed or sent to the other
party at the following addresses or at such other address as may be given by
proper notice:
If to Licensor: Dr. Scott Dahlbeck
716 Logan
Holdrege, Nebraska 68949
Fax No.:______________
With a copy to: Nawrocki, Rooney & Sivertson
3433 Broadway Street N.E.
Suite 401
Minneapolis, MN 55413
Attn: John L. Rooney
Fax No.: 612-331-2239
If to Licensee: CNS, Inc.
Box 39802
Minneapolis, MN 55439
Attn: Richard E. Jahnke
Fax No.: 612-835-5229
With a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2205
Attn: Patrick Delaney
Fax No.: 612-371-3207
Either party hereto may designate any other address for notices given
hereunder by written notice to the other party given at least ten (10) days
prior to the effective date of such change.
9.5 Entire Agreement. This Agreement represents the entire agreement
between the parties with respect to the subject matter hereof; there are no oral
promises, representations or warranties. No modification of this Agreement or
waiver of any of its terms shall be binding upon the parties unless said
modification or waiver is in writing, signed by both parties, and states that it
is an amendment to this Agreement.
9.6 Parties in Interest. This Agreement shall inure to the benefit of,
be binding upon, and be enforceable against the parties hereto, their respective
successors and assigns.
9.7 Governing Law. This Agreement shall be governed by, construed and
enforced under the internal laws (and not the laws of conflicts) of the State of
Minnesota.
9.8 Severability. If any portion of this Agreement is held invalid by
the final judgment of any court of competent jurisdiction, such portion shall be
deemed revised or "blue lined" so that it is enforceable to the fullest extent
possible under applicable law and the remaining provisions shall remain in full
force and effect as if such invalid provision had not been included herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNS, INC.
/s/ Scott Dahlbeck By: /s/ Richard E. Jahnke
Scott Dahlbeck, M.D. Its: President
SCHEDULE 4.3
<TABLE>
<CAPTION>
MINIMUM ROYALTIES
Minimum Royalties
Period Per Quarter
<S> <C>
1. All Contract Quarters prior to completion $[Confidential Treatment Requested]
of the first full Contract Year of royalty
payments.
2. Contract Quarters during second Contract $[Confidential Treatment Requested]
Year of royalties.
3. Contract Quarters during third Contract $[Confidential Treatment Requested]
Year of royalties.
4. All Contract Quarters after third Contract $[Confidential Treatment Requested]
Year and prior to termination of the Agreement
</TABLE>
OPTION AGREEMENT
Certain information has been omitted from this exhibit and filed seperately
with the SEC pursuant to a request for confidential treatment under Rule 24b-2.
Exhibit 10.17
This Agreement is entered into on this 5th day of October, 1995 between
CNS, Inc. having its place of business at 1250 Park Road, in Chanhassen,
Minnesota 55317 hereinafter referred to as "CNS", and Trutek Corp. having its
place of business at c/o Kenneth P. Glynn, Esq., Suite 201 (Plaza One), Rte. 12
West, in Flemington, New Jersey, 08022 hereinafter referred to as "Trutek".
1. CNS agrees to pay Trutek a sum of $50,000.00 upon execution of this
Option Agreement, and, in exchange, Trutek grants to CNS an exclusive option to
take out a license on the property described in the patents and applications
attached hereto as Exhibit A, under the License Agreement attached hereto as
Exhibit B.
2. This option shall run for a period of six (6) months form the date
set forth above. It may be extended for one period of three (3) additional
months beyond the initial six (6) month period, by payment of $25,000.00 payment
must be received by Trutek at the above address before the expiration of the
previous option period, or this option shall immediately and irrevocably expire.
3. During the aforesaid option period, Trutek shall refrain from
licensing the property covered hereunder to any third party.
4. During this six (6) month option period, Trutek agrees to procure or
perform the following:
(a) Single Blind Efficacy Tests from Dr. Jalaj on approximately 10 to
18 of his patients;
(b) Double Blind Efficacy Tests from RTL on 12 patients;
(c) Safety Tests from Laberco, as follows:
(i) Acute Oral Toxicity
(ii) Primary Eye Irritation
(iii) Primary Skin Irritation
(iv) Oral Mucosal with Guinea Pigs or Hamsters (abraded
and non-abraded);
(d) FDA opinion letter from consultant Sidney Rubinstein;
(e) Cover U.S. Patent Fees, International Patent Fees and drawing costs
through February 15, 1996; and,
(f) Provide copies to CNS.
5. CNS may exercise its option to license hereunder by executing the
License Agreement attache hereto as Exhibit B and sending same, along with the
initial payment set forth herein, by Certified Mail, Express Mail or Federal
Express, to Trutek, before the expiration of the option period.
6. This Agreement is governed by the Laws of the State of New Jersey.
CNS, Inc Trutek Corp.
By: /s/ Daniel E. Cohen By: /s/ Ashok L. Wahi
Dr. Daniel Cohen, President Ashok L. Wahi, President
Date: 10/5/95 Date: 10/6/95
EXHIBIT A
U.S. CASES:
(Attorney Docket No. ALW-101A)
Title: Electrostatically Charged Nasal
Application Product and Method
U.S. Serial No. 08/080,775
Filing Date: June 24, 1993
Status: Issue Fee Paid
- - - - - - - - - - - - - -
(Attorney Docket No. ALW-102C)
Title: Electrostatically Charged Nasal
Application Product and Method
(Divisional of U.S. Serial No. 08/080,775)
U.S. Serial No. 08/443,906
Filing Date: May 17, 1995
Status: Pending
INTERNATIONAL CASE:
(Attorney Docket No. ALW-101F/PCT)
Title: Electrostatically Charged Nasal
Application Product and Method
International Application No. PCT/US94/06740
Filing Date: June 13, 1994
Status: Pending
EXHIBIT B
LICENSE AGREEMENT
THIS AGREEMENT, made and effective this 1st day of April, 1996 by and
between CNS, Inc. having its principal place of business at 1250 Park Road,
Chanhassen, Minnesota 55317, hereinafter "CNS", and Trutek Corp., a New Jersey
corporation, having its principal place of business at c/o Kenneth P. Glynn,
Esq., Suite 201 (Plaza One), One Route 12 West, Flemington, New Jersey 08822
("TRUTEK").
W I T N E S S E T H:
WHEREAS, CNS is currently engaged in manufacturing, distributing and
selling certain Breathe Right nasal strips (the "Products");
WHEREAS, TRUTEK has developed a number of inventions and improvements
of Electrostatically Charged Nasal Application Product and Method and has filed
for Untied States Patent protection for many such developments and, more
specifically, has applied for United States patent applications on
"Electrostatically Charged Nasal Application Product and Method" (ALW-101A) and
its U.S. Divisional application counterpart and its PTC international
application counterpart (hereinafter "Patent Assets"); and
WHEREAS, CNS desires to obtain an exclusive license under the Patent
Assets and TRUTEK is willing to grant such a license to CNS, upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
legal sufficiency of which is hereby acknowledged, CNS and TRUTEK agree as
follows:
ARTICLE 1 - DEFINITIONS
1.01 The following terms as used in this AGREEMENT shall have the meanings set
forth in this Article:
(a) "Patent Assets" shall mean the United States Patent Application
known as "Electrostatically Charged Nasal Application Product and Method",
Docket No. ALW-101A, Serial No. 08/080,775, filed on June 24, 1993, allowed and
about to be issued as a United States Patent, and the United States Patent
Application known as "Electrostatically Charged Nasal Application Product and
Method", Docket No. ALW-102C, Serial No. 08/443,906, filed on May 17, 1995, and
all continuing, continuation-in-part, divisional and foreign counterparts
thereof.
(b) "Valid Claim" shall mean a claim in an unexpired TRUTEK Patent
which has not been disclaimed, held invalid by a court of competent jurisdiction
from which no appeal has been or can be taken, or held unpatentable through any
reissue, reexamination and/or interference proceeding in the United States
Patent and Trademark Office and any other similar process or opposition
proceeding in any foreign Patent Office which is affirmed or sustained by any
panel or court of competent jurisdiction from which no appeal has been or can be
taken.
(c) "Licensed Product" shall mean Products covered by a Valid Claim of
the Patent.
(d) "Anniversary Royalty Date" shall mean one year from the date of the
Agreement and each Anniversary date thereafter.
(e) "Affiliate" shall mean:
(i) an organization of which fifty percent (50%) or more
of the voting stock is controlled or owned, directly
or indirectly, by either party;
(ii) an organization which directly or indirectly owns or
controls fifty percent (50%) or more of the voting
stock of either party;
(iii) an organization, the majority ownership of which is
directly or indirectly common to the majority
ownership of either party; or
(iv) an organization under (i), (ii), or (iii) above
wherein the amount of said ownership is less than
fifty percent (50%) and that amount is the maximum
amount of ownership allowed pursuant to the laws
governing the ownership of said organization.
(f) "Gross Revenue" shall mean gross amount collected by CNS from any
end user, sublicensee, or any other person relating to or arising form the sale
of products after deduction of (i) any amounts repaid and accredited by reason
of the returns, and (ii) trade and quantity discounts actually allowed and
taken. If Licensed Products are sold by a sublicensee of CNS who did not
purchase such products from CNS pursuant to the rights granted to CNS hereunder
and if CNS collects a fee directly from such sublicensee as a result of the
sale, then CNS shall be deemed to have received Gross Revenues from the sale
equal to the gross amount actually paid to sub sublicensee for such products
after deduction of any amounts paid or credited by licensee by reason of
rejection or return and tarde quantity discounts actually allowed and taken.
Notwithstanding the foregoing, if the Licensed Products are incorporated by a
sublicensee, who did not purchase the Licensed Products from CNS, into an
existing product or into a product where a Licensed Product functions as a value
added item in the sublicensee's product, such sale shall not be considered Gross
Revenue, but instead shall be subject to a royalty as set forth in paragraph
3.02(c).
(g) "Know-How" shall mean all formulations, constituents, percentage,
full disclosure of samples made and of samples tested, testing techniques,
toxicology and efficiency test results relating to Licensed Product.
(h) "Royalty Year" shall mean a twelve (12) month period commencing
with each Anniversary Royalty Date.
(i) "United States" shall mean the United States, its territories and
its possessions, and the Commonwealth of Puerto Rico.
ARTICLE 2 - GRANT
2.01 TRUTEK hereby grants CNS a worldwide, sole and exclusive right and license
for the term of this AGREEMENT under the TRUTEK Patent Assets to make, have
made, use, and sell the Licensed Product, including the right to grant
sublicenses. The sole and exclusive right and license granted by TRUTEK to CNS
shall be exclusive even as to TRUTEK.
2.02 (a) Subject to further provisions hereof, CNS may sublicense any and all
rights granted hereunder. For any sublicense of any rights to sell Licensed
Products to parties other than CNS to be valid, CNS shall, prior to the
sublicense, enter into a written sublicense agreement with the proposed
sublicensee under which the sublicensee agrees to make payments or royalties to
CNS at commercially reasonable rates based upon the sale of Licensed Products
and provide CNS records, data and other information necessary to verify the
sublicensee's performance and its obligations under such sublicense.
(b) CNS agrees that it shall take all such actions that are reasonable
in order to fully enforce the obligations of any such sublicensee under any sub
sublicense agreement. The sublicense shall further specifically recognize that
TRUTEK is a third party beneficiary of such sublicense agreement.
(c) TRUTEK agrees at CNS's written request to grant a direct license
under the TRUTEK Patent Assets under the terms and conditions of this AGREEMENT
to any affiliate of CNS outside of North American and CNS guarantees the
performance of all obligations imposed on such Affiliate by such license.
ARTICLE 3 - CONSIDERATION
3.01 On the effective date of this AGREEMENT, CNS shall pay TRUTEK a first
Annual Minimum Royalty of [Confidential Treatment Requested] and shall pay that
same amount on all subsequent Anniversary Royalty Dates. All Annual Minimum
Royalty payments shall be fully creditable against running royalties, but only
against such running royalties as may accrue within the twelve months following
the Anniversary Royalty Date upon which a payment is made. All initial and
minimum annual payments from all sub-licenses shall be shared 50/50 between CNS
and TRUTEK.
3.02 (a) If TRUTEK believes that CNS has not made the payments due under this
AGREEMENT, TRUTEK may give written notice to CNS requesting CNS to make such
payment. If CNS does not make payment within 30 days, TRUTEK will have the right
to obtain the review of CNS's relevant books and records by an independent
certified public accountant to be appointed by agreement of the parties, which
agreement shall not be unreasonably withheld. If CNS fails to make such payment
as the independent certified public accountant determines to be due within 30
days of written notice to CNS of such amount, then this AGREEMENT shall
terminate. Either party shall have the right to dispute the amount of the
royalty in a court of competent jurisdiction following the written notice of the
amount the independent certified public accountant has determined is due.
(b) CNS shall pay TRUTEK a royalty of 5% of Gross Revenue of Licensed
Products sold, except for Licensed Products not sold by CNS to a sublicensee
which are incorporated into a sublicensee's existing product or where the
Licensed Product functions as a value added item in the sublicensee's product.
Such royalty shall accrue at the time the Licensed Product is sold by CNS, its
sublicensees or Affiliates as provide din the AGREEMENT and become payable as
provided in paragraph 4.01.
(c) If Licensed Products are incorporated by a sublicensee, who did not
purchase the Licensed Products form CNS, into an existing product or where the
Licensed Product functions as a value added item in the sublicensee's product,
CNS shall pay TRUTEK a royalty of 50% of the royalty received from the
sublicensee by CNS.
3.03 The obligation to pay royalties to TRUTEK under this AGREEMENT is imposed
only once with respect to the same unit of Licensed Product. Royalties due
pursuant to Section 3.02 shall accrue when the Licensed Product is shipped or
billed to a third party, whichever first occurs.
3.04 If CNS terminates this AGREEMENT under Article 89 hereof, CNS shall be
relieved of the obligation to make any further payments under this AGREEMENT
accruing after receipt by TRUTEK of the notice of termination.
ARTICLE 4 - REPORTS AND PAYMENT TIMING
4.01 Within thirty (30) days after the close of each quarter of a Royalty Year,
CNS shall submit to TRUTEK a payment where applicable, along with an accounting
report of said quarter year as to quantities of Licensed Product sold by CNS,
its Affiliates and sublicensees which are subject under this AGREEMENT to the
royalty @ 5% of Gross Revenue, as set forth herein.
4.02 CNS shall keep and maintain such books and records as are required to
accurately enable the determination and verification of the payments made by CNS
under this AGREEMENT. Such records shall be retained by CNS and abstracts of
those records which relate to the Licensed Product shall be made available upon
ten (10) days prior notice and at a reasonably acceptable time to CNS for the
purpose of verifying the amount of payments made hereunder. Such books and
records shall be retained, and such right of examination shall continue, for two
(2) years from the date of their origin, or one (1) year after the date of
termination of this AGREEMENT, whichever occurs first. Such books and records
shall be considered proprietary information and treated in accordance with
Article 9 of this AGREEMENT.
4.03 Payments due pursuant to this AGREEMENT shall be paid to TRUTEK in U.S.
Dollars at its address as noted in Article 13 hereof or such other address as
TRUTEK may designate.
ARTICLE 5 - KNOW-HOW
5.01 Promptly following the effective date of this AGREEMENT, TRUTEK shall
disclose to CNS the Know-How by furnishing copies and documentation thereof to
the extent it has not done so previously. CNS, and any of its sublicensees,
shall be free to use such Know-How free of charge in any manner it so desires.
ARTICLE 6 - MAINTENANCE AND ENFORCEMENT OF LICENSED PATENTS
6.01 TRUTEK shall maintain, at its expense, any pending and issued U.S. patents
and any pending and issued foreign Patents. If TRUTEK elects not to maintain any
such application or patent, it shall first give CNS sixty (60) days advance
notice, and CNS may opt by notice to TRUTEK to finance same, to protect its
interests herein; and any such payment so made by CNS shall be fully creditable
against any remaining royalties obligations. However, under such circumstances,
TRUTEK shall remain owner of all such patent applications and patents.
6.02 If either party has knowledge of any infringement of a claim of any TRUTEK
Patent which covers the making, use or sale of a Licensed Product, such party
shall promptly inform the other party of such infringement. CNS and TRUTEK shall
thereafter discuss what action should be taken, including whether any legal
proceeding should be instituted. If CNS and TRUTEK mutually agree on the course
of action to be taken, they shall jointly select on the course of action to be
taken, they shall jointly select counsel and equally share any expenses; any
settlement or recovery shall be shared by CNS and TRUTEK. If TRUTEK determined
to take action, but CNS does not desire to do so, TRUTEK may take action at
TRUTEK's expense and through counsel of TRUTEK's choice; any settlement or
recovery shall belong solely to TRUTEK. If CNS determines to take action, but
TRUTEK does not desire to do so, CNS may take action at CNS's expense and
through counsel of CNS's choice and may joint TRUTEK as a plaintiff or defendant
in such action. CNS, after deduction of all its expense in the litigation, shall
pay TRUTEK the lesser of 50% of the amount remaining after such deduction or 50%
of the payments which under Article 3 would have been due on the sales of the
infringer had they been sublicensed by CNS hereunder.
6.03 If one party institutes and carries on a legal proceeding to enforce a
TRUTEK Patent Asset against an alleged infringer, the other party shall fully
cooperate with and supply all assistance reasonably requested by the party
instituting and carrying on such proceedings. The party which institutes such a
proceeding shall have control over the proceeding, shall bear all costs incurred
in connection with such proceeding, including court costs, counsel's fees,
expenses and disbursements and shall hold the other party harmless against and
from all such cots other than fees and disbursements of such other party's own
counsel if such other party elects to be separately represented in such
proceeding. No settlement, compromise or other disposition of any such
proceeding which concerns the validity of the TRUTEK Patent Assets shall be
entered into without the other party's prior written consent, which consent
shall not be unreasonably withheld.
6.04 Should CNS, its Affiliates or sublicensee be required either by judgment,
award of decree, or by settlement consented to by TRUTEK, which consent shall
not be unreasonably withheld, to make royalty payments to a third party as a
consequence of CNS's, its Affiliates' or its sublicensees, marketing Licensed
Product in the United States, it is agreed that the payments due to TRUTEK under
this AGREEMENT for sales of Licensed Product in the United States, whether or
not already paid to TRUTEK, shall be reduced by an amount equal to that which
CNS, its Affiliates or its sublicensees are required to pay said third party.
ARTICLE 7 - EFFECTIVE DATE AND TERM
7.01 This AGREEMENT shall become effective on the date first above written,
subject to Section 1.01(d) and, unless terminated sooner under Articles 3 or 8,
shall expire upon the expiration of the TRUTEK Patent Assets. Notwithstanding
the foregoing, royalties shall not be due on any Licensed Product where any
patent covering the Licenced Product has expired. In addition, no royalties will
be paid on sales of Licensed Products in the event that a patent covering that
product is declared invalid or unenforceable by a court of competent
jurisdiction. However, should a decision be rendered on appeal finding such
patent valid and enforceable then the obligation of CNS to pay royalties shall
apply as if no adverse decision on invalidity or unenforceability has been
rendered.
ARTICLE 8 - TERMINATION
8.01 Except as provided in paragraph 3.02(a) above, if either party fails to
comply with any material obligation or condition of this AGREEMENT, the other
party shall give the party in default written notice that such default be cured.
If such default is not cured within ninety (90) days after receipt of such
notice by the party in default, the notifying party shall be entitled to
terminate this AGREEMENT in its entirety by giving further written notice t the
party in default. Termination shall take effect upon receipt of such further
written notice. The right of either party to terminate this AGREEMENT in its
entirety as provided in this paragraph 8.01 shall not be affected by any wavier
of, or failure to take action with respect to, any previous default.
8.02 Upon termination of this AGREEMENT, CNS shall within thirty (30) days
notify TRUTEK of all stock of Licensed Product which CNS, its sublicensee, and
its Affiliate have on hand. CNS, its sublicensees and Affiliates shall
thereafter have a nonexclusive license to sell such stock of Licensed Product;
provided that CNS shall pay royalties to TRUTEK on such sales a the rate and at
the time provided for in this AGREEMENT.
8.03 CNS may relinquish the rights and license granted to CNS under this
AGREEMENT for any reason at any time prior to any Anniversary Royalty Date or
any fixed payment due date by giving TRUTEK written notice of its desire to do
so at least thirty (30) days prior to the date on which the rights an license
are to terminate. Should CNS relinquish all of the rights and license granted
hereunder, CNS shall be relieved of the obligation to make any and all further
payments to TRUTEK which have not yet been made or accrued as of termination.
8.04 Termination of this AGREEMENT for any reason shall be without prejudice to:
(1) those rights and obligations under this AGREEMENT which
expressly survive termination; and
(2) any remedies which either party may then or thereafter have
under this AGREEMENT.
ARTICLE 9 - PROPRIETARY INFORMATION
9.01 (a) Except as otherwise provided herein, any proprietary information
conveyed by either party to the other party hereunder shall be treated as that
party would treat its own proprietary information. The providing party of such
proprietary information shall designate it as such at the time it is conveyed
and the recipient of such proprietary information may not disclose such
proprietary information to any third parties without the express written consent
of the other party; provided, however, that CNS may communicate proprietary
information of TRUTEK to third parties if such communication is reasonably
necessary in the ordinary course of business for the purpose of making or
marketing the Licensed Product.
(b) The recipient shall be relieved of its obligations under Section
9.01(a) to the extent that: (1) such information was already in the recipient's
possession prior to disclosure by the other party; (2) such information is, or
becomes, publicly known through no fault or omission attributable to the
recipient; or (3) such information is lawfully given to the recipient by a third
party having a right to do so.
ARTICLE 10 - FORCE MAJEURE
10.01 Neither CNS nor TRUTEK shall be liable for the failure to perform any of
its obligations under this AGREEMENT if such failure is occasioned by a
contingency beyond its reasonable control including but not limited to
occurrences such as strikes, or other labor disturbances, lock out, riot, war,
default by a common carrier, fire, flood, storm, earthquake, or act or failure
to act by a government agency or instrumentality. Each party will notify the
other party in writing immediately if any such contingency occurs.
ARTICLE 11 - WARRANTIES
11.01 Each of TRUTEK and CNS warrants and represents to the other that it has
the full right, authority, and power to enter into this AGREEMENT, and that is
not aware of any impediment which would inhibit its ability to perform the terms
and conditions imposed on it by this AGREEMENT.
11.02 TRUTEK warrants and represents that it has the entire right, and interest
in and to the TRUTEK Patent Assets; that to the best of its knowledge there are
no known outstanding claims or licenses or other encumbrances upon such TRUTEK
Patent Assets; that the TRUTEK Patent Assets is the only patent, or patent
applications now owned or controlled by TRUTEK which covers the Licensed
Products and/or the making, using or selling of the Licensed Product throughout
the United States; and that it is not in the possession of any information which
would, in its opinion, render any claims of the TRUTEK Patent Assets invalid
and/or unenforceable.
11.03 TRUTEK warrants and represents that it has no knowledge of the existence
of any patent or patent application, U.S. or foreign, other than the TRUTEK
Patent Assets, owned or controlled by anyone which (1) covers the Licensed
Product and/or (2) would prevent CNS from taking, using or selling the Licensed
Product in the United States.
11.04 TRUTEK warrants and represents that it has full right and authority fully
to disclose all present Know-How to CNS hereunder and to grant to CNS the right
to use said present KnowHow in the United States; and TRUTEK further warrants
that it is aware of no claim in or to the Know-How or any residuary rights
therein by any third party whether governmental agency, educational institution,
corporation (including subsidiaries or parent companies thereof), or private
person, nor any impediment to its agreement to disclose and to grant to CNS the
right to use future Know-How.
11.05 TRUTEK warrants and represents that it has disclosed all information in
its possession ro control which, in its opinion, would be material to CNS
entering into this AGREEMENT, and to the best of its knowledge such information
does not contain any untrue statements of a material fact or omit to state a
material fact.
ARTICLE 12 - MISCELLANEOUS
12.01 This AGREEMENT sets forth the entire agreement and understanding between
TRUTEK and CNS and supersedes all previous agreements whether written or oral.
No modification or amendment of this AGREEMENT shall be of any force or effect
unless it is in writing and signed by both TRUTEK and CNS.
12.02 Neither party may sell, assign, transfer, or otherwise coney any of its
rights or delegate any of its duties under this AGREEMENT without the prior
written consent of the other, which consent will not be unreasonably withheld,
except to a corporation which has succeeded to substantially all the business
and assets of the assignor and assumed in writing its obligations under this
AGREEMENT or to a corporation surviving a merger or consolidation to which the
party to this AGREEMENT is a party. This AGREEMENT shall be binding upon and
inure to the benefit of the parties hereto and such respective successors and
assigns. Any attempted sale, assignment, transfer, conveyance, or delegation ion
violation of this Section 12.02 shall be null and void.
12.03 This AGREEMENT does not entitle a party to use of the trademarks of the
other without proper authorization from the other party.
12.04 If a court of competent jurisdiction holds that a particular provision or
requirement of this AGREEMENT is in violation of any law or otherwise invalid or
unenforceable and from which no appeal has been taken or can be taken, such
provision or requirement shall not be enforced to the extent that it is in
violation of such law or is otherwise invalid or unenforceable; and all other
provisions and requiremets of this AGREEMENT shall remain in full force and
effect.
12.05 This AGREEMENT shall be governed by, and construed in accordance with, the
laws of the State of New Jersey.
12.06 This AGREEMENT has been prepared jointly and shall not be strictly
construed against either party hereto.
12.07 All titles and captions in this AGREEMENT are for convenience only and
shall not be of any meaning or substance.
ARTICLE 13 - NOTICES
13.01 Any legal notice required or permitted hereunder shall be considered
properly given if in writing and sent by registered or certified mail, return
receipt requested, or delivered personally to the party being notified at the
respective address of such party as follows:
If to TRUTEK: TRUTEK CORP.
c/o Kenneth P. Glynn, Esq.
Suite 201 (Plaza One)
One Route 12 West
Flemington, NH 08822
If to CNS: CNS, Inc.
1250 Park Road
Chanhassen, MN 55317
Attention: Dr. Daniel Cohen
Such notice shall be effective upon receipt.
IN WITNESS WHEREOF, this AGREEMENT has been executed in duplicate by
duly authorized representatives of CNS and TRUTEK upon the dates set forth
below.
CNS, INC. TRUTEK CORP.
By: _________________________ By: _________________________
Dr. Daniel Cohen, Ashok L. Wahi,
President President
Date: _______________________ Date: _______________________
(certain information has been omitted from this exhibit and filed separately
with the SEC pursuant to a request for confidential treatment under Rule 24b-2).
Exhibit 10.18
MARKETING AND
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 11th day of January,
1996 between CNS, Inc., a Delaware corporation ("Distributor"), Natus
Corporation, a Minnesota corporation ("Natus"), and LecTec Corporation, a
Minnesota corporation ("LecTec") (Natus and LecTec are collectively referred to
herein as "Manufacturer").
B A C K G R O U N D
LecTec manufactures the Product (as defined below) and Natus has
certain rights to the Product. Manufacturer is the owner of the Product.
Distributor is in the business of manufacturing and marketing consumer medical
products and has established sales channels for such products. Manufacturer
desires to enter into a marketing and distribution agreement for the Product on
the terms and conditions set forth in this Agreement.
TERMS AND CONDITIONS
NOW THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall be defined in the manner set forth below:
1.1 "Product" shall mean Manufacturer's topical analgesic pain relief
patch containing any of the active ingredients methyl salicylate, menthol and
camphor, and all alterations of and improvements to such Product; provided,
however, that Manufacturer may not alter the Product without Distributor's
approval, which approval shall not be unreasonably withheld.
1.2 "Territory" shall mean the United States of America and Canada, and
all of their possessions and territories.
1.3 "Exclusive Market" shall mean all retail stores in the Territory
and all wholesalers serving those retail stores.
1.4 "Non-Exclusive Market" shall mean those retail channels in the
Territory other than the channels in the Exclusive Market; provided, however,
that the Non-Exclusive Market shall not include (i) direct response
infommercials and electronic retailing through television-based shopping
programs such as (but not limited to) QVC and HSN, or (ii) direct person to
person marketing, including multi-level distributorships.
1.5 "Growth Factor" for any one calendar year shall mean the product of
Distributor's minimum purchase obligation for the prior year and the total
growth in the United States' retail topical analgesic market for such prior year
as measured by Information Resources, Inc. ("IRI") or Nielson Rating Services
("Nielson") scanner data.
2. APPOINTMENT OF DISTRIBUTOR.
2.1 Subject to the terms and conditions contained herein, Manufacturer
grants to the Distributor, and the Distributor hereby accepts, the rights and
responsibilities of (i) an exclusive distributor of the Product in the Exclusive
Market in the Territory and (ii) a non-exclusive distributor of the Product in
the Non-Exclusive Market in the Territory. Distributor is prohibited from
selling the Product outside the Exclusive Market or Non-Exclusive Market or to
any customer who is not in the Territory. In addition, Distributor is hereby
granted a right of first refusal to act as exclusive distributor in the
Exclusive Market of any analgesic patch developed by the Manufacturer other than
the Product. Such right of first refusal shall expire on the first anniversary
of the commencement of test marketing of the Product hereunder.
2.2 Beginning on January 1, 1996 and during the Term of this Agreement,
Manufacturer shall maintain Distributor's exclusivity in the Exclusive Market in
the Territory by not appointing any sales representatives or distributors, or
selling directly through other outlets in the Exclusive Market in the Territory.
Nothing contained herein shall in any manner restrict or limit Manufacturer in
regard to appointing another distributor for the Product or in regard to selling
directly or through other outlets in the Non-Exclusive Market. Distributor
acknowledges that Manufacturer has granted to a third party certain rights to
sell the Product in the Exclusive Market under the trademark "Natus Patch,"
which rights are terminable by Manufacturer, and that on January 1, 1996
Manufacturer will give notice to such party to terminate such third party's
rights to sell the Product in the Exclusive Market effective January 30, 1996.
2.3. Each of the parties is an independent contractor and nothing
contained herein shall be deemed or construed to create the relationship of an
agency, partnership, joint venture, franchise or any other association or
relationship between the parties except that of a marketing and distributor
relationship. Distributor is not granted any right or authority to assume or
create any obligations or responsibilities, express or implied, on behalf, or in
the name of, Manufacturer or to bind Manufacturer in any manner or thing
whatsoever, without the prior written approval and acceptance by Manufacturer in
each instance.
3. PURCHASE ORDERS.
3.1 No purchase orders of Distributor shall be binding upon
Manufacturer until accepted by Manufacturer in writing. Except as otherwise
agreed in writing by Manufacturer, an order may not be canceled by Distributor
after it has been accepted.
3.2 All sales of Product by Manufacturer to Distributor hereunder shall
be subject to the provisions of this Agreement and shall not be subject to the
terms and conditions contained in any purchase order of Distributor or
confirmation of Manufacturer, except insofar as any such purchase order or
confirmation establishes (i) the quantity of Product to be sold or (ii) the
shipment date of Product.
4. SHIPMENT OF PRODUCT.
4.1 Subject to delay due to force majeure, Manufacturer will ship
Product on the date indicated in Distributor's purchase order if such order is
within the then current sales projection of Distributor. If such order is beyond
the projection, Manufacturer will use commercially reasonable efforts to meet
such order and will not unreasonably withhold or delay its acceptance of the
order.
4.2 All Product sold by Manufacturer to Distributor hereunder will be
shipped by Manufacturer F.0.B. LecTec's loading dock ("Shipping Point").
4.3 Distributor shall assume all risk of loss for Product upon delivery
by Manufacturer of the Product to the Shipping Point.
4.4 Distributor will pay all loading, freight, shipping, insurance,
forwarding and handling charges, taxes, storage, and all other charges
applicable to the Product after it is delivered by Manufacturer to the Shipping
Point.
5. PRICE AND PAYMENT.
5.1 Manufacturer agrees to sell the Product to Distributor F.O.B.
Shipping Point at the price set forth on Exhibit A. Prices may not be changed
without Distributor's prior approval and changes will be based on the national
consumer price index.
5.2 The parties agree to renegotiate in good faith the price paid by
Distributor for the Product in the following situations: (i) for specified
packout configurations, for which different prices will be based on any cost
savings or increases that Manufacturer incurs as a result of such packout
changes; (ii) in the event price elasticity or competitive pricing pressures
impact Distributor's ability to effectively penetrate the market, in which case
the new prices will be negotiated in good faith; and (iii) to share
manufacturing cost reductions with Distributor in the event that unit sales of
the Product reach sufficient sustainable volume to generate manufacturing
economies of scale, in which case the new prices will be negotiated in good
faith with the understanding that the parties will take into consideration any
cost saving experienced by Distributor in connection with its marketing efforts.
5.3 Manufacturer agrees that it will not (i) sell comparably-sized
Product to any other party in the Non-Exclusive Market at a price less than the
price paid by Distributor or (ii) sell comparably-sized Product to any other
party at a price less than the price paid for the Product by Distributor. The
restriction in Section 5.3(ii) shall not apply to sales under (a) agreements
existing as of the date of this Agreement or (b) agreements for sales through
direct person to person marketing, including multi-level distributorships.
5.4 Except as otherwise provided in this Agreement, Distributor shall
pay Manufacturer for each shipment of Product within thirty (30) days of the
date of the invoice issued by Manufacturer in conjunction with such shipment.
6. RETURNED GOODS POLICY. Distributor may return Product to
Manufacturer upon Manufacturer's prior written approval if such Product deviated
from Distributor's packaging specifications or if the Product or packaging does
not meet the warranties contained in Section 13.1. Complaints concerning
conditions of any Product or packaging must be made within fifteen (15) days of
receipt by Distributor of such Product. Manufacturer shall pay all freight
charges incurred in connection with any return of Product pursuant to this
returned goods policy.
7. MANUFACTURER'S RESPONSIBILITIES.
7.1 In support of Distributor's sales efforts to promote Product in the
Territory, Manufacturer will furnish, at no cost to Distributor, (i) to the
extent known and available to Manufacturer, medical literature regarding or
relating to the Product, including abstracts of clinical studies and medical
journal articles, (ii) sales and promotional materials as may be developed by
Manufacturer, limited to technical data and technical journal reprints, and
(iii) samples of Product in reasonable quantities, as requested by Distributor
and agreed to by Manufacturer, each acting in good faith. Manufacturer will
furnish information to aid in the orientation and training of Distributor's
service and sales personnel.
7.2 Manufacturer will package the Product in conformance with the
packaging specifications provided by Distributor. Distributor will provide
camera-ready artwork for labels and packaging.
7.3 Manufacturer shall take such actions as are necessary (such as
cutting off supply of Product) to prevent any domestic or foreign entity from
distributing or selling, directly or indirectly, the Product in the Exclusive
Market in the Territory.
7.4 Manufacturer shall, with the exception of an IND, underwrite the
cost of any clinical studies necessary to support the Citizens Petition or other
similar FDA filings. Distributor and Manufacturer shall jointly underwrite the
cost of any mutually agreed upon clinical studies intended to broaden Product
claims beyond the monograph. Neither party shall be obligated to file an IND or
perform any clinical studies with respect to the Product.
7.5 Manufacturer shall give Distributor 180 days' written notice prior
to discontinuing the manufacture of the Product and shall not discontinue
manufacturing the Product prior to December 31, 1997 without Distributor's
written approval, unless the Food and Drug Administration forbids production or
distribution of the Product.
7.6 Manufacturer shall maintain a 30-day inventory of Product to meet
Distributor's forecasted volume requirements provided to Manufacturer pursuant
to Section 8.2.
8. DISTRIBUTOR'S RESPONSIBILITIES. In addition to the duties and
responsibilities outlined elsewhere in this Agreement, Distributor agrees as
follows:
8.1 Distributor will vigorously promote the sale and acceptance of
Product throughout the Territory. Distributor shall provide its customers with
all necessary and appropriate training and support regarding the use of the
Product.
8.2 Distributor shall furnish to Manufacturer a written four-month
rolling forecast for the Product, which forecast shall be given to Manufacturer
on or before the 10th day of each month.
8.3 Distributor shall underwrite the cost of any comparative clinical
studies for the Product. Distributor and Manufacturer shall jointly underwrite
the cost of any clinical studies intended to broaden Product claims beyond the
monograph, which are mutually agreed upon by the parties.
8.4 Claims language in all advertising or promotional materials
utilized by Distributor, its agents or employees in conjunction with the sale of
Product, other than such sales literature as is furnished to Distributor by
Manufacturer, shall be approved, in writing, by Manufacturer prior to their use
or dissemination.
8.5 Distributor shall cooperate fully with Manufacturer in dealing with
customer complaints concerning the Product and shall take such action to resolve
such complaints as may be requested by Manufacturer.
8.6 Distributor agrees, during the term of this Agreement, to comply
with all FDA regulations applicable to the Product. Distributor shall not, in
any way, misrepresent the nature or indications for use of the Product or,
except by prior written approval of Manufacturer, alter the Product.
9. MINIMUM PURCHASE OBLIGATIONS AND RETAIL STORE PLACEMENTS.
9.1 During the term of this Agreement, Distributor shall purchase a
minimum number of Product from Manufacturer per calendar year and shall have the
Product placed in a minimum number of retail stores as of December 31 of each
year, as set forth below.
9.1.1 Year Number of Patches
---- -----------------
1996
1997 [Confidential
1998 Treatment
Thereafter Requested]
9.1.2 Year Number of Stores
---- -----------------
1996 [Confidential
1997 Treatment
Thereafter Requested]
The above minimums assume that test marketing of the Product will begin by May
1, 1996. If test marketing begins later, the parties shall renegotiate the
minimums in good faith.
9.2 The minimum purchase obligation for 1997 may be satisfied by
achieving a combined volume of [Confidential Treatment Requested] patches during
1996 and 1997.
9.3 During years 1996, 1997 and 1998, Distributor's obligations under
this Section 9 may be satisfied by achieving either the Product minimums or
retail store minimums, determined through IRI or Nielson data and store purchase
data, records of which may be reviewed by Manufacturer.
9.4 In the event that Manufacturer loses its Product deferral with the
FDA and, as a consequence, Distributor is prohibited from selling the Product,
the minimum requirements set forth above shall be waived.
9.5 In the event Distributor shall fail to meet any minimum
requirements as set forth in this Section 9, Distributor shall have defaulted
under this Agreement, and Manufacturer's exclusive remedy is to terminate this
Agreement pursuant to Section 10; provided, however, that after 1998,
Distributor shall not be in breach of this Section 9 and Manufacturer may not
terminate this Agreement until (i) Distributor shall have failed to meet any of
its minimum requirements, (ii) Manufacturer has given Distributor a 30-day
written notice of such failure, and (iii) Distributor fails to meet the minimum
requirements after an additional six-month period to cure.
9.6 The minimums stated above will be appropriately reduced by good
faith negotiation of the parties (i) if Manufacturer does not use reasonable
efforts to defend its patents, (ii) if Manufacturer does not obtain or maintain
the necessary governmental or regulatory approvals to sell the Product or (iii)
where the parties are unable to agree on the price of the Product pursuant to in
paragraph 5.2(ii) hereof.
10. TERM OF AGREEMENT; TERMINATION.
10.1 This Agreement shall commence on the date hereof and terminate on
the later of (i) expiration of the last of Manufacturer's United States patents
on the Product issued or pending as of the date of this Agreement and (ii) any
other patent issued or pending or application filed on the Product after the
date hereof.
10.2 Either party may terminate this Agreement by giving thirty (30)
days' written notice to the other party of any material breach provided that as
of the expiration of said thirty (30) day notice period and an additional sixty
(60) days' cure period such breach remains uncured (other than as set forth in
Section 9.5)(iii)).
10.3 Either party may terminate this Agreement immediately upon written
notice to the other party if the other party shall: (i) file a voluntary
petition in bankruptcy or be the subject of an involuntary petition in
bankruptcy which is not dismissed within thirty (30) days of the date of filing;
(ii) be voluntarily or involuntarily dissolved; or (iii) have a receiver,
trustee or other court officer appointed for its property in connection with any
such bankruptcy proceeding, liquidation or insolvency proceeding.
10.4 Termination of this Agreement shall not relieve Manufacturer of
its obliga tions to deliver all Product ordered by Distributor and accepted by
Manufacturer prior to such termination; nor will such termination relieve
Distributor of its obligation to accept and pay for all Product ordered by
Distributor under purchase orders issued by Distributor and accepted by
Manufacturer prior to the date of such termination. Termination shall not
relieve or release either party from its obligation to make any other payments
which may be owing to the other party under the terms of this Agreement or from
any other liability which either party may have to the other arising out of this
Agreement or the breach of this Agreement. Following notice of termination,
Manufacturer shall have no obligation to accept any orders for Product from
Distributor.
10.5 Upon termination of this Agreement for breach by Manufacturer or
for breach by Distributor of its minimum purchase obligations or minimum store
placements hereunder, Distributor shall have the right, but not the obligation,
to cause Manufacturer to repurchase all Product having at least 50% of its
original shelf life in possession of Distributor, at the lower of Distributor's
original invoice purchase price or the then current invoice price, provided,
that such Product is new, unused and not materially damaged. Manufacturer agrees
to buy said Product from Distributor for said price should Distributor exercise
this right.
10.6 Upon termination of this Agreement for breach by Distributor
(other than a breach by Distributor of its minimum purchase obligations or
minimum store placements hereunder), Manufacturer shall have no obligation to
repurchase Distributor's inventory of Product, and shall have the right, but not
the obligation, to cause Distributor to purchase, at the then current price,
Manufacturer's 30 day inventory of Product as required to be held by
Manufacturer pursuant to Section 7.6, having at least 50% of its original shelf
life in Manufacturer's possession, provided, that such Product is new, unused
and not materially damaged. Distributor agrees to buy said Product from
Manufacturer for said price should Manufacturer exercise this right.
10.7 Notwithstanding anything contained herein to the contrary,
Sections 12, 13 and 19 of this Agreement shall survive termination of this
Agreement and shall remain in full force and effect.
11. WAIVER OF BREACH. The waiver or failure of either party to enforce
the terms of this Agreement in one instance shall not constitute a waiver of
said party's rights under this Agreement with respect to other violations.
12. MANUFACTURER'S WARRANTIES AND REPRESENTATIONS; INDEMNIFICATION.
12.1 Manufacturer warrants that the Product and its packaging (i) are
free from defects in material and manufacture, (ii) are fit to be used as
indicated in the Product labeling, (iii) meet all specifications and performance
claims, and (iv) are not adulterated or misbranded (as defined by the FDA). If a
Product or the packaging does not meet its warranty, Manufacturer shall replace
such Product or packaging or refund Distributor's purchase price. In case of a
recall, Manufacturer shall reimburse Distributor for its reasonable costs in
assisting in the recall.
THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY
MANUFACTURER, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF USE, EXCEPT AS
EXPRESSED ABOVE IN PARAGRAPH 12.1.
12.2 Manufacturer will comply with all material laws and regulations,
including FDA GMPs with respect to the manufacturing, packaging and labeling of
the Products. Distributor may periodically audit procedures, processes, process
controls and manufacturing records of Manufacturer.
12.3 Each of LecTec and Natus has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Minnesota and the undersigned has been duly authorized to execute this Agreement
on behalf of the Manufacturer, and when so executed, this Agreement will
constitute the valid and binding obligation of Manufacturer, enforceable in
accordance with its terms.
12.4 Manufacturer has the exclusive right, under the applicable patents
related to the Product, to manufacture the Product, for the duration of such
patents, in the United States and Canada and Manufacturer has obtained clearance
to market the Product in the United States from the FDA. It will use
commercially reasonable efforts to obtain clearance from the Ministry of Health
to market the Product in Canada taking into account the costs of obtaining such
clearance and the anticipated market for the Products in Canada.
12.5 LecTec and Natus shall jointly and severally save Distributor, its
directors, officers and employees from and against and indemnify them from any
and all claims, liabilities, costs and expenses of any nature (including
attorney's fees) caused by reason of claims that the Product caused personal
injury or property damage; provided, however, that Manufacturer's
indemnification obligations are conditioned upon Distributor giving Manufacturer
prompt written notice of any such claims and allowing Manufacturer to
participate in its own defense with its own counsel.
12.6 Manufacturer shall maintain product liability insurance coverage
in the amount of $2 million per occurrence which will be renewed annually and
which shall name Distributor as an additional named insured.
12.7 No party shall be liable to another party for any consequential
damages (e.g., lost profits, business opportunities or investments) that arise
as a result of this Agreement or its termination.
13. DISTRIBUTOR'S REPRESENTATIONS; INDEMNIFICATION.
13.1 Distributor shall not make any statements concerning the Product
which are not approved by Manufacturer, and any such statements by Distributor
shall be the sole responsibility of Distributor and Distributor shall save
Manufacturer, its directors, officers and employees harmless against and
indemnify them from the liability, costs, and expenses of any nature (including
attorneys' fees) which Manufacturer may incur as the result of any such
statements; provided, however, that Distributor's indemnification obligations
are conditioned upon Manufacturer giving Distributor prompt written notice of
any such claims and allowing Distributor to participate in its own defense with
its own counsel.
13.2 Distributor has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware and the
undersigned has been duly authorized to execute this Agreement on behalf of the
Distributor, and when so executed, this Agreement will constitute the valid and
binding obligation of Distributor, enforceable in accordance with its terms.
14. TRADEMARKS AND TRADE NAMES.
14.1 Manufacturer hereby grants to Distributor the exclusive license to
use the "TheraPatch(TM)" trade name for use in the Territory in connection with
the advertising and sale of the Product. If at any time Distributor markets the
Product under a trade name other than "TheraPatch," the exclusive license
granted pursuant to this Section 14.1 shall terminate. Distributor will
discontinue the use of such trade name at the end of this Agreement. If
Distributor uses the TheraPatch name in connection with the advertising and sale
of the Product, Distributor shall indicate on package labeling of the Product
that the product is manufactured by LecTec and that "TheraPatch" is a trademark
of the Manufacturer."
14.2 Distributor is hereby granted the first right of negotiation to
acquire the trade name "TheraPatch." Such right of negotiation shall expire on
the first anniversary of the commencement of test marketing of the Product
hereunder.
14.3 Distributor shall not remove, cover, change, or add to the labels
affixed by Manufacturer to Product without first receiving Manufacturer's
written approval.
15. PATENT OR TRADEMARK INFRINGEMENT..
15.1 If a patent infringement action is commenced or threatened against
Manufacturer as to any Product and Manufacturer elects to, as a result,
discontinue the sale of the Product in any part or all of the Territory,
Distributor shall discontinue its efforts to sell said Product in any such part
or all of the Territory immediately upon receipt of written notice thereof from
Manufacturer. LecTec and Natus shall jointly and severally save Distributor, its
directors, officers and employees harmless from and against and indemnify them
from any and all claims, liabilities, costs and expenses of any nature
(including attorney's fees) caused by reason of claims that the Product
infringes the intellectual property rights of others (e.g., patent, copyright ,
trademark, trade name, etc.); provided, however, that Manufacturer's
indemnification obligations are conditioned upon Distributor giving Manufacturer
prompt written notice of any such claims and giving the defense of the claim to
Manufacturer and reasonably cooperating with Manufacturer in the defense.
Distributor shall have a right to cooperate in its own defense with its own
counsel.
15.2 Distributor shall promptly notify Manufacturer in the event
Distributor becomes aware of any activities of a third party that may constitute
infringement of the Manufacturer's patents or pending patents on the Product or
trademarks.
16. RECALL. Distributor shall maintain complete and accurate records of
all Product sold by Distributor, its agents or employees (including without
limitation a complete and current list of all customers who have purchased, the
date of such purchases and the lot numbers of the units purchased). In the event
of a recall of any of the Product, Distributor will cooperate fully with
Manufacturer in effecting such recall, including without limitation, promptly
contacting any purchasers Manufacturer desires be contacted during the course of
any such recall, and promptly communicating to such purchasers such information
or instructions as Manufacturer may desire be transmitted to such purchasers.
17. TRACEABILITY. Distributor agrees to comply with all traceability
programs in effect at any time as initiated by Manufacturer. Manufacturer may
examine and make transcripts of any records required as part of a traceability
program at reasonable times during business hours.
18. APPOINTMENT OF SUBDISTRIBUTORS. In the event Distributor appoints
any subdistributors or sales representatives in the Territory in connection with
the performance of this Agreement, such appointment shall be made only in the
name and for the account of Distributor and shall be for a term no greater than
the term of this Agreement. Distributor shall not grant to the subdistributors
and/or sales representatives any rights greater than those which are granted by
Manufacturer to Distributor under this Agreement. Distributor shall also impose
on the subdistributors and/or sales representatives the same obligations as
Manufacturer has imposed on Distributor under this Agreement.
19. CONFIDENTIAL INFORMATION. Manufacturer and Distributor may exchange
information each considers confidential ("Confidential Information").
"Confidential Information" shall include any information that is not generally
known, including trade secrets, outside of that disclosing party and that is
proprietary to that party, relating to any phase of that party's existing or
reasonably forseeable business which is disclosed to the receiving parties
during the term of this Agreement. "Confidential Information" does not include
information that (i) is or becomes publicly available through no fault of the
receiving parties, (ii) is in the possession of the receiving parties prior to
the receipt from the disclosing party, (iii) is developed by the receiving party
independently of the Confidential Information, or (iv) is given to the receiving
party by someone else who has the right to do so. Each party hereto specifically
agrees to keep confidential and not to disclose to others any and all
Confidential Information. Upon the request of the disclosing party, or in the
event of the expiration or other termination of this Agreement, the receiving
parties shall promptly return all such Confidential Information to the
disclosing party. Each party hereto agrees not to use any such Confidential
Information except in conjunction with the purposes of this Agreement. The duty
not to disclose or use (other than in conjunction with the performance of this
Agreement) such Confidential information shall survive the termination of this
Agreement.
20. FORCE MAJEURE. Neither Manufacturer nor Distributor shall be in
breach of this Agreement for a failure to perform or be liable to the other for
any failure to perform under this Agreement if such failure is caused, in whole
or in part, directly or indirectly, by strikes, lockouts, or any other labor
troubles, fires, floods, acts of God, accidents, embargoes, war, riots, act or
order of any government or governmental agency, delay in the delivery of raw
material, parts, or completed merchandise by the supplier thereof, or any other
cause beyond the control of, or occurring without the fault of, such party.
21. NOTICE. All notices under this Agreement shall be in writing, and
may be delivered by hand or sent by mail or facsimile transaction. Notices sent
by mail shall be sent by registered mail, return receipt requested, and shall be
deemed received on the date of receipt indicated by the receipt verification
provided by the United States postal service. Notices delivered by hand or
facsimile transaction shall be effective upon receipt. Notices shall be given,
mailed, or sent to the parties at the following addresses:
If to LecTec: With a copy to:
LecTec Corporation Dorsey & Whitney P.L.L.P.
10701 Red Circle Drive Pillsbury Center South
Minnetonka, MN 55343 220 South 6th Street
Attn: Thomas E. Brunnelle, Ph.D. Minneapolis, MN 55402
Phone: (612) 933-2291 Attn: Karin Keitel
Fax: (612) 933-1068 Phone: (612) 340-8809
Fax: (612) 340-8738
If to Natus: With a copy to:
Natus Corporation Dorsey & Whitney P.L.L.P.
4550 W. 77th Street Pillsbury Center South
Edina, MN 55435 220 South 6th Street
Attn: Kathleen A. Billings Minneapolis, MN 55402
Phone: (612) 835-4626 Attn: Karin Keitel
Fax: (612) 835-2317 Phone: (612) 340-8809
Fax: (612) 340-8738
If to Distributor: With a copy to:
CNS, Inc. Lindquist & Vennum P.L.L.P.
P.O. Box 39802 4200 IDS Center
Minneapolis, MN 55439 80 South 8th Street
Attn: Richard E. Jahnke Minneapolis, MN 55402
Phone: (612) 820-6696 Attn: Patrick Delaney
Fax: (612) 820-6697 Phone: (612) 371-3281
Fax: (612) 371-3207
Any party hereto may designate any other address for notices given it
hereunder for written notice to the other party given at least ten (10) days
prior to the effective date of such change.
22. ENTIRE CONTRACT. There are no oral or other agreements or
understandings between the parties affecting this Agreement or relating to the
selling or purchase of Product. This Agreement supersedes all previous oral and
written arrangements between the parties, including their letter of intent dated
October 10, 1995, and is intended as a complete and exclusive statement of the
terms of their understanding.
23. AMENDMENTS. Amendments, if any, shall be in writing and valid only
when signed by all parties.
24. ASSIGNABILITY. No party may assign this Agreement without the
written consent of the other parties; provided, however, that either party may
assign this Agreement without such consent to any majority-owned or controlled
affiliate or subsidiary.
25. SEVERABILITY. In the event that any provision of this Agreement is
held invalid by the final judgment of any court of competent jurisdiction, the
remaining provisions shall remain in full force and effect as if such invalid
provision had not been included herein.
26. REMEDIES. The parties acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that, in
addition to any other relief afforded by law, an injunction against such
violation may be issued against it and every other person concerned thereby, it
being understood that both damages and an injunction shall be proper modes of
relief and are not to be considered mutually exclusive remedies. In the event of
any such violation, the parties agrees to pay, in addition to the actual damages
sustained by the other parties as a result thereof, the reasonable attorneys'
fees incurred by such party in pursuing any of its rights under this Agreement.
27. ACTION FOR BREACH. The time within which Manufacturer or
Distributor may bring an action for breach of this Agreement shall be one year
from the date of knowledge of such breach. No action may be commenced after that
one-year period.
28. DISPUTES; APPLICABLE LAW AND FORUM SELECTION. Except as altered or
expanded by this Agreement, the substantive law (and not the law of conflicts)
of the State of Minnesota shall govern this Agreement in all respects as to the
validity, interpretation, construction and enforcement of this Agreement and all
aspects of the relationship between the parties hereto. Any disputes between the
parties hereto relating to any provision hereof shall be settled by submission
for arbitration at the Minneapolis, Minnesota office of the American Arbitration
Association under the then current rules of the American Arbitration
Association. Notwithstanding the foregoing, nothing herein shall prevent a party
from seeking and obtaining equitable relief in a court of competent jurisdiction
solely for the purpose of protecting such party's rights, pending a final decree
of the arbitrator.
IN WITNESS WHEREOF, the parties have hereunto set their hands ^l as of
the day and year first above written.
LECTEC CORPORATION NATUS CORPORATION
By /s/ Thomas E. Brunelle By /s/ Kathleen A. Billings
Thomas E. Brunelle, Ph.D., Kathleen A. Billings,
Chairman, President and CEO President and CEO
CNS, INC.
By /s/ Richard E. Jahnke
Richard E. Jahnke, President
and COO
Exhibit A
PRICES
The initial price for the Product shall be $[Confidential Treatment Requested]
per patch based on packaging of five patches per box. The price shall be subject
to change based on future negotiations.
EXHIBIT 11
CNS, INC.
COMPUTATION OF NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Income (loss) from continuing operations $13,310,505 $ (2,558,101) $ (298,753)
Income (loss) from discontinued operations 765,989 (309,314) (1,132,020)
----------- ------------ ------------
Net income (loss) $14,076,494 $ (2,867,415) $ (1,430,773)
=========== ============ ============
PRIMARY EARNINGS PER SHARE:
Average number of common and common equivalent
shares outstanding:
Average common shares outstanding 17,220,709 15,754,586 13,145,276
Incentive stock options 663,338 0 0
Non qualified stock options 391,990 0 0
Warrants 70,301 0 0
----------- ------------ ------------
18,346,338 15,754,586 13,145,276
=========== ============ ============
Earnings per share from continuing operations $ .73 $ (.16) $ (.02)
Earnings per share from discontinued operations .04 (.02) (.09)
----------- ------------ ------------
Primary earnings (loss) per share $ .77 $ (.18) $ (.11)
=========== ============ ============
FULLY DILUTED EARNINGS PER SHARE
Average number of common and common equivalent
shares outstanding:
Average common shares outstanding 17,220,709 15,754,586 13,145,276
Incentive stock options 680,013 0 0
Non qualified stock options 403,206 0 0
Warrants 71,597 0 0
----------- ------------ ------------
18,375,525 15,754,586 13,145,276
=========== ============ ============
Earnings per share from continuing operations $ .72 $ (.16) $ (.02)
Earnings per share from discontinued operations .04 (.02) (.09)
----------- ------------ ------------
Fully diluted earnings (loss) per share $ .76 $ (.18) $ (.11)
=========== ============ ============
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CNS, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-19044, 33-29454, 33-42971 and 33-59719) on Form S-8 of CNS, Inc. of our
reports dated January 26, 1996, relating to the balance sheets of CNS, Inc. as
of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity, cash flows, and related financial statement schedule for
each of the years in the three-year period ended December 31, 1995, which
reports appear in the December 31, 1995 annual report on Form 10-K of CNS, Inc.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,551,919
<SECURITIES> 1,950,354
<RECEIVABLES> 8,031,793
<ALLOWANCES> 201,000
<INVENTORY> 11,100,909
<CURRENT-ASSETS> 31,310,649
<PP&E> 700,313
<DEPRECIATION> 141,314
<TOTAL-ASSETS> 32,340,535
<CURRENT-LIABILITIES> 5,455,193
<BONDS> 0
0
0
<COMMON> 26,002,312
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,340,535
<SALES> 48,631,855
<TOTAL-REVENUES> 48,631,855
<CGS> 17,554,413
<TOTAL-COSTS> 17,554,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,500
<INCOME-PRETAX> 12,969,505
<INCOME-TAX> (341,000)
<INCOME-CONTINUING> 13,310,505
<DISCONTINUED> 765,989
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,076,494
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
