edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7AkIAAETZKyq3vnyDpxeCDjovtpzDTszzZIocTPEvPUi6JRj1AUFEgkGpepz/TFbf8o+CSPbqHjb3ZzcvSKfZbbg==910<SEC-DOCUMENT>0000897101-01-500081.txt : 2001040911<SEC-HEADER>0000897101-01-500081.hdr.sgml : 2001040912ACCESSION NUMBER: 0000897101-01-50008113CONFORMED SUBMISSION TYPE: 10-K40514PUBLIC DOCUMENT COUNT: 615CONFORMED PERIOD OF REPORT: 2000123116FILED AS OF DATE: 200104021718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: CNS INC /DE/22CENTRAL INDEX KEY: 000081425823STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]24IRS NUMBER: 41158027025STATE OF INCORPORATION: DE26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K40530SEC ACT:31SEC FILE NUMBER: 000-1661232FILM NUMBER: 15897083334BUSINESS ADDRESS:35STREET 1: PO BOX 3980236CITY: MINNEAPOLIS37STATE: MN38ZIP: 5543939BUSINESS PHONE: 61282066964041MAIL ADDRESS:42STREET 1: PO BOX 3980243STREET 2: PO BOX 3980244CITY: MINNEAPOLIS45STATE: MN46ZIP: 5543947</SEC-HEADER>48<DOCUMENT>49<TYPE>10-K40550<SEQUENCE>151<FILENAME>cns010440_10k.htm52<DESCRIPTION>CNS, INC. FORM 10-K 12-31-200053<TEXT>5455<HTML>56<HEAD>57<!-- Control Number: 010440 -->58<!-- Rev Number: 3.0 -->59<!-- Client Name: CNS, Inc. -->60<!-- Project Name: Form 10-K -->61<!-- Firm Name: Prepared by AFPI EDGAR Plus -->62<TITLE>CNS, Inc. Form 10-K</TITLE>63</HEAD>64<BODY>656667686970<!-- MARKER FORMAT-SHEET="SEC TITLE" -->71<H1 ALIGN=CENTER><FONT SIZE=3>UNITED STATES<BR>SECURITIES AND EXCHANGE COMMISSION</FONT><BR>72<FONT SIZE=2>Washington, D.C. 20549<BR><BR></FONT><FONT SIZE=3>FORM 10-K</FONT></H1>7374<!-- MARKER FORMAT-SHEET="Para Center Bold" -->75<P ALIGN="left"><B></B></P>7677<!-- MARKER FORMAT-SHEET="Para In 0" -->78<P><FONT SIZE="2"><B>|X| ANNUAL REPORT PURSUANT TO SECTION7913 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></P>8081<!-- MARKER FORMAT-SHEET="Para Center" -->82<P ALIGN="CENTER">For the fiscal year ended December 31, 2000</P>8384<!-- MARKER FORMAT-SHEET="Para Center Bold" -->85<A NAME="A006"></A>86<P ALIGN="CENTER"><B>OR</B></P>8788<P><FONT SIZE="2"><B>|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE89SECURITIES EXCHANGE ACT OF 1934</B></FONT></P>9091<!-- MARKER FORMAT-SHEET="Para Center" -->92<P ALIGN="CENTER"><FONT SIZE="2">For the Transition period from _________ to __________</FONT></P>9394<!-- MARKER FORMAT-SHEET="Para Center Bold" -->95<A NAME="A008"></A>96<P ALIGN="CENTER"><B>COMMISSION FILE NUMBER: 0-16612</B></P>9798<!-- MARKER FORMAT-SHEET="Para Center Bold" -->99<A NAME="A009"></A>100<P ALIGN="CENTER"><FONT SIZE=3><B>CNS, INC.</B><BR></FONT><FONT SIZE=2>(Exact name of registrant as specified in its charter)</FONT></P>101102103<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" ALIGN="CENTER" WIDTH="600">104<TR VALIGN="BOTTOM">105<TD WIDTH="65%" ALIGN="CENTER"><B><U>Delaware</U></B></TD>106<TD WIDTH="34%" ALIGN="CENTER"><B><U>41-1580270</U></B></TD></TR>107<TR VALIGN="BOTTOM">108<TD ALIGN="CENTER">(State or other jurisdiction</TD>109<TD ALIGN="CENTER">(I.R.S. Employer</TD></TR>110<TR VALIGN="BOTTOM">111<TD ALIGN="CENTER">of incorporation or organization)</TD>112<TD ALIGN="CENTER">Identification No.)</TD></TR>113</TABLE>114115<!-- MARKER FORMAT-SHEET="Para Center" -->116<P ALIGN="CENTER"><B>P.O. Box 39802 <BR>Minneapolis, MN 55439</B> <BR>(Address of principal executive117offices and zip code)</P>118119<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->120<P><FONT SIZE=3>Registrant's telephone number, including area code: (952) 229-1500 </FONT></P>121122<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->123<P><FONT SIZE=3>Securities registered pursuant to section 12(b) of the Act: None </FONT></P>124125<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->126<P><FONT SIZE=3>Securities registered pursuant to section 12(g) of the Act: </FONT></P>127128<!-- MARKER FORMAT-SHEET="Para Flush In 3" -->129<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>130<TR VALIGN=TOP>131<TD WIDTH=15%> </TD>132<TD WIDTH=85%>133<FONT SIZE="3"><U>Title134of each class</U><BR> Common Stock, par value of $.01 per share <BR>Preferred Stock purchase rights</FONT></TD>135</TR>136</TABLE>137<BR>138139<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->140<P><FONT SIZE=3>Indicate by check mark whether the registrant (1) has filed all141reports required to be filed by Section 13 or 15(d) of the Securities Exchange142Act of 1934 during the preceding 12 months (or for such shorter period that the143registrant was required to file such reports), and (2) has been subject to such144filing requirements for the past 90 days. YES <U> X </U>145No <U> </U> </FONT></P>146147<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->148<P><FONT SIZE=3>Indicate by check mark if disclosure of delinquent filers149pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be150contained, to the best of registrant’s knowledge, in definitive proxy or151information statements incorporated by reference in Part III of this Form 10-K152or any amendment to this Form 10-K. |X| </FONT></P>153154<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->155<P><FONT SIZE=3>As of March 15, 2001, assuming as market value the price of156$4.375 per share, the closing sale price of the Company’s Common Stock on157the Nasdaq National Market, the aggregate market value of shares held by158non-affiliates was approximately $49,000,000. </FONT></P>159160<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->161<P><FONT SIZE=3>As of March 15, 2001, the Company had outstanding 14,126,269162shares of Common Stock of $.01 par value per share. </FONT></P>163164<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->165<P><FONT SIZE=3>Documents Incorporated by Reference: Portions of the166Company’s Proxy Statement for its Annual Meeting of Stockholders to be held167on May 23, 2001, are incorporated by reference into Part III of this Form 10-K. </FONT></P>168169170171172173<!-- *************************************************************************** -->174<!-- MARKER LABEL="sheet: 1, page: 1" -->175176177178<!-- MARKER FORMAT-SHEET="Para Center Bold" -->179<P ALIGN="CENTER"><B><U>TABLE OF CONTENTS</U></B></P>180181<PRE><FONT SIZE="1">182183184<B><U>PART I</U></B>185186Item 1. Business....................................................................... 3187Item 2. Properties..................................................................... 17188Item 3. Legal Proceedings.............................................................. 17189Item 4. Submission of Matters to a Vote of Security Holders............................ 17190191<B><U>192PART II</U></B>193194Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 18195Item 6. Selected Financial Data....................................................... 19196Item 7. Management's Discussion and Analysis of Financial Condition197and Results of Operations.................................................. 20198Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................... 26199Item 8. Financial Statements and Supplementary Data................................... 26200Item 9. Changes in and Disagreements with Accountants on Accounting and201Financial Disclosure....................................................... 26202203204<B><U>PART III</U></B>205206Item 10. Directors and Executive Officers of the Registrant............................ 27207Item 11. Executive Compensation........................................................ 27208Item 12. Security Ownership of Certain Beneficial Owners and Management................ 27209Item 13. Certain Relationships and Related Transactions................................ 27210211212<B><U>PART IV</U></B>213214Item 14. Exhibits, Financial Statement Schedules, and215Reports on Form 8-K........................................................ 28216217SIGNATURES...................................................................................... 29218EXHIBIT INDEX................................................................................... 31219FINANCIAL STATEMENTS............................................................................ F-1220</FONT></PRE>221222<BR><BR><BR>223<!-- MARKER FORMAT-SHEET="Para Center" -->224<P ALIGN="CENTER">2</P>225226227228229230<!-- *************************************************************************** -->231<!-- MARKER LABEL="sheet: 2, page: 2" -->232233234235236237238<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->239<P><FONT SIZE=3><B><U>Forward-Looking Statements </U></B> </FONT></P>240241<!-- MARKER FORMAT-SHEET="Para In 0" -->242<P> Certain statements contained243in this Annual Report on Form 10-K and other written and oral statements made244from time to time by the Company do not relate strictly to historical or current245facts but provide current expectations or forecasts of future events. As such,246they are considered “forward-looking statements” under the Private247Securities Litigation Reform Act of 1995 and are subject to certain risks and248uncertainties that could cause actual results to differ materially from those249presently anticipated or projected. Such forward-looking statements can be250identified by the use of terminology such as “may,” “will,”251“expect,” “plan,” “intend,”252“anticipate,” “estimate,” or “continue” or similar253words or expressions. It is not possible to foresee or identify all factors254affecting the Company’s forward-looking statements and investors therefore255should not consider any list of factors to be an exhaustive statement of all256risks, uncertainties or potentially inaccurate assumptions. Factors that could257cause actual results to differ from the results discussed in the forward-looking258statements include, but are not limited to, the following factors: (i) the259Company’s revenue and profitability is reliant on sales of Breathe260Right® nasal strips; (ii) the Company’s success and future growth will261depend significantly on its ability to effectively market Breathe Right nasal262strips and upon its ability to develop and achieve markets for additional263products; (iii) the Company’s competitive position will, to some extent, be264dependent on the enforceability and comprehensiveness of the patents on its265Breathe Right nasal strip technology which have been, and in the future may be,266the subject of litigation and could be narrowed as a result of the outcome of the267reexamination of one such patent by the United States Patent and Trademark268Office (see Item 1, “Patents, Trademarks and Proprietary Rights” and269Item 3, “Litigation”); (iv) the Company has faced and will continue to270face challenges in successfully developing and introducing new products; (v) the271Company operates in competitive markets where recent and potential entrants into272the nasal dilator segment pose competitive challenges (see Item 1,273“Competition”); (vi) the Company is dependent upon contract274manufacturers for the production of substantially all of its products; and (vii) the275Company currently purchases most of its major components for its nasal strip276products from different contract manufacturers that obtain the raw materials277from a single supplier that has the right to discontinue the production and sale278of the materials at any time (see Item 1, “Manufacturing and279Operations”).</P>280281<!-- MARKER FORMAT-SHEET="Para Center" -->282<A NAME="A018"></A>283<P ALIGN="CENTER"><B>PART I</B></P>284285<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->286<A NAME="A019"></A>287<P><FONT SIZE=3><B><U>Item 1. BUSINESS</U></B> </FONT></P>288289<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->290<P><FONT SIZE="3"><B>General</B></FONT> </P>291292<!-- MARKER FORMAT-SHEET="Para In 0" -->293<P> CNS, Inc. (the294“Company”) is in the business of developing and marketing consumer295health care products, including the Breathe Right® nasal strip. The Breathe296Right nasal strip improves breathing by reducing nasal airflow resistence. It297can be effective in providing temporary relief for nasal congestion, reducing298snoring and reducing breathing difficulties due to a deviated nasal septum. In2992000, the Company expanded its Breathe Right product line to include nasal300strips for colds with Vicks® mentholated vapors that are sized for the301entire family, and nasal strips for children that are available in multiple302colors.</P>303304<!-- MARKER FORMAT-SHEET="Para In 0" -->305<P> The Company introduced its306new FiberChoice® chewable fiber tablets in the second quarter of 2000. The307FiberChoice product is an orange-flavored, chewable fiber tablet that offers308consumers an effective, convenient and good-tasting way to supplement their309daily intake of dietary fiber. In the fourth quarter of 1999, the Company310introduced a product for race horses called the FLAIR™ equine nasal311strip. Invented by two veterinarians, the FLAIR equine nasal strip is a312patented, drug-free product that enables horses to breathe more easily during313strenuous exercise.</P>314315316<BR><BR><BR>317<!-- MARKER FORMAT-SHEET="Para Center" -->318<P ALIGN="CENTER">3</P>319320321322323324<!-- *************************************************************************** -->325<!-- MARKER LABEL="sheet: 3, page: 3" -->326327328329330331332<!-- MARKER FORMAT-SHEET="Para In 0" -->333<P> In addition to expanding the334Breathe Right brand and introducing other new products, the Company is exploring335possibilities for acquiring new consumer health care products or companies that336have established consumer brands. The Company is also considering opportunities337for licensing new products and technologies.</P>338339<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->340<P><FONT SIZE="3"><B>Management</B></FONT> </P>341342<!-- MARKER FORMAT-SHEET="Para In 0" -->343<P> The Company’s management344structure is organized into strategic business teams in order to expand the345platform for building the Breathe Right brand and develop and launch new346products: Breathe Right Brand Team; FiberChoice Team; International Team; FLAIR347Team; and Business Development Team. The Company believes that its team focus348enables the Company to more effectively implement its business strategies and349position itself to become a large, multi-product consumer products company with350a significant international presence.</P>351352<!-- MARKER FORMAT-SHEET="Para In 0" -->353<P> <B><I>Breathe Right Brand354Team.</I></B><I></I> The Company’s Breathe Right Brand Team is responsible355for the strategic development and management of the Breathe Right nasal strip356business and other non-nasal strip products that seek to leverage the Breathe357Right brand name. Breathe Right nasal strip products currently represent the358cornerstone of the Company’s business. The Company intends to exploit new359markets and opportunities that it believes exist for its current nasal strip360products and plans to commercialize potential new Breathe Right brand products.361The Company introduced two new products during the fall of 2000 to coincide with362the cough/cold season, nasal strips for colds with Vicks mentholated vapors for363the entire family and nasal strips for children.</P>364365<!-- MARKER FORMAT-SHEET="Para In 0" -->366<P> <B><I>FiberChoice367Team.</I></B><I></I> The Company introduced its FiberChoice chewable fiber368tablets during the second quarter of 2000. The FiberChoice Product Team is369responsible for the strategic development and management of the FiberChoice370chewable fiber supplement business and leads the Company’s launch of the371product.</P>372373<!-- MARKER FORMAT-SHEET="Para In 0" -->374<P> <B><I>International375Team</I>.</B> The Company began shipping Breathe Right nasal strips to new376distributor partners in Europe, Australia and Japan during the second and third377quarters of 2000. The International Team is responsible for developing and378managing the Company’s overseas business and its relationships with379distributors and representatives in international markets. See Item 1,380“International Distribution.”</P>381382<!-- MARKER FORMAT-SHEET="Para In 0" -->383<P> <B><I>FLAIR Team.</I></B> The Company introduced the384FLAIR equine nasal strip during the fourth quarter of 1999. The Company's FLAIR Product385Team is responsible for the strategic development and management of the FLAIR equine386nasal strip business.</P>387388<!-- MARKER FORMAT-SHEET="Para In 0" -->389<P> <B><I>Business Development390Team.</I></B><I></I> The Business Development Team is committed to the expansion391of the Company’s product base through the acquisition or licensing of392promising consumer health care products that have significant market potential.393The Business Development Team is responsible for identifying and evaluating394potential new products, inventions and other business prospects that will enable395the Company to achieve its long-term growth and profit objectives, including396opportunities for the acquisition of companies that have established product397lines.</P>398399<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->400<P><FONT SIZE="3"><B>Products</B></FONT> </P>401402<!-- MARKER FORMAT-SHEET="Para In 0" -->403<P> <B><I>Breathe Right Nasal404Strips</I></B><I></I>. The Breathe Right nasal strip is a nonprescription,405single-use disposable device that improves breathing by opening the nasal406passages. The Company has 510(k) clearance from the United States Food and Drug407Administration (“FDA”) to market the Breathe Right nasal strip for408improvement of nasal breathing, temporary relief of nasal congestion,409elimination or reduction of snoring and temporary relief of breathing410difficulties due to a deviated nasal septum. See Item 1, “Government411Regulation.” The Breathe Right nasal strip comes in tan, clear, mentholated412and stars for kid’s varieties.</P>413414<BR><BR><BR>415<!-- MARKER FORMAT-SHEET="Para Center" -->416<P ALIGN="CENTER">4</P>417418419420421422423<!-- *************************************************************************** -->424<!-- MARKER LABEL="sheet: 4, page: 4" -->425426427428429430<!-- MARKER FORMAT-SHEET="Para In 0" -->431<P> The Breathe Right nasal strip432includes two embedded plastic strips. When folded down onto the sides of the433nose, the Breathe Right nasal strip lifts the side walls of the nose outward to434open the nasal passages. The product improves nasal breathing upon application435and does not include any medication, thereby avoiding any medicinal side436effects. The Breathe Right nasal strip is offered in three sizes (kid’s,437small/medium and large) to accommodate the range of nose sizes. The Breathe438Right nasal strip is packaged for the consumer market in various quantities439ranging between 8 to 38 strips per box. The Company believes that the Breathe440Right nasal strip is priced comparably to medicinal decongestants on a daily or441nightly dosage basis at suggested retail prices ranging between $3.99 and $11.99442per box.</P>443444<!-- MARKER FORMAT-SHEET="Para In 0" -->445<P> The Company expanded the446Breathe Right nasal strip line with the introduction of the Breathe Right nasal447strip with Vicks mentholated vapors and the Breathe Right nasal strip for kids448in the second half of 2000. The Company has licensed the Vicks trademark from449The Proctor & Gamble Company for use with the new mentholated nasal strip450product. The Vicks mentholated nasal strip uses traditional Breathe Right strip451technology but contains a soothing mentholated aroma for additional relief. The452mentholated vapors are released when the strip surface is rubbed. Research has453suggested that the mentholated nasal strip product could increase the454Company’s customer base for nasal strip products by more clearly455communicating that Breathe Right nasal strips can ease the congestion associated456with the common cold. The Kid’s Strips are sized specifically to fit457children and include a brightly colored version and a mentholated version.</P>458459<!-- MARKER FORMAT-SHEET="Para In 0" -->460<P> <B><I>Breathe Right Brand461Products.</I></B><I></I> The Breathe Right saline nasal spray is a non-habit462forming, drug-free product that restores moisture to comfort and soothe dry,463irritated nasal passages due to colds, allergies, dry air (low humidity), air464pollution and the overuse of nasal decongestants. The Company intends to465introduce additional non-nasal strip products in the future that carry the466Breathe Right brand name and to extend the product line.</P>467468<!-- MARKER FORMAT-SHEET="Para In 0" -->469<P> <B><I>FiberChoice Chewable470Fiber Tablets.</I></B><I></I> The Company introduced nationally its FiberChoice471chewable fiber tablets in the second quarter of 2000. FiberChoice is an472orange-flavored, chewable tablet that offers consumers an effective, convenient,473good-tasting way to supplement their daily intake of dietary fiber. The active474ingredient in FiberChoice tablets is fructan, a natural fiber source. Fructan is475a prebiotic that helps promote the growth of healthy intestinal tract bacteria.476The FiberChoice tablets can be taken without water and have been clinically477proven to be as effective as powder alternatives. The product is available in478both regular and sugar-free varieties and packaged in 160-count and 90-count479bottles and 10-count rolls.</P>480481<!-- MARKER FORMAT-SHEET="Para In 0" -->482<P> <B><I>FLAIR Equine Nasal483Strips</I>.</B> The FLAIR equine nasal strip is a product for horses that484capitalizes on the Company’s current nasal strip technology. Invented by485two veterinarians, the FLAIR equine nasal strip is a patented, drug-free product486that enables horses to breathe more easily during strenuous exercise. Results487from several clinical trials indicate that the equine nasal strip product also488reduces a bleeding condition in horses called exercise-induced pulmonary489hemorrhaging (“EIPH”) that often occurs during and after races, high490performance events and strenuous workouts. The FLAIR equine nasal strip holds491open the nasal passages of the horses, which can breathe only through their492noses, and reduces the effort required to breathe.</P>493494<!-- MARKER FORMAT-SHEET="Para In 0" -->495<P> The FLAIR equine nasal strip496was introduced for the first time during the Breeder’s Cup in November of4971999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR equine nasal498strips are being sold in tack shops and equine supply stores and through equine499catalogs. The Company’s FLAIR product remains a developing business but is500not expected to have a material impact on the Company’s revenues. The501Company is in the process of exploring strategic alternatives for the FLAIR502equine nasal strip business.</P>503504<BR><BR><BR>505<!-- MARKER FORMAT-SHEET="Para Center" -->506<P ALIGN="CENTER">5</P>507508509510511512<!-- *************************************************************************** -->513<!-- MARKER LABEL="sheet: 5, page: 5" -->514515516517518519520<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->521<P><FONT SIZE="3"><B>Markets</B></FONT> </P>522523<!-- MARKER FORMAT-SHEET="Para In 0" -->524<P> <B><I>Breathe Right Brand Product Line.</I></B> The525Breathe Right brand of products includes the Breathe Right nasal strip and the Breathe526Right saline nasal spray.</P>527528<!-- MARKER FORMAT-SHEET="Para In 0" -->529<P> Air impedance in the nose530accounts for approximately one-half of the total airway resistance involved in531the respiratory system (i.e., one-half of the energy required for breathing). If532the effort to breathe through the nose during sleep is excessive, the person533will resort to mouth breathing, promoting snoring, dry mouth, sore throat and534mini-awakenings which disrupt sleep. In addition, nasal breathing difficulties535during sleep are often caused by nasal congestion found in people who have a536common cold, allergies and sinusitis and by those who experience nasal537obstruction due to a deviated nasal septum. The Company believes that people538with chronic conditions such as snoring or allergies or with structural problems539such as deviated septa may be more predisposed to use Breathe Right products on540a regular or daily basis, while seasonal sufferers are likely to use Breathe541Right products as needed. These conditions are aggravated when people have nasal542congestion, thus increasing the opportunity for usage and consumer trial during543the cough/cold season. People suffering from these conditions are currently the544primary users of the Company’s Breathe Right products and are the main545targets of its advertising.</P>546547<!-- MARKER FORMAT-SHEET="Para In 0" -->548<P> In 1999, the Company began to549emphasize the Breathe Right nasal strip position as a product that provides550instant, drug-free relief for those suffering from nasal congestion and other551symptoms due to the common cold, allergies and sinusitis. The Company’s552advertising emphasizes the ability of Breathe Right nasal strips to provide553immediate relief from nasal congestion due to colds.</P>554555<!-- MARKER FORMAT-SHEET="Para In 0" -->556<P> The Company’s marketing557efforts capitalize on the benefits of Breathe Right products to consumers in558various, and often overlapping, consumer market segments:</P>559560<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->561<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>562<TR VALIGN=TOP>563<TD WIDTH=5%><FONT SIZE=3></FONT></TD>564<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>565<TD WIDTH=90%><FONT SIZE=3>566<I><U>Nasal Congestion Relief</U>.</I> Most Americans suffer some nasal567congestion annually as a result of the common cold, while nasal congestion as a568result of allergies affects approximately 35 million Americans. The Company569believes that the Breathe Right nasal strip is often used as either an570alternative or as an adjunct to decongestant drugs (including nasal sprays and571oral decongestants). This broad cough/cold market represents a significant572potential for the Breathe Right nasal strip. Prior to 1999, the product had not573been marketed directly to the cough/cold consumer<B> </B>in any significant574respect. In 1999, the Company commenced marketing efforts aimed at repositioning575the Breathe Right nasal strip as a product that provides relief for the common576cold. In the fall of 2000, this repositioning as a product for colds was577reinforced by the introduction of Breathe Right nasal strips with Vicks578mentholated vapors. At the same time, the product line was extended into kid579sizes, with a brightly colored “stars” strip and a Kid Strip with580Vicks mentholated vapors.</FONT></TD>581</TR>582</TABLE>583<BR>584585<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->586<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>587<TR VALIGN=TOP>588<TD WIDTH=5%><FONT SIZE=3></FONT></TD>589<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>590<TD WIDTH=90%><FONT SIZE=3>591<I><U>Snoring Relief</U>.</I> Breathe Right nasal strips were effective in592reducing snoring loudness in approximately 75% of the participants in a clinical593study. Snoring relief was one of the Company’s key advertising messages594prior to 1999. This market remains very important to the Company since595approximately 37 million people snore regularly, while another 50 million people596snore occasionally. The Company believes that snorers can be targeted597effectively and directly through relationship marketing efforts as well as598through broad-based advertising.</FONT></TD>599</TR>600</TABLE>601<BR>602603<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->604<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>605<TR VALIGN=TOP>606<TD WIDTH=5%><FONT SIZE=3></FONT></TD>607<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>608<TD WIDTH=90%><FONT SIZE=3>609<I><U>Improved Breathing for Consumers with Deviated Septa</U>.</I>610Approximately 12 million people in the United States suffer from a deviated611septum, a bend in the cartilage or bone that divides the nostrils. Breathe Right612nasal strips were cleared by the Food and Drug Administration in 1996 to provide613temporary relief from breathing difficulties associated with a deviated septum.</FONT></TD>614</TR>615</TABLE>616<BR>617618<BR><BR><BR>619620<!-- MARKER FORMAT-SHEET="Para Center" -->621<P ALIGN="CENTER">6</P>622623624625626627628629630<!-- *************************************************************************** -->631<!-- MARKER LABEL="sheet: 6, page: 6" -->632633634635636<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->637<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>638<TR VALIGN=TOP>639<TD WIDTH=5%><FONT SIZE=3></FONT></TD>640<TD WIDTH=5%><FONT SIZE=3>•</FONT></TD>641<TD WIDTH=90%><FONT SIZE=3>642<I><U>Athletic Market</U></I><U></U>. The Company believes that the Breathe643Right nasal strip may make nasal breathing more comfortable and may improve644endurance during athletic activity, particularly when a mouth guard is used. An645exercise physiology study published in peer-reviewed medical literature in 1997646concluded that the Breathe Right nasal strip provided physiologic advantages in647ventilation and heart rate during mid-level exercise. Other exercise physiology648studies have been conducted and add to the substantiation of the positive649effects of the Breathe Right nasal strip during exercise. The Company continues650to use athletes to endorse the Breathe Right nasal strip to increase the651visibility of the product, which thereby leads to greater awareness of the652product and the Breathe Right brand.</FONT></TD>653</TR>654</TABLE>655<BR>656657<!-- MARKER FORMAT-SHEET="Para In 0" -->658<P> <B><I>FiberChoice Chewable659Fiber Tablets.</I></B><I></I> Approximately 10 million U.S. households annually660purchase bulk fiber products, primarily to promote regularity and improve661digestive health. The bulk fiber category represents approximately $325 million662in U.S. retail sales. The Company believes there is a significant opportunity to663expand this category due to both the aging of the baby-boomer generation and the664marketing of a better consumer solution to existing dietary fiber665products–FiberChoice chewable fiber tablets. As people age, they frequently666develop digestive problems. People over 55 years old are three times more likely667to purchase a bulk fiber supplement than those younger than 55. The first year668the baby-boom generation will turn 55 is in 2001. This generation is generally669more active and demanding than their parents. These consumers will be searching670for solutions that do not hamper their active lifestyles. The Company believes671that its FiberChoice chewable fiber tablet represents such a solution in that it672provides an effective, convenient and good-tasting alternative for supplementing673dietary fiber intake. The tablets can be taken anytime and anywhere, with or674without water.</P>675676<!-- MARKER FORMAT-SHEET="Para In 0" -->677<P> <B><I>FLAIR Equine Nasal678Strips.</I></B><I></I> The FLAIR equine nasal strip is similar in concept to the679human Breathe Right nasal strip adjusted to the unique anatomy and size of a680horse. A horse breathes only through its nose, not through its mouth. During681strenuous exercise, large amounts of air are inhaled and exhaled during which682soft tissue on the side of the nose can collapse. The equine nasal strip683supports those soft tissues so they do not collapse, which allows a horse to684breathe more easily with less stress developing in the lungs. Results from685several clinical trials indicate that horses wearing the FLAIR equine nasal686strip use less energy to breathe and that the product reduces a bleeding687condition in horses called exercise-induced pulmonary hemorrhaging688(“EIPH”) that often occurs during races, high-performance events and689strenuous workouts.</P>690691<!-- MARKER FORMAT-SHEET="Para In 0" -->692<P> The FLAIR equine nasal strip693could be used any time a horse is engaged in strenuous exercise. The Company694estimates that in the U.S. there are approximately 1.3 million individual horse695starts in racing competitions and over 1 million individual horse starts in696non-racing competitions. Horses can benefit from the use of the FLAIR equine697nasal strip in training as well as competition.</P>698699<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->700<P><FONT SIZE="3"><B>Business Strategies</B></FONT> </P>701702<!-- MARKER FORMAT-SHEET="Para In 0" -->703<P> The Company’s business704strategy includes attempting to increase sales of its Breathe Right nasal strip705and other Breathe Right brand products through advertising, expanding its706Breathe Right product line with value added line extensions like Breathe Right707nasal strips for colds with Vicks mentholated vapors and children’s nasal708strips, maximizing the potential of recently introduced products and709successfully introducing new products.</P>710711<!-- MARKER FORMAT-SHEET="Para In 0" -->712<P> <B><I>Increasing New Consumer713Product Trial and Increasing Product Usage.</I></B><I></I> The Company uses a714combination of advertising, sampling, promotions, public relations and celebrity715endorsements to increase consumer awareness and to encourage consumer trial of716the Breathe Right nasal strip. In 1999, the Company began to emphasize the717position of the Breathe Right nasal strip as a product that provides instant,718drug-free</P>719720721<BR><BR><BR>722723<!-- MARKER FORMAT-SHEET="Para Center" -->724<P ALIGN="CENTER">7</P>725726727728729730731732<!-- *************************************************************************** -->733<!-- MARKER LABEL="sheet: 7, page: 7" -->734735736737738<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->739<P><FONT SIZE=3>relief for those suffering from nasal congestion and other740symptoms due to the common cold, allergies and sinusitis. The Company’s new741advertising introduced the Breathe Right nasal stip for the common cold with742Vicks mentholated vapors, emphasizing the ability of Breathe right nasal strips743to provide instant, drug-free relief from nasal congestion. </FONT></P>744745<!-- MARKER FORMAT-SHEET="Para In 0" -->746<P> <B><I>Marketing New Breathe747Right Brand Products.</I></B><I></I> The Company believes that the Breathe Right748brand name is one of its most valuable assets. In 1998, the Company introduced749the Breathe Right saline nasal spray. The Company has also expanded the Breathe750Right product line to include nasal strips for colds with Vicks mentholated751vapors and nasal strips for children, both of which were introduced during the752fall of 2000 in order to coincide with the cough/cold season.</P>753754<!-- MARKER FORMAT-SHEET="Para In 0" -->755<P> <B><I>Expanding Company756Presence in International Markets</I>.</B> The Company believes that there is a757significant market potential for its products outside the United States. The758Company is devoting significant resources to the development of its759international business. During 2000, the Company entered into agreements with760new distributors and representatives for the distribution of the Company’s761nasal strip products in Japan, Australia and a number of major markets in762Europe. The Company is currently in negotiations with additional distributors763and representatives for distribution of the its nasal strip products in764international markets. The Company believes that the network that it has765established for the international distribution of Breathe Right nasal strips766will also enable the Company to build its international marketing and767distribution capacity for other products. See Item 1, “International768Distribution.” During 2001, the Company intends to launch its Breathe Right769nasal strips with Vicks mentholated vapors in international markets in770conjunction with each market’s cough/cold season.</P>771772<!-- MARKER FORMAT-SHEET="Para In 0" -->773<P> <B><I>Acquiring, Developing774and Marketing New Products.</I></B><I></I> The Company plans to take advantage775of its marketing and distribution strengths by acquiring or licensing the rights776to new products that it believes have merit and bring them to market. The777FiberChoice chewable fiber tablet was launched in the second quarter of 2000 and778the FLAIR equine nasal strip was introduced in the fourth quarter of 1999. See779Item 1, “Marketing Strategies.” In addition, the Company is evaluating780opportunities for licensing new products and acquiring companies or product781lines that have an established base of consumer acceptance.</P>782783<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->784<P><FONT SIZE=3><B><B>Marketing Strategies</B></B> </FONT></P>785786<!-- MARKER FORMAT-SHEET="Para In 0" -->787<P> <B><I>Breathe Right Nasal788Strips</I>.</B> The Company’s marketing efforts for Breathe Right products789are directed to different consumer markets–the nasal congestion market and790the snoring market. The Company has primarily used television and magazine791advertising to market its products. The Company’s advertising focuses on792the Breathe Right brand benefit of providing instant, drug-free relief from793nasal congestion. The Company also uses product promotion programs, such as794sampling, coupons, public relations activities and joint promotional programs795with Vicks products, to encourage product trial and repeat purchases.796Introduction of the new Breathe Right nasal strips for colds with Vicks797mentholated vapors has aided in expanding the Company’s penetration into798this significant market. Marketing communications are generally designed to799promote trial of Breathe Right brand products by increasing consumer awareness800of the benefits of each product.</P>801802<!-- MARKER FORMAT-SHEET="Para In 0" -->803<P> Marketing efforts for Breathe804Right nasal strips as an aid in the prevention of snoring were also extended in8052000 into direct mail sampling and sampling through direct response television.806In both programs, self-identified snorers were sent a sample of Breathe Right807nasal strips along with a brochure explaining the causes of snoring and how the808Company’s Breathe Right products can alleviate the condition.</P>809810<!-- MARKER FORMAT-SHEET="Para In 0" -->811<P> Because the Breathe Right812nasal strip is sold as a consumer product, sales of the product will depend in813part upon the degree to which the consumer is aware of the product and is814satisfied with its use, which also influences repeat usage and word of mouth815referrals. The most recent research data collected by a nationally</P>816817818<BR><BR><BR>819820<!-- MARKER FORMAT-SHEET="Para Center" -->821<P ALIGN="CENTER">8</P>822823824825826827<!-- *************************************************************************** -->828<!-- MARKER LABEL="sheet: 8, page: 8" -->829830831832833834835<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->836<P><FONT SIZE=3>recognized consumer market research firm indicated that837approximately 35% of those in the United States who had purchased Breathe Right838nasal strips have purchased additional product in the same year. </FONT></P>839840<!-- MARKER FORMAT-SHEET="Para In 0" -->841<P> <B><I>FiberChoice Chewable842Fiber Tablets</I>.</B> The Company’s marketing efforts for FiberChoice843chewable fiber tablets has concentrated on advertising through television and844magazines to consumers who are 55 or more years old. In addition, the Company845has distributed samples of the product and coupons to current users of bulk846fiber products. The Company believes that direct response television is an847efficient sampling vehicle. In these advertisements, consumers are invited to848call a toll-free number to receive a free 10-count sample of FiberChoice fiber849tablets. This risk-free trial has led to a high conversion rate among both850existing users of fiber products and those new to the fiber category.</P>851852<!-- MARKER FORMAT-SHEET="Para In 0" -->853<P> <B><I>FLAIR Equine Nasal854Strips</I>.</B> The Company’s marketing communications for FLAIR equine855nasal strips focus on the health benefits of using the product identified in856clinical studies. Marketing efforts have included advertising in influential857equine magazines and public relations activities surrounding high profile races858and events in order to create awareness in the racing and non-racing segments of859the market. The Company has also used top horse trainers and competitors to860endorse the FLAIR equine nasal strip. FLAIR remains a developing business, but861is not expected to have a material impact on the Company’s revenues. The862Company is in the process of exploring strategic alternatives for the FLAIR863equine nasal strip.</P>864865<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->866<P><FONT SIZE=3><B>New Products Strategy</B> </FONT></P>867868<!-- MARKER FORMAT-SHEET="Para In 0" -->869<P> The Company is committed to870the future expansion of its product base through the acquisition and development871of unique consumer health care products and technologies that have good market872potential. The Company routinely evaluates the merit of product concepts and873acquisition opportunities and, from time to time, may acquire or license the874rights to products which it believes could successfully be sold through the875Company’s established distribution channels. For example, the Company has876licensed the Vicks trademarks from The Proctor & Gamble Company for use with877its new product, Breathe Right nasal strips for colds with Vicks mentholated878vapors. The Company has also licensed the intellectual property that enabled879recent introductions of the FiberChoice dietary fiber supplement and the FLAIR880equine nasal strip.</P>881882<!-- MARKER FORMAT-SHEET="Para In 0" -->883<P> Most, if not all, of the884Company’s current products are regulated to varying degrees by the FDA and885other regulatory bodies. See Item 1, “Government Regulation.” Products886that the Company may acquire or develop in the future could also be subject to a887variety of regulatory requirements. Some products will require extensive888clinical studies and regulatory approvals prior to marketing and sale. There can889be no assurance that any required regulatory approvals will be obtained or that890the Company will market or sell any of these products.</P>891892<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->893<P><FONT SIZE=3><B>Domestic Distribution</B> </FONT></P>894895<!-- MARKER FORMAT-SHEET="Para In 0" -->896<P> The Breathe Right nasal897strip, the Breathe Right saline nasal spray and the FiberChoice chewable fiber898tablets are sold primarily as consumer products in mass merchant chain stores,899drug stores, grocery stores, warehouse clubs and military base stores in the900United States. The Company sells its products through a direct sales force that901concentrates on serving certain key retail accounts as well as through a network902of independent sales representatives referred to in the industry as non-food903general merchandise brokers. The Company uses direct sales people and broker904groups who call on the mass merchant, chain drug, and grocery accounts and the905wholesalers who serve primarily the independent drug stores and many of the906grocery stores in the United States.</P>907908<!-- MARKER FORMAT-SHEET="Para In 0" -->909<P> The Breathe Right nasal strip is910typically positioned in the cough, cold and allergy section of stores because it provides911benefits similar to those obtained with other decongestant products. The Breathe Right</P>912913<BR><BR><BR>914915<!-- MARKER FORMAT-SHEET="Para Center" -->916<P ALIGN="CENTER">9</P>917918919920921922923<!-- *************************************************************************** -->924<!-- MARKER LABEL="sheet: 9, page: 9" -->925926927928929930<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->931<P><FONT SIZE=3>saline nasal spray is also usually positioned in the same932section of the store as the Breathe Right nasal strip since the products are933typically used by those suffering from congestion, allergies and colds.934FiberChoice chewable tablets are positioned in the bulk fiber and laxative935sections of stores. </FONT></P>936937<!-- MARKER FORMAT-SHEET="Para In 0" -->938<P> The Company’s retail939customers include national chains of mass merchants, drug stores and grocery940stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens, RiteAid, CVS, and941Albertson’s and warehouse clubs such as Sam’s Club and Price Costco,942as well as regional and independent stores in the same store categories. In9432000, one retail chain accounted for approximately 19% of sales. The loss of944this customer or any other large retailer would require the Company to replace945the lost sales through other retail outlets and could disrupt distribution of946the Company’s products.</P>947948<!-- MARKER FORMAT-SHEET="Para In 0" -->949<P> The FLAIR equine nasal strip950is sold primarily to trainers and owners in the horse racing industry through951tack shops, equine catalogs, veterinarians and equine supply stores.</P>952953<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->954<P><FONT SIZE=3><B>International Distribution</B> </FONT></P>955956<!-- MARKER FORMAT-SHEET="Para In 0" -->957<P> From August of 1995 through958September of 1999, The 3M Company (“3M”) was the exclusive distributor959of the Company’s Breathe Right nasal strip products outside the United960States and Canada. The contractual relationship with 3M produced less than961anticipated results in international markets. On September 30, 1999, the Company962and 3M agreed to terminate the existing distribution agreement in a manner that963enabled the Company to take a direct and immediate role in the sale, marketing964and distribution of its nasal strip products in international markets. Under the965agreement, 3M had the right to sell its existing stock of the Company’s966nasal strip products outside the United States and Canada until June 30, 2000.967As part of the agreement, 3M also agreed not sell any nasal dilator devices for968a period of two years.</P>969970<!-- MARKER FORMAT-SHEET="Para In 0" -->971<P> The Company is optimistic972about the prospects for generating increased sales of nasal strips outside the973United States and believes that international markets require an increased level974of focus, advertising and promotion to reach their potential. In 2000, the975Company established a broad-ranging international distribution system for the976Breathe Right nasal strip business that consists of both sales representatives977and reselling distributors. The Company has established relationships with978distributors in Canada, Australia, Japan and most of the major markets in979Europe. The Company is also pursuing additional distribution opportunities.980Sales are supervised by the Company from its Minnesota headquarters and by CNS981International, Inc., a wholly-owned domestic subsidiary with one business982manager in Europe. The business manager supervises and coordinates the983activities of the distributors and sales representatives in Europe. Distributors984are appointed largely on an exclusive basis, with territories consisting of one985or more countries, and it is expected that this pattern will continue. The986Company retains control over the packaging and advertising in all territories.987Most shipments are made in bulk, either to reselling distributors who package988for the local market, or to warehouse facilities abroad, where final packaging989is arranged by the Company directly before shipment to retailers.</P>990991<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->992<P><FONT SIZE=3><B>Manufacturing and Operations</B> </FONT></P>993994<!-- MARKER FORMAT-SHEET="Para In 0" -->995<P> The Company currently996subcontracts with multiple manufacturers to produce Breathe Right nasal strips,997Breathe Right saline nasal spray, FiberChoice chewable fiber tablets and FLAIR998equine nasal strips. The Company does no in-house product production itself.999These contract manufacturers are capable of providing full turnkey service and1000shipping product to the Company that is completely packaged ready to be sold to1001retailers or providing semi-finished goods to the Company that require final1002packaging. With respect to the Breathe Right nasal strip, the Company has the1003ability to wrap individual strips in the paper sleeve in-house and subcontracts1004the final packaging out to qualified packaging subcontractors.</P>10051006<BR><BR><BR>10071008<!-- MARKER FORMAT-SHEET="Para Center" -->1009<P ALIGN="CENTER">10</P>1010101110121013101410151016<!-- *************************************************************************** -->1017<!-- MARKER LABEL="sheet: 10, page: 10" -->101810191020102110221023<!-- MARKER FORMAT-SHEET="Para In 0" -->1024<P> Each of the manufacturers1025builds the product to the Company’s specifications using materials1026specified by the Company. The contract manufacturers have all entered into1027confidentiality agreements with the Company to protect the Company’s1028intellectual property rights. Company quality control and operations personnel1029periodically visit the contract manufacturers in order to observe processes and1030procedures. Finished goods are inspected to ensure that they meet quality1031requirements. The Company inspects its contract manufacturers on a regular basis1032in an attempt to ensure compliance with FDA Good Manufacturing Practice1033Standards. The Company works closely with its material vendors and contract1034manufacturers to reduce scrap and waste, improve efficiency and improve yields1035to reduce the manufacturing costs of the product. The Company has received1036certification that it has established and maintains a quality system which meets1037the requirements of ISO 9001/EN 46001.</P>10381039<!-- MARKER FORMAT-SHEET="Para In 0" -->1040<P> To ensure consistent quality,1041the Company contracts with converters that currently purchase most of the major1042components for the Breathe Right nasal strips directly from 3M. Although similar1043materials are currently available from other suppliers, the Company has1044historically utilized 3M components in its products. While the Company does not1045expect 3M to do so, 3M has the right to discontinue its production or sale of1046the materials used in its nasal strip products at any time. The inability to1047obtain sufficient quantities of these components or the need to develop1048alternative sources in a timely and cost-effective manner could adversely affect1049the Company’s operations until new sources of these components become1050available, if at all.</P>10511052<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1053<P><FONT SIZE=3><B>Competition</B> </FONT></P>10541055<!-- MARKER FORMAT-SHEET="Para In 0" -->1056<P> <B><I>Breathe Right Nasal1057Strips</I>.</B> The Company believes that the market for decongestant products1058is highly competitive. The Company’s competition in the consumer market for1059decongestant products and other cold, allergy and sinus relief products consists1060primarily of pharmaceutical products, other nasal sprays and external nasal1061dilators, while competition in the snoring remedies market also consists1062primarily of nasal dilators, throat sprays, herbs, supplements and homeopathic1063remedies. Although the Company is currently the leading manufacturer of external1064nasal dilation products, Schering Plough Corp. entered the market in the fourth1065quarter of 1998 with an external nasal dilation device. Other companies have1066also recently entered the nasal dilation market with private label products.1067Many of the companies that compete with the Breathe Right nasal strip and other1068Breathe Right products, including Schering Plough, have significantly greater1069financial and operating resources than the Company. The Company has developed1070and implemented marketing strategies aimed at minimizing the impact of1071competitive products. As a result, the Breathe Right nasal strip has maintained1072approximately 90% of the nasal dilator market despite the entry of other1073competitors into the market place.</P>10741075<!-- MARKER FORMAT-SHEET="Para In 0" -->1076<P> The patents licensed by the1077Company on the Breathe Right nasal strip will limit the ability of others to1078introduce competitive external nasal dilator products similar to the Breathe1079Right nasal strip in the United States. The Company intends to aggressively1080enforce the patents it has licensed covering the Breathe Right nasal strip and1081has engaged in significant litigation to protect its patent rights. See Item 3,1082“Legal Proceedings.”</P>10831084<!-- MARKER FORMAT-SHEET="Para In 0" -->1085<P> There can be no assurance1086that potential competitors will not be able to develop nasal dilation products1087which circumvent the Company’s patents. In addition, external nasal dilator1088products compete in the consumer markets with decongestant and sinus relief1089products and snoring remedies in many international markets where the Company1090does not yet have patent protection on the Breathe Right nasal strip.</P>10911092<!-- MARKER FORMAT-SHEET="Para In 0" -->1093<P> <B><I>FiberChoice Chewable1094Fiber Tablet</I>.</B> The market for dietary fiber supplements is highly1095competitive and dominated by large companies with resources greater than the1096Company’s and established brands, such as Metamucil, Citrucel and FiberCon.1097The Company believes that its FiberChoice chewable fiber tablet is a unique1098product with significant market potential that offers consumers an effective,1099convenient and good-tasting alternative to existing products.</P>11001101<BR><BR><BR>11021103<!-- MARKER FORMAT-SHEET="Para Center" -->1104<P ALIGN="CENTER">11</P>110511061107110811091110<!-- *************************************************************************** -->1111<!-- MARKER LABEL="sheet: 11, page: 11" -->11121113111411151116111711181119<!-- MARKER FORMAT-SHEET="Para In 0" -->1120<P> <B><I>FLAIR Equine Nasal1121Strip</I>.</B> As an alternative to controversial drug therapies, the FLAIR1122equine nasal strip is a unique product which currently has no direct1123competition. The only competitive product currently available is the drug1124Furosemide (“Lasix”). Lasix is intended to alleviate a bleeding1125condition in the lungs of horses called exercise-induced pulmonary hemorrhaging1126(“EIPH”) that often occurs during races, high-performance events and1127strenuous workouts. Unlike Lasix, however, the FLAIR equine nasal strip has not1128been shown to be a race-day, performance enhancing product.</P>11291130<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1131<P><FONT SIZE=3><B>Government Regulation</B> </FONT></P>11321133<!-- MARKER FORMAT-SHEET="Para In 0" -->1134<P> As a manufacturer and1135marketer of medical devices, the Company is subject to regulation by, among1136other governmental entities, the FDA and the corresponding agencies of the1137states and foreign countries in which the Company sells its products. The1138Company must comply with a variety of regulations, including the FDA’s Good1139Manufacturing Practice regulations, and is subject to periodic inspections by1140the FDA and applicable state and foreign agencies. If the FDA believes that its1141regulations have not been fulfilled, it may implement extensive enforcement1142powers, including the ability to ban products from the market, prohibit the1143operation of manufacturing facilities and effect recalls of products from1144customer locations. The Company believes that it is currently in compliance with1145applicable FDA regulations.</P>11461147<!-- MARKER FORMAT-SHEET="Para In 0" -->1148<P> FDA regulations classify1149medical devices into three categories that determine the degree of regulatory1150control to which the manufacturer of the device is subject. In general, Class I1151devices involve compliance with labeling and record keeping requirements and are1152subject to other general controls. Class II devices are subject to performance1153standards in addition to general controls. Class III devices are those devices,1154usually invasive, for which pre-market approval (as distinct from pre-market1155notification) is required before commercial marketing to assure product safety1156and effectiveness.</P>11571158<!-- MARKER FORMAT-SHEET="Para In 0" -->1159<P> Before a new medical device1160can be introduced into the market, the manufacturer generally must obtain FDA1161clearance through either a 510(k) pre-market notification or a pre-market1162approval application (“PMA”). A 510(k) clearance will be granted if1163the submitted data establish that the proposed device is “substantially1164equivalent” to a legally marketed Class I or II medical device, or to a1165Class III medical device for which the FDA has not called for PMAs. The PMA1166process can be expensive, uncertain and lengthy, frequently requiring from one1167to several years from the date the PMA is accepted. In addition to requiring1168clearance for new products, FDA rules may require a filing and waiting period1169prior to marketing modifications of existing products. The Company has received1170510(k) approvals to market the Breathe Right nasal strip as a device that can1171(i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii)1172eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal1173airflow resistance, and (iv) temporarily relieve breathing difficulties due to a1174deviated nasal septum. Nasal dilators have been classified by the FDA as Class I1175devices and exempt from pre-market notification.</P>11761177<!-- MARKER FORMAT-SHEET="Para In 0" -->1178<P> The Company’s1179FiberChoice product is considered to be a dietary supplement and is regulated1180under the Federal Food, Drug, and Cosmetic Act as amended by the Dietary1181Supplement Health and Education Act “DSHEA” of 1994, and under the1182Fair Packaging and Labeling Act. There is generally no requirement that a1183company obtain a license or approval from FDA before marketing dietary1184supplements in the United States. The FDA is developing implementing regulations1185for certain provisions of the DSHEA which will be published as final rules in1186the Federal Register.</P>11871188<!-- MARKER FORMAT-SHEET="Para In 0" -->1189<P> There is no national1190regulatory body for horse racing. Consequently, approval from state horse racing1191commissions must be obtained on a state-by-state basis before the Company’s1192FLAIR equine nasal strip can be used during horse racing events. The Company has1193been working with state racing commissions to gain approval for the use of the1194FLAIR equine nasal strip in competition. To date, the FLAIR equine nasal strip1195can be used in horse races in most states, including the leading racing states1196of Kentucky, California and Florida,</P>11971198<BR><BR><BR>11991200<!-- MARKER FORMAT-SHEET="Para Center" -->1201<P ALIGN="CENTER">12</P>12021203120412051206120712081209<!-- *************************************************************************** -->1210<!-- MARKER LABEL="sheet: 12, page: 12" -->12111212121312141215<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1216<P><FONT SIZE=3>and most of the provinces in Canada. The product has not, however, been1217approved for racing in New York or New Jersey. </FONT></P>12181219<!-- MARKER FORMAT-SHEET="Para In 0" -->1220<P> Sales of the Company’s1221products outside the United States are subject to regulatory requirements that1222vary widely from country to country. The Company has selected a third party to1223act as an “Authorized Representative” in the European Union. The1224Company believes that it has the necessary documentation to support affixing the1225“CE” mark, an international symbol of quality and compliance with1226applicable European medical device directives, to the Company’s Breathe1227Right nasal strips in Europe. Regulatory approvals have also been obtained for1228the Breathe Right nasal strip in Australia and additional approvals in other1229jurisdictions will be sought by the Company as needed for all of its products.</P>12301231<!-- MARKER FORMAT-SHEET="Para In 0" -->1232<P> No assurance can be given1233that the FDA or state or foreign regulatory agencies will give on a timely1234basis, if at all, the requisite approvals or clearances for additional1235applications for the Breathe Right nasal strip or for any of the other1236Company’s products. Moreover, after clearance is given, the Company is1237required to advise the FDA and these other regulatory agencies of modifications1238to its products. These agencies have the power to withdraw the clearance or1239require the Company to change the device or its manufacturing process or1240labeling, to supply additional proof of its safety and effectiveness or to1241recall, repair, replace or refund the cost of the medical device if it is shown1242to be hazardous or defective. The process of obtaining clearance to market1243products is costly and time-consuming and can delay the marketing and sale of1244the Company’s products. Furthermore, federal, state and foreign regulations1245regarding the manufacture and sale of medical devices and other products are1246subject to future change. The Company cannot predict what impact, if any, such1247changes might have on its business.</P>12481249<!-- MARKER FORMAT-SHEET="Para In 0" -->1250<P> The Company is also subject to1251substantial federal, state and local regulation regarding occupational health and safety,1252environmental protection, hazardous substance control and waste management and disposal,1253among others.</P>12541255<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1256<P><FONT SIZE=3><B>Patents, Trademarks and Proprietary Rights</B> </FONT></P>12571258<!-- MARKER FORMAT-SHEET="Para In 0" -->1259<P> The Company has registered1260trademarks, owns a patent and pending patent application, and has a number of1261patents under licenses which are used in connection with its business. Some of1262these patents and licenses cover significant product formulations, methods and1263designs for the Company’s current and possible future products. The Company1264believes its trademarks are important as protection for the Company’s image1265in the marketplace. The Company’s success is and will continue to be1266dependent upon the existence of and ability to protect its patents, trademarks1267and those under its licenses and the Company intends to take such steps as are1268necessary to protect its intellectual property rights.</P>12691270<!-- MARKER FORMAT-SHEET="Para In 0" -->1271<P> There can be no assurance1272that the Company’s technology and proprietary rights will not be challenged1273on the grounds that its products infringe on patents, copyrights or other1274proprietary information owned or claimed by others, or that others will not1275successfully utilize part or all of the Company’s technology without1276compensation to the Company. Nor can there be any assurance that others will not1277attempt to challenge the validity or enforceability of the Company’s1278patents and licensed patents on the basis of prior art or introduce competitive1279products. In addition to seeking patent protection for its products, the Company1280also intends to protect its proprietary technologies and proprietary information1281as trade secrets.</P>12821283<!-- MARKER FORMAT-SHEET="Para In 0" -->1284<P> The Company entered into1285license agreements pursuant to which the Company acquired from the licensors the1286exclusive rights to manufacture and sell the Breathe Right nasal strip, the1287FiberChoice chewable fiber tablet and the FLAIR equine nasal strip.1288Specifically, the Company has the exclusive right pursuant to those license1289agreements to manufacture, sell and otherwise practice any invention claimed in1290the licensors’ patents issued in any country, including those that issue on1291pending applications. The Company is obligated</P>12921293<BR><BR><BR>12941295<!-- MARKER FORMAT-SHEET="Para Center" -->1296<P ALIGN="CENTER">13</P>129712981299130013011302<!-- *************************************************************************** -->1303<!-- MARKER LABEL="sheet: 13, page: 13" -->1304130513061307130813091310<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1311<P><FONT SIZE=3>to pay royalties to the licensors based on sales of the products1312including certain minimum royalty amounts in order to maintain its exclusivity. </FONT></P>13131314<!-- MARKER FORMAT-SHEET="Para In 0" -->1315<P> The licensor of the Breathe1316Right nasal strip has filed patent applications with the U.S. Patent and1317Trademark Office seeking patent protection for different aspects of the Breathe1318Right nasal strip technology. Six of these patent applications have resulted in1319issued patents in the United States, including one with claims that cover the1320single-body construction of the Breathe Right nasal strip. The licensor of the1321Breathe Right nasal strip also has one patent application which is currently1322pending. In addition, that licensor has obtained patent protection on the1323Breathe Right nasal strip in several foreign countries and has various1324applications pending which seek further patent protection in these and a number1325of additional countries. The Company has one patent and one patent application1326pending in the U.S. and has filed a corresponding patent application seeking1327protection in several foreign countries of rights to nasal dilation technology1328that it acquired.</P>13291330<!-- MARKER FORMAT-SHEET="Para In 0" -->1331<P> The licensor of the1332FiberChoice chewable fiber tablet has filed two patent applications with the1333U.S. Patent and Trademark Office seeking patent protection for different aspects1334of this product which remain pending. The licensor of the Breathe Right aromatic1335nasal strip has filed at least four patent applications with the U.S. Patent and1336Trademark Office resulting in one issued patent so far. Eight patent1337applications for the FLAIR equine nasal strip have also been filed by the1338licensor thereof in the U.S. Patent and Trademark Office which have resulted in1339three issued U.S. patents. Each of these licensors has filed corresponding1340patent applications for acquiring patent protection in several foreign countries1341on the licensed products.</P>13421343<!-- MARKER FORMAT-SHEET="Para In 0" -->1344<P> Although the Company believes1345that its licensed patents on the Breathe Right nasal strip will limit the1346ability of others to introduce competitive external nasal dilator products in1347the United States, there can be no assurance that the patents on the Breathe1348Right nasal strip, or any additional patents on this or other products that may1349be issued in the future, if any, will effectively foreclose the development of1350competitive products. The Company does, however, intend to aggressively enforce1351the patents covering the Breathe Right nasal strip and its other products. In1352order to enforce any patents issued covering the Breathe Right nasal strip or any1353of its other products, the Company may have to engage in litigation, which may1354result in substantial cost to the Company and counterclaims against the Company.1355Any adverse outcome of such litigation could have a negative impact on the1356Company’s business.</P>13571358<!-- MARKER FORMAT-SHEET="Para In 0" -->1359<P> The Company has engaged in1360litigation to enforce its patent rights relating to the Breathe Right nasal1361strip. In 1999, the Company brought a suit in federal district court to enforce1362one of the licensed nasal strip patents containing the broadest claims and1363providing the most comprehensive protection. See Item 3, “Legal1364Proceedings.” In the course of this suit, the defendant requested1365reexamination in the U.S. Patent and Trademark Office (the “Patent1366Office”) of the Company’s primary licensed patent. On September 29,13672000, the Patent Office issued an Office Action in Reexamination and rejected1368certain of the claims. Other claims that were not subject to reexamination1369remain in effect. The Company has joined the licensor in the exercise of its1370right to contest the action of the Patent Office and has provided reasons that1371it believes establish that the claims should not have been rejected. The Company1372and its licensor are also seeking to amend certain claims to provide the Company1373with additional protection under the patent. The final outcome of the1374reexamination by the Patent Office is therefore uncertain. Although an adverse1375ruling from the Patent Office could narrow the range of protection available for nasal1376dilators and limit the breadth of the Company’s patent protection, the1377Company believes that its current portfolio of both pending patent applications1378and issued patents will enable it to maintain significant patent protection for1379its nasal strip products.</P>13801381<!-- MARKER FORMAT-SHEET="Para In 0" -->1382<P> The Company has registered1383its Breathe Right and FiberChoice trademarks in the United States and in several1384foreign countries and is seeking further registration of those trademarks and1385other trademarks. The Company has also licensed the right to a U.S. trademark1386registration for the FLAIR equine nasal strip product.</P>13871388<BR><BR><BR>13891390<!-- MARKER FORMAT-SHEET="Para Center" -->1391<P ALIGN="CENTER">14</P>139213931394139513961397<!-- *************************************************************************** -->1398<!-- MARKER LABEL="sheet: 14, page: 14" -->1399140014011402140314041405140614071408<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1409<P><FONT SIZE=3><B>Employees</B> </FONT></P>14101411<!-- MARKER FORMAT-SHEET="Para In 0" -->1412<P> At March 15, 2001, the1413Company had 80 full-time employees and 1 part-time employee, of whom 19 were1414engaged in operations, 32 in general administration, 25 in marketing and sales1415and 5 in product development. There are no unions representing Company1416employees. Relations with its employees are believed to be positive and there1417are no pending or threatened labor employment disputes or work interruptions.</P>14181419<!-- MARKER FORMAT-SHEET="Head Major" -->1420<A NAME="A046"></A>1421<H1 ALIGN=CENTER><FONT SIZE=3>EXECUTIVE OFFICERS OF THE COMPANY</FONT></H1>14221423<!-- MARKER FORMAT-SHEET="Para In 0" -->1424<P> The following table sets1425forth the names and ages of the Company’s Executive Officers together with1426all positions and offices held with the Company by such executive officers.1427Officers are appointed to serve until the meeting of the Board of Directors1428following the next Annual Meeting of Stockholders and until their successors1429have been elected and have qualified.</P>143014311432<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="100%">1433<TR VALIGN="BOTTOM">1434<TD><U>Name and Age</U></TD>1435<TD> <U>Office</U></TD></TR>1436<TR VALIGN="BOTTOM">1437<TD WIDTH="31%" ALIGN="LEFT">Daniel E. Cohen (48)</TD>1438<TD WIDTH="69%" ALIGN="LEFT">Chairman of the Board, Chief Executive Officer and Director</TD></TR>1439<TR VALIGN="BOTTOM">1440<TD ALIGN="LEFT">Marti Morfitt (43)</TD>1441<TD ALIGN="LEFT">President, Chief Operating Officer and Director</TD></TR>1442<TR VALIGN="BOTTOM">1443<TD ALIGN="LEFT">M. W. Anderson, Ph.D (50)</TD>1444<TD ALIGN="LEFT">Vice President of Product Development and Regulatory Affairs</TD></TR>1445<TR VALIGN="BOTTOM">1446<TD ALIGN="LEFT">David J. Byrd (47)</TD>1447<TD ALIGN="LEFT">Vice President of Finance, Chief Financial Officer and Treasurer</TD></TR>1448<TR VALIGN="BOTTOM">1449<TD ALIGN="LEFT">Kirk P. Hodgdon (41)</TD>1450<TD ALIGN="LEFT">Vice President of Business Development</TD></TR>1451<TR VALIGN="BOTTOM">1452<TD ALIGN="LEFT">John J. Keppeler (39)</TD>1453<TD ALIGN="LEFT">Vice President of Worldwide Sales</TD></TR>1454<TR VALIGN="BOTTOM">1455<TD ALIGN="LEFT">Larry R. Muma (50)</TD>1456<TD ALIGN="LEFT">Vice President of Operations</TD></TR>1457<TR VALIGN="BOTTOM">1458<TD ALIGN="LEFT">Teri P. Osgood (37)</TD>1459<TD ALIGN="LEFT">Vice President of U.S. Marketing</TD></TR>1460<TR VALIGN="BOTTOM">1461<TD ALIGN="LEFT">Carol J. Watzke (53)</TD>1462<TD ALIGN="LEFT">Vice President of Consumer Strategy</TD></TR>1463</TABLE>1464<BR><BR><BR>1465<!-- MARKER FORMAT-SHEET="Para In 0" -->1466<P> <I>Daniel E. Cohen</I> has1467served as the Company’s Chairman of the Board since 1993, its Chief1468Executive Officer since 1989 and a director since 1982. He also served as the1469Company’s Treasurer from 1982 to March of 1999. Mr. Cohen, a founder of the1470Company, is a medical doctor and board-certified neurologist.</P>14711472<!-- MARKER FORMAT-SHEET="Para In 0" -->1473<P> <I>Marti Morfitt</I> has1474served as the Company’s President and Chief Operating Officer and a1475director since March 1998. From September of 1982 through February of 1998, Ms.1476Morfitt served in a series of positions of increasing responsibility with The1477Pillsbury Company, a Minneapolis-based manufacturer and distributor of food1478products, most recently serving from May of 1997 to February of 1998 as1479Vice-President, Meals, and from February 1994 to May 1997 as Vice-President,1480Green Giant Brands. She also serves as a director of Graco, Inc., a1481Minneapolis-based manufacturer of fluid handling systems.</P>148214831484<BR><BR><BR>14851486<!-- MARKER FORMAT-SHEET="Para Center" -->1487<P ALIGN="CENTER">15</P>14881489149014911492149314941495<!-- *************************************************************************** -->1496<!-- MARKER LABEL="sheet: 15, page: 15" -->14971498149915001501<!-- MARKER FORMAT-SHEET="Para In 0" -->1502<P> <I>M. W. Anderson, Ph.D</I>1503has served as the Company’s Vice President of Product Development and1504Regulatory Affairs since 1998,Vice President of Clinical and Regulatory Affairs1505from 1994 to 1998, and Vice President of Research and Development from 1990 to15061994. He has served in various other capacities since joining the Company in15071984, including Director of Applications Research and Director of Research and1508Development. Prior to joining the Company in 1984, Dr. Anderson was an Assistant1509Professor at the University of Minnesota’s College of Pharmacy.</P>15101511<!-- MARKER FORMAT-SHEET="Para In 0" -->1512<P> <I>David J. Byrd</I> served as the Company's Vice President of Finance and Chief Financial Officer since1513February of 1996 and its Treasurer since March of 1999. Prior to joining the Company, Mr. Byrd was Chief1514Financial Officer and Treasurer of Medisys, Inc., a health care services company, since 1991. From 1975 to15151991, Mr. Byrd was employed by Coopers & Lybrand, where he was a partner from 1986 to 1991. Mr. Byrd1516is a certified public accountant.</P>15171518<!-- MARKER FORMAT-SHEET="Para In 0" -->1519<P> <I>Kirk P. Hodgdon</I> has1520served as the Company’s Vice President of Business Development since April1521of 1999, and has served as the Company’s Vice President of Breathe Right1522Brand from 1998 to 1999 and as Vice President of Marketing from 1994 to 1998.1523Prior to joining the Company, Mr. Hodgdon served as: Vice President-Management1524Supervisor at Gage Marketing Communications, a marketing services company, from15251993 to 1994; Vice President – Account Supervisor at U.S. Communications, a1526marketing agency, from 1989 to 1993; and Marketing Manager at Land O’Lakes,1527Inc., a consumer foods cooperative, from 1988 to 1989.</P>15281529<!-- MARKER FORMAT-SHEET="Para In 0" -->1530<P> <I>John J. Keppeler</I> has1531served as the Company’s Vice President of Worldwide Sales since August of15321999, and has served as the Company’s Vice President of Sales from 1998 to15331999. From November of 1986 to June of 1998, Mr. Keppeler served in a series of1534sales and marketing positions of increasing responsibility with The Pillsbury1535Company, a Minneapolis-based manufacturer and distributor of food products, most1536recently serving as Director of Category & Customer Development for the1537Green Giant and Progresso Business.</P>15381539<!-- MARKER FORMAT-SHEET="Para In 0" -->1540<P> <I>Larry R. Muma</I> has1541served as the Company’s Vice President of Operations since January of 2001.1542From May of 2000 to December of 2000, Mr. Muma served as Director of Supply1543Chain for Novartis, Inc., a worldwide manufacturer and distributor of health1544care and pharmaceutical products. From February of 1992 to April of 2000, Mr.1545Muma served in various operations positions of increasing responsibility with1546The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food1547products, serving from February 1994 to April of 1999 as Vice President of1548Operations for Pillsbury North America and most recently from April of 1999 to1549April of 2000 as Vice President of Operations Frozen Division.</P>15501551<!-- MARKER FORMAT-SHEET="Para In 0" -->1552<P> <I>Teri P. Osgood</I> has1553served as the Company’s Vice President of U.S. Marketing since December of15541999, of the Breathe Right Brand from April to December of 1999, and has served1555as the Company’s Vice President of New Business Commercialization from 19981556to April of 1999. From August of 1990 to July of 1998, Ms. Osgood served in a1557series of positions of increasing responsibility with The Pillsbury Company, a1558Minneapolis- based manufacturer and distributor of food products, most recently1559serving from May of 1997 to July of 1998 as Business Team Leader for Old El1560Paso, and from October of 1995 to May of 1997 as Business Team Leader for Pizza1561Snacks. Prior to joining Pillsbury, Ms. Osgood was employed in marketing by the1562Kimberly Clark Corp., from 1988 to 1990.</P>15631564<!-- MARKER FORMAT-SHEET="Para In 0" -->1565<P> <I>Carol J. Watzke</I> has1566served as the Company’s Vice President of Consumer Strategy since July of15671998. Prior to joining the Company, Ms. Watzke served in a series of positions1568of increasing responsibility since 1974 with The Pillsbury Company, a1569Minneapolis-based manufacturer and distributor of food products, most recently1570serving as Consumer Insights Director from May of 1997 to July of 1998 and as1571Market Research Director, Green Giant Brands, from 1994 to 1997.</P>157215731574<BR><BR><BR>15751576<!-- MARKER FORMAT-SHEET="Para Center" -->1577<P ALIGN="CENTER">16</P>1578157915801581158215831584<!-- *************************************************************************** -->1585<!-- MARKER LABEL="sheet: 16, page: 16" -->158615871588158915901591<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1592<P><FONT SIZE=3><B><U>Item 2. PROPERTIES</U></B> </FONT></P>15931594<!-- MARKER FORMAT-SHEET="Para In 0" -->1595<P> The Company leases approximately 73,000 square feet of office, manufacturing and warehouse space1596in Eden Prairie, Minnesota. The lease expires in November of 2010 and contains a renewal option.</P>15971598<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1599<P><FONT SIZE=3><B><U>Item 3. LEGAL PROCEEDINGS</U></B> </FONT></P>16001601<!-- MARKER FORMAT-SHEET="Para In 0" -->1602<P> On July 20, 1999, the Company1603commenced a civil action in the United States District Court for the District of1604Minnesota, Case No. 99-CV-111 JMR/JGL, against JMS Labs Limited (USA), LLC, a/k/a/ JMS1605Labs Limited, asserting claims of patent infringement and Lanham Act violations. The1606Company contended that nasals strips manufactured, sold and/or offered for sale by JMS1607infringed the Company's licensed United States Patent No. 5,533,499 (the "499 Patent"),1608and that JMS made false and/or misleading statements concerning the characteristics and1609qualities of its own products and the Company's products. JMS filed an answer and1610counterclaim, denying the Company's claims and asserting a counterclaim for declaratory1611judgment that the 499 Patent was invalid, unenforceable and not infringed, and that the1612complained of statements were not false and misleading. JMS also moved before the United1613States Patent and Trademark Office (the "Patent Office") for reexamination of the 4991614Patent.</P>16151616<!-- MARKER FORMAT-SHEET="Para In 0" -->1617<P> On August 14, 2000, the United States1618District Court for the District of Minnesota approved a Stipulation and Order of1619Dismissal without prejudice in the above-referenced matter. The case was dismissed1620without prejudice based on the pendency of the reexamination proceeding concerning the1621499 Patent. As previously reported, certain of the claims relating to the Company's 4991622Patent that were pending in reexamination were rejected by the Patent Office. Other1623claims that were not subject to reexamination remain in effect. The Company has joined1624the licensor in the exercise of its right to contest the action of the Patent Office, and1625has provided reasons that it believes that the claims should not have been rejected and1626is seeking to amend certain claims to provide additional protection under the 499 Patent.1627Although an adverse ruling from the Patent Office could narrow the range of protection available1628for nasal dilators and limit the breadth of the Company's patent protection, the Company1629believes that its current portfolio of both pending and issued patents will enable it to1630maintain significant patent protection for its nasal strip products. See Item 1,1631"Patents, Trademarks and Proprietary Rights."</P>16321633<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1634<P><FONT SIZE=3><B><U>Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</U></B> </FONT></P>16351636<!-- MARKER FORMAT-SHEET="Para In 0" -->1637<P> None.</P>1638163916401641<!-- MARKER FORMAT-SHEET="Para Center" -->1642<P ALIGN="CENTER">17</P>1643164416451646164716481649<!-- *************************************************************************** -->1650<!-- MARKER LABEL="sheet: 17, page: 17" -->165116521653165416551656<!-- MARKER FORMAT-SHEET="Head Major" -->1657<A NAME="A056"></A>1658<H1 ALIGN=CENTER><FONT SIZE=3>PART II</FONT></H1>16591660<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1661<P><FONT SIZE=3><B><U>Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED<BR>1662STOCKHOLDER MATTERS</U></B> </FONT></P>16631664<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1665<P><FONT SIZE=3><B>Market Information</B> </FONT></P>16661667<!-- MARKER FORMAT-SHEET="Para In 0" -->1668<P> The Company's Common Stock has been1669traded on The Nasdaq Stock Market under the symbol "CNXS" since April 8, 1994. The1670following table sets forth the high and low last sale prices of the Company's Common1671Stock for the period indicated.</P>16721673<PRE><FONT SIZE="1">1674FISCAL YEAR ENDED DECEMBER 31, 2000 HIGH LOW1675---- ---1676First Quarter...............................................7.109 3.9381677Second Quarter..............................................5.000 3.5001678Third Quarter...............................................5.500 3.9061679Fourth Quarter..............................................4.125 3.12516801681FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW1682---- ---1683First Quarter...............................................4.063 3.0001684Second Quarter..............................................3.469 2.8131685Third Quarter...............................................4.188 3.4691686Fourth Quarter..............................................7.188 3.6251687</FONT></PRE>16881689<!-- MARKER FORMAT-SHEET="Para In 0" -->1690<P> On March 15, 2001, the last sale price1691of the Common Stock was $4.375 per share.</P>16921693<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1694<P><FONT SIZE=3><B>Shareholders</B> </FONT></P>16951696<!-- MARKER FORMAT-SHEET="Para In 0" -->1697<P> As of March 15, 2001, there were1698approximately 750 owners of record of Common Stock and an estimated 8,000 beneficial1699holders whose shares were registered in the names of nominees.</P>17001701<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1702<P><FONT SIZE=3><B>Dividends</B> </FONT></P>17031704<!-- MARKER FORMAT-SHEET="Para In 0" -->1705<P> The Company has never paid any1706dividends on its Common Stock. The Company currently intends to retain any earnings for1707use in its operations and does not anticipate paying cash dividends in the foreseeable1708future. The payment of dividends, if any, in the future will be at the discretion of the1709Board of Directors and will depend upon, among other things, future earnings, capital1710requirements, restrictions in future financing agreements, the general financial1711condition of the Company and general business considerations.</P>1712171317141715<!-- MARKER FORMAT-SHEET="Para Center" -->1716<P ALIGN="CENTER">18</P>171717181719172017211722<!-- *************************************************************************** -->1723<!-- MARKER LABEL="sheet: 18, page: 18" -->1724172517261727172817291730<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1731<A NAME="A062"></A>1732<P><FONT SIZE=3><B><U>Item 6. SELECTED FINANCIAL DATA</U></B> </FONT></P>17331734<!-- MARKER FORMAT-SHEET="Para In 0" -->1735<P> The following selected financial data1736should be read in conjunction with the Company's Consolidated Financial Statements and1737Notes thereto together with the "Management's Discussion and Analysis of Financial1738Condition and Results of Operations," all of which are included elsewhere in this Report.1739The Consolidated Statements of Operations and Balance Sheet data presented below as of1740and for the Years Ended December 31, 1998 through December 31, 2000 have been derived1741from the Company's Consolidated Financial Statements included elsewhere in this Report,1742which have been audited by KPMG LLP, independent certified public accountants.</P>17431744<PRE><FONT SIZE="1">1745FINANCIAL HIGHLIGHTS1746(In thousands, except per share amounts)17471748Years ended December 31,17492000 1999 1998 1997 19961750------------------------------------------------------------17511752Net sales $ 68,892 $ 46,050 $ 53,623 $ 66,957 $ 85,8661753Operating income (loss) (17,843) (18,696) 701 9,644 21,7431754Net income (loss) (15,660) (13,756) 2,982 8,770 15,5221755Diluted net income (loss) per share (1.09) (0.89) 0.16 0.44 0.7817561757Working capital $ 32,507 $ 50,183 $ 72,025 $ 76,919 $ 78,4031758Total assets 56,344 65,337 84,963 88,495 89,4091759Stockholders' equity 36,937 53,584 75,866 80,645 79,7751760</FONT></PRE>17611762<BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR>1763<!-- MARKER FORMAT-SHEET="Para Center" -->1764<P ALIGN="CENTER">19</P>176517661767<!-- *************************************************************************** -->1768<!-- MARKER LABEL="sheet: 19, page: 19" -->176917701771<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->1772<P><FONT SIZE=3><B><U>Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL1773CONDITION<BR> AND RESULTS OF OPERATIONS</U></B> </FONT></P>17741775<!-- MARKER FORMAT-SHEET="Para In 0" -->1776<P> The following discussion of1777the financial condition and results of operations should be read in conjunction1778with the Company’s audited consolidated financial statements and notes1779thereto appearing elsewhere in this Annual Report. In the opinion of the1780Company’s management, the quarterly unaudited information set forth below1781has been prepared on the same basis as the audited financial information, and1782includes all adjustments (consisting only of normal, recurring adjustments)1783necessary to present this information fairly when read in conjunction with the1784Company’s consolidated financial statements and notes thereto.</P>17851786<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1787<P><FONT SIZE=3><B>Overview</B> </FONT></P>17881789<!-- MARKER FORMAT-SHEET="Para In 0" -->1790<P> The Company was founded in17911982. From 1987 until 1995, the Company designed, manufactured and marketed1792computer-based diagnostic devices for sleep disorders. In 1995, the Company1793divested itself of the assets related to its sleep disorders business to focus1794on the Breathe Right® nasal strip. In 2000, the Company launched1795FiberChoice® chewable fiber tablets.</P>17961797<!-- MARKER FORMAT-SHEET="Para In 0" -->1798<P> The Company obtained the1799exclusive license to manufacture and sell the Breathe Right nasal strip in 19921800and received FDA clearance in October 1993 to market the Breathe Right nasal1801strip as a product that improves nasal breathing. The Company has also received1802FDA clearance to market the Breathe Right nasal strip for the reduction or1803elimination of snoring, for the temporary relief of nasal congestion and for the1804temporary relief of breathing difficulties due to a deviated nasal septum.</P>18051806<!-- MARKER FORMAT-SHEET="Para In 0" -->1807<P> In August 1995, the Company1808signed an exclusive international distribution agreement with the 3M Company1809(“3M”) to market Breathe Right nasal strips outside the U.S. and1810Canada. On September 30, 1999, the Company and 3M amended the distribution1811agreement in a manner that enabled the Company to regain control of the1812marketing, sales and distribution of Breathe Right nasal strips in international1813markets. In exchange for the one-time contract termination fee noted below, the1814international distribution agreement with 3M terminated on June 30, 2000. During18152000, the Company added distributors who have reintroduced nasal strips in1816Europe, Japan and Australia.</P>18171818<!-- MARKER FORMAT-SHEET="Para In 0" -->1819<P> In July 1996, U.S. Utility1820Patents were issued covering the basic invention of the Breathe Right nasal1821strip and additional elements incorporated in the product. During 1997, the1822Company became aware of a foreign reference to a nasal dilator, not commercially1823available. During 2000, the U.S. Patent and Trademark Office (“Patent1824Office”) reexamined the Company's primary licensed patent and rejected certain claims. The1825Company has joined its licensor in the exercise of its right to contest the action of the Patent Office. The Company and1826its licensor are also seeking to amend certain claims to provide the Company with additional1827protection under the patent. The final outcome of the reexamination is therefore1828uncertain. Although an adverse ruling could narrow the range of protection available for nasal dilators and limit the breadth of the1829Company’s patent protection, the Company believes that its current1830portfolio of both pending patent applications and issued patents will enable it to maintain1831significant patent protection for its nasal strip products.</P>18321833<!-- MARKER FORMAT-SHEET="Para In 0" -->1834<P> During 1998, the Company strengthened1835its management team to add consumer packaged goods and new products experience and1836organized into focused business teams. The Company completed positioning research work to1837expand the Breathe Right brand and developed </P>1838183918401841<BR><BR><BR>18421843<!-- MARKER FORMAT-SHEET="Para Center" -->1844<P ALIGN="CENTER">20</P>184518461847<!-- *************************************************************************** -->1848<!-- MARKER LABEL="sheet: 20, page: 20" -->184918501851<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1852<P><FONT SIZE=3>a road map for new product development. During 1999 and 2000, the Company1853invested aggressively in marketing, selling and product development expenses to build the1854Breathe Right brand and launch additional products. </FONT></P>18551856<!-- MARKER FORMAT-SHEET="Para In 0" -->1857<P> During 2000, the Company1858launched FiberChoice chewable fiber tablets. The tablets are positioned in the1859bulk fiber supplement market and give the Company an entry into the digestive1860health products market. FiberChoice tablets can be taken without water and have1861been clinically proven to be as effective as powder alternatives.</P>18621863<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->1864<P><FONT SIZE=3><B>Operating Results</B> </FONT></P>18651866<!-- MARKER FORMAT-SHEET="Para In 0" -->1867<P> The tables below set forth1868certain selected financial information of the Company and the percentage of net1869sales represented by certain items included in the Company’s statements of1870income for the periods indicated.</P>1871187218731874<PRE><FONT SIZE="1">18751876Three Months Ended Year1877---------------------------------------------------- Ended1878Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,18792000 2000 2000 2000 20001880---------- --------- ---------- --------- -----------1881(In thousands)1882Domestic net sales $ 14,338 $ 12,697 $ 16,618 $ 19,082 $ 62,7351883International net sales 296 606 2,603 2,652 6,1571884---------- --------- ---------- --------- -----------1885Net sales 14,634 13,303 19,221 21,734 68,8921886Cost of goods sold 4,846 5,110 6,875 8,076 24,9071887---------- --------- ---------- --------- -----------1888Gross profit 9,788 8,193 12,346 13,658 43,9851889---------- --------- ---------- --------- -----------1890Operating expenses:1891Marketing and selling 14,312 7,876 11,606 21,487 55,2811892General and administrative 1,173 1,178 1,237 1,237 4,8251893Product development 488 414 403 417 1,7221894Contract termination fee 0 0 0 0 01895---------- --------- ---------- --------- -----------1896Total operating expenses 15,973 9,468 13,246 23,141 61,8281897---------- --------- ---------- --------- -----------1898Operating loss (6,185) (1,275) (900) (9,483) (17,843)1899Investment income 498 566 507 612 2,1831900---------- --------- ---------- --------- -----------1901Loss before income taxes $ (5,687) $ (709) $ (393) $ (8,871) $(15,660)1902========== ========= ========== ========= ===========19031904[WIDE TABLE CONTINUED FROM ABOVE]19051906Three Months Ended Year1907------------------------------------------------ Ended1908Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,19092000 2000 2000 2000 20001910--------- -------- -------- --------- --------19111912Domestic net sales1913International net sales19141915Net sales 100.0% 100.0% 100.0% 100.0% 100.0%1916Cost of goods sold 33.1 38.4 35.8 37.2 36.21917--------- -------- -------- --------- --------1918Gross profit 66.9 61.6 64.2 62.8 63.81919--------- -------- -------- --------- --------1920Operating expenses:1921Marketing and selling 97.8 59.2 60.4 98.9 80.21922General and administrative 8.0 8.9 6.4 5.7 7.01923Product development 3.3 3.1 2.1 1.9 2.51924Contract termination fee 0.0 0.0 0.0 0.0 0.01925--------- -------- -------- --------- --------1926Total operating expenses 109.1 71.2 68.9 106.5 89.71927--------- -------- -------- --------- --------1928Operating loss (42.3) (9.6) (4.7) (43.6) (25.9)1929Investment income 3.4 4.3 2.6 2.8 3.21930--------- -------- -------- --------- --------1931Loss before income taxes (38.9)% (5.3)% (2.0)% (40.8)% (22.7)%1932========= ======== ======== ========= ========1933193419351936<PAGE>19371938Three Months Ended Year1939--------------------------------------------------- Ended1940Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,19411999 1999 1999 1999 19991942---------- --------- ---------- --------- -----------1943(In thousands)1944Domestic net sales $ 11,811 $ 7,994 $ 10,151 $ 15,106 $ 45,0621945International net sales 123 191 312 362 9881946---------- --------- ---------- --------- -----------1947Net sales 11,934 8,185 10,463 15,468 46,0501948Cost of goods sold 4,688 3,629 3,992 6,049 18,3581949---------- --------- ---------- --------- -----------1950Gross profit 7,246 4,556 6,471 9,419 27,6921951---------- --------- ---------- --------- -----------1952Operating expenses:1953Marketing and selling 11,430 4,361 4,644 12,918 33,3531954General and administrative 803 824 941 815 3,3831955Product development 979 843 782 702 3,3061956Contract termination fee 0 0 6,345 0 6,3451957---------- --------- ---------- --------- -----------1958Total operating expenses 13,212 6,028 12,712 14,435 46,3871959---------- --------- ---------- --------- -----------1960Operating loss (5,966) (1,472) (6,241) (5,016) (18,695)1961Investment income 899 698 643 598 2,8381962---------- --------- ---------- --------- -----------1963Loss before income taxes $ (5,067) $ (774) $ (5,598) $ (4,418) $(15,857)1964========== ========= ========== ========= ===========19651966[WIDE TABLE CONTINUED FROM ABOVE]19671968Three Months Ended Year1969------------------------------------------------ Ended1970Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,19711999 1999 1999 1999 19991972--------- -------- -------- --------- --------1973Domestic net sales1974International net sales19751976Net sales 100.0% 100.0% 100.0% 100.0% 100.0%1977Cost of goods sold 39.3 44.3 38.2 39.1 39.91978--------- -------- -------- --------- --------1979Gross profit 60.7 55.7 61.8 60.9 60.11980--------- -------- -------- --------- --------1981Operating expenses:1982Marketing and selling 95.8 53.3 44.4 83.5 72.41983General and administrative 6.7 10.1 9.0 5.3 7.31984Product development 8.2 10.3 7.5 4.5 7.21985Contract termination fee 0.0 0.0 60.6 0.0 13.81986--------- -------- -------- --------- --------1987Total operating expenses 110.7 73.6 121.5 93.3 100.71988--------- -------- -------- --------- --------1989Operating loss (50.0) (18.0) (59.6) (32.4) (40.6)1990Investment income 7.5 8.5 6.1 3.9 6.21991--------- -------- -------- --------- --------1992Loss before income taxes (42.5)% (9.5)% (53.5)% (28.6)% (34.4)%1993========= ======== ======== ========= ========1994199519961997<PAGE>199819992000Three Months Ended Year2001-------------------------------------------------- Ended2002Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,20031998 1998 1998 1998 19982004---------- --------- ---------- --------- -----------2005(In thousands)2006Domestic net sales $ 13,354 $ 11,789 $ 12,581 $ 14,130 $ 51,8542007International net sales 1,127 168 168 305 1,7682008---------- --------- ---------- --------- -----------2009Net sales 14,481 11,957 12,749 14,435 53,6222010Cost of goods sold 4,470 4,454 4,242 5,320 18,4862011---------- --------- ---------- --------- -----------2012Gross profit 10,011 7,503 8,507 9,115 35,1362013---------- --------- ---------- --------- -----------2014Operating expenses:2015Marketing and selling 9,694 5,581 7,032 6,470 28,7772016General and administrative 1,047 1,167 810 596 3,6202017Product development 395 589 540 515 2,0392018---------- --------- ---------- --------- -----------2019Total operating expenses 11,136 7,337 8,382 7,581 34,4362020---------- --------- ---------- --------- -----------2021Operating income (loss) (1,125) 166 125 1,534 7002022Investment income 690 730 712 660 2,7922023---------- --------- ---------- --------- -----------2024Income (loss) before income taxes $ (435) $ 896 $ 837 $ 2,194 $ 3,4922025========== ========= ========== ========= ===========20262027[WIDE TABLE CONTINUED FROM ABOVE]20282029Three Months Ended Year2030--------------------------------------------- Ended2031Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,20321999 1999 1999 1999 19992033--------- -------- -------- --------- --------2034Domestic net sales2035International net sales20362037Net sales 100.0% 100.0% 100.0% 100.0% 100.0%2038Cost of goods sold 30.9 37.3 33.3 36.9 34.52039--------- -------- -------- --------- --------2040Gross profit 69.1 62.7 66.7 63.1 65.52041--------- -------- -------- --------- --------2042Operating expenses:2043Marketing and selling 66.9 46.7 55.2 44.8 53.72044General and administrative 7.2 9.8 6.4 4.1 6.82045Product development 2.7 4.9 4.2 3.6 3.82046--------- -------- -------- --------- --------2047Total operating expenses 76.9 61.4 65.7 52.5 64.22048--------- -------- -------- --------- --------2049Operating income (loss) (7.8) 1.4 1.0 10.6 1.32050Investment income 4.8 6.1 5.6 4.6 5.22051--------- -------- -------- --------- --------2052Income (loss) before income taxes (3.0)% 7.5% 6.6% 15.2% 6.5%2053========= ======== ======== ========= ========205420552056</FONT></PRE>2057<BR><BR><BR>20582059<!-- MARKER FORMAT-SHEET="Para Center" -->2060<P ALIGN="CENTER">21</P>20612062<!-- *************************************************************************** -->2063<!-- MARKER LABEL="sheet: 21, page: 21" -->206420652066<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->2067<P><FONT SIZE=3><B>2000 Compared to 1999</B> </FONT></P>20682069<!-- MARKER FORMAT-SHEET="Para In 0" -->2070<P> <I>Net Sales</I>. Net sales2071were $68.9 million for 2000 compared to $46.1 million for 1999. Sales increased2072by 49.6% for the year due to increased advertising expenditures and new product2073introductions. For the year 2000, domestic sales increased to $62.7 million from2074$45.1 for 1999. The increase reflects increased Breathe Right nasal strip sales2075and shipments of FiberChoice chewable tablets. Breathe Right strip sales grew2076due to initial shipments of the Company’s new mentholated and kids strips2077and the growth of the core Breathe Right nasal strip business. In addition, 19992078sales were reduced by reserves for returns of product in connection with the2079introduction of new packaging that year.</P>20802081<!-- MARKER FORMAT-SHEET="Para In 0" -->2082<P> International sales increased2083to $6.2 million for 2000 from $988,000 for 1999. The higher level of sales2084reflects the reintroduction of Breathe Right nasal strips through the2085Company’s new international distributors in Japan, Europe and Australia.2086The distribution agreement with the Company’s previous international2087distributor was terminated effective June 30, 2000.</P>20882089<!-- MARKER FORMAT-SHEET="Para In 0" -->2090<P> The Company has experienced2091in the past, and expects that it will continue to experience in the future,2092quarterly fluctuations in both domestic and international sales and earnings.2093These fluctuations are due in part to advertising levels and seasonality of2094sales as described below, as well as increases and decreases in purchases by2095distributors and retailers in anticipation of future demand by consumers.</P>20962097<!-- MARKER FORMAT-SHEET="Para In 0" -->2098<P> <I>Gross Profit</I>. Gross2099profit was $44.0 million for 2000 compared to $27.7 million for 1999. Gross2100profit as a percentage of net sales was 63.8% for 2000 compared to 60.1% for21011999. Gross profit in 2000 was unfavorably impacted by the lower gross profit on2102FiberChoice chewable tablets, especially the 10-count trial size tubes. The2103Company also disposed of an excess inventory of pillow covers and incurred2104higher costs associated with expediting inventory purchases and deliveries.2105During the third and early fourth quarters, customer orders exceeded forecasts,2106resulting in additional costs to meet customer delivery schedules. Margins2107should improve 2 to 4% during 2001. The gross profit percentage was lower in21081999, primarily due to costs for the transition of Breathe Right nasal strips to2109new product packaging.</P>21102111211221132114<!-- MARKER FORMAT-SHEET="Para Center" -->2115<P ALIGN="CENTER">22</P>211621172118<!-- *************************************************************************** -->2119<!-- MARKER LABEL="sheet: 22, page: 22" -->2120212121222123<!-- MARKER FORMAT-SHEET="Para In 0" -->2124<P> <I>Marketing and Selling2125Expenses</I>. Marketing and selling expenses were $55.3 million for 20002126compared to $33.4 million for 1999. Marketing and selling expenses as a2127percentage of net sales increased to 80.2% in 2000 from 72.4% in 1999,2128reflecting the planned investment in advertising needed to return the Breathe2129Right brand to growth, relaunch Breathe Right nasal strips in key international2130markets and launch FiberChoice tablets.</P>21312132<!-- MARKER FORMAT-SHEET="Para In 0" -->2133<P> <I>General and Administrative2134Expenses</I>. General and administrative expenses were $4.8 million for 20002135compared to $3.4 million for 1999. This increase was primarily from2136infrastructure to support the growing business and business development expenses2137to identify future product opportunities. General and administrative expenses as2138a percentage of net sales decreased to 7.0% in 2000 from 7.3% in 1999 as a2139result of the higher level of sales in 2000.</P>21402141<!-- MARKER FORMAT-SHEET="Para In 0" -->2142<P> <I>Product Development2143Expenses</I>. Product development expenses were $1.7 million for 2000 compared2144to $3.3 million for 1999. Product development expenses as a percentage of net2145sales decreased to 2.5% in 2000 from 7.2% in 1999. This decrease represents the2146substantial completion of development expenses for new products the Company2147introduced in 2000 and a shift in emphasis to business development efforts.</P>21482149<!-- MARKER FORMAT-SHEET="Para In 0" -->2150<P> <I>Investment Income.</I> Investment income2151was $2.2 million for 2000 compared to $2.8 million for 1999. The decrease was primarily2152the result of a decrease in investments.</P>21532154<!-- MARKER FORMAT-SHEET="Para In 0" -->2155<P> <I>Income Tax Benefit (Expense).</I> There2156was no income tax provision for 2000 due to tax loss carryforwards.</P>21572158<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->2159<P><FONT SIZE=3><B>1999 Compared to 1998</B> </FONT></P>21602161<!-- MARKER FORMAT-SHEET="Para In 0" -->2162<P> <I>Net Sales</I>. Net sales2163were $46.1 million for 1999 compared to $53.6 million for 1998. While sales were2164down for the year, fourth quarter sales increased to $15.5 million for 1999 from2165$14.4 million for 1998 due to increased advertising expenditures. For the year21661999, domestic sales declined to $45.1 million from $51.9 for 1998. Slower sales2167for 1999 reflect both a lower level of advertising during the previous2168cough/cold season and the presence of competition. Retailer returns of product2169in conjunction with our introduction of new packaging also reduced sales.</P>21702171<!-- MARKER FORMAT-SHEET="Para In 0" -->2172<P> International sales decreased2173to $988,000 for 1999 from $1.8 million for 1998. The lower level of2174international sales for 1999 is attributable in large part to disappointing2175marketing results and continued high inventory levels at the Company’s2176international distributor 3M. The distribution agreement with 3M was terminated2177effective June 30, 2000.</P>21782179<!-- MARKER FORMAT-SHEET="Para In 0" -->2180<P> <I>Gross Profit</I>. Gross2181profit was $27.7 million for 1999 compared to $35.1 million for 1998. Gross2182profit as a percentage of net sales was 60.1% for 1999 compared to 65.5% for21831998. The lower gross profit as a percentage of net sales was primarily due to2184costs of the transition to new product packaging, lower sales and product mix.</P>21852186<!-- MARKER FORMAT-SHEET="Para In 0" -->2187<P> <I>Marketing and Selling2188Expenses</I>. Marketing and selling expenses were $33.4 million for 19992189compared to $28.8 million for 1998. This increase resulted primarily from a2190resumption in national television advertising during 1999 after no significant2191advertising in the fourth quarter of 1998. Marketing and selling expenses as a2192percentage of net sales increased to 72.4% in 1999</P>219321942195<BR><BR><BR>21962197<!-- MARKER FORMAT-SHEET="Para Center" -->2198<P ALIGN="CENTER">23</P>2199220022012202<!-- *************************************************************************** -->2203<!-- MARKER LABEL="sheet: 23, page: 23" -->220422052206<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2207<P><FONT SIZE=3>from 53.7% in 1998 reflecting the planned investment in advertising2208needed to return the Breathe Right brand to growth in the fourth quarter of 1999. </FONT></P>22092210<!-- MARKER FORMAT-SHEET="Para In 0" -->2211<P> <I>General and Administrative2212Expenses</I>. General and administrative expenses were $3.4 million for 19992213comparable to $3.6 million for 1998. General and administrative expenses as a2214percentage of net sales increased to 7.3% in 1999 from 6.7% in 1998 primarily as2215a result of the lower level of sales in 1999.</P>22162217<!-- MARKER FORMAT-SHEET="Para In 0" -->2218<P> <I>Product Development2219Expenses</I>. Product development expenses were $3.3 million for 1999 compared2220to $2.0 million for 1998. This increase resulted primarily from costs related to2221evaluation and testing of potential new products, including FiberChoice chewable2222fiber tablets and FLAIR equine nasal strips. Product development expenses as a2223percentage of net sales increased to 7.2% in 1999 from 3.8% in 1998.</P>22242225<!-- MARKER FORMAT-SHEET="Para In 0" -->2226<P> <I>Contract Termination2227Fee</I>. Contract termination fee of $6.3 million represents a one-time payment2228to 3M, the Company’s international distributor, to terminate the2229international distribution agreement. The amount paid was negotiated, and is2230less than the amount called for in the original contract. The agreement allowed2231the Company to regain control of the international business on a phased schedule2232that was completed June 30, 2000.</P>22332234<!-- MARKER FORMAT-SHEET="Para In 0" -->2235<P> <I>Investment Income.</I> Investment income2236was $2.8 million for 1999 and 1998.</P>22372238<!-- MARKER FORMAT-SHEET="Para In 0" -->2239<P> <I>Income Tax Benefit2240(Expense)</I>. Income tax provision for 1999 was a benefit of $2.1 million2241compared to an expense of $510,000 for 1998. Due to tax loss carryforwards the2242income tax benefit for 1999 represents the remaining tax benefit available from2243carrying back current year losses, offset by a reserve against net deferred2244income tax assets. A high level of tax-exempt interest income impacted the2245effective income tax rate in 1998.</P>22462247<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->2248<P><FONT SIZE=3><B>Seasonality</B> </FONT></P>22492250<!-- MARKER FORMAT-SHEET="Para In 0" -->2251<P> The Company believes that a2252portion of Breathe Right nasal strip use is for the temporary relief of nasal2253congestion and congestion-related snoring. Sales of nasal congestion remedies2254are higher during the fall and winter seasons because of increased use during2255the cold and allergy seasons.</P>22562257<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->2258<P><FONT SIZE=3><B>Liquidity and Capital Resources</B> </FONT></P>22592260<!-- MARKER FORMAT-SHEET="Para In 0" -->2261<P> At December 31, 2000, the2262Company had cash, cash equivalents and marketable securities of $31.3 million2263and working capital of $32.5 million.</P>22642265<!-- MARKER FORMAT-SHEET="Para In 0" -->2266<P> <I>Operating Activities</I>.2267The Company used cash in operations of approximately $4.4 million in 20002268primarily due to the net loss for the year offset by an increase in operating2269liabilities. The Company used cash in operations of $12.1 million in 19992270compared to cash provided of $9.3 million in 1998. The decreased cash flow in22711999 was primarily due to the net loss for the year.</P>22722273<!-- MARKER FORMAT-SHEET="Para In 0" -->2274<P> <I>Investing Activities</I>.2275Sales and maturities of marketable securities exceeded purchases by $9.2 million in 2000. Net proceeds were2276used to fund the cash used in operations, purchases of property and equipment and2277purchase treasury shares. Sales and maturities of marketable</P>22782279228022812282228322842285<BR><BR><BR>22862287<!-- MARKER FORMAT-SHEET="Para Center" -->2288<P ALIGN="CENTER">24</P>228922902291<!-- *************************************************************************** -->2292<!-- MARKER LABEL="sheet: 24, page: 24" -->229322942295229622972298<P>securities exceeded2299purchases by $21.1 million in 1999. Net proceeds were used to fund the cash used in2300operations and purchase treasury shares. Marketable securities purchased consisted of2301cash equivalents, corporate bonds, U.S. Government obligations and municipal bonds. </P>23022303<!-- MARKER FORMAT-SHEET="Para In 0" -->2304<P> The Company purchased $2.02305million of property and equipment in 2000, primarily associated with the2306Company’s move to different facilities, and $331,000 in 1999, primarily2307associated with the upgrade of management information systems.</P>23082309<!-- MARKER FORMAT-SHEET="Para In 0" -->2310<P> <I>Financing Activities</I>.2311The Company purchased 396,000 shares of its common stock for $1.5 million in23122000 and purchased 2.3 million shares for $8.6 million in 1999. These treasury2313shares are to be used to meet the Company’s obligations under its employee2314stock ownership plan and stock option plans, and for possible future2315acquisitions. The Company received $103,000 in 2000 and $499,000 in 1999 from2316the exercise of stock options and issuance of stock under the employee stock2317purchase plan.</P>23182319<!-- MARKER FORMAT-SHEET="Para In 0" -->2320<P> The Company believes that its2321existing funds will be sufficient to support its planned operations for the2322foreseeable future.</P>23232324<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->2325<P><FONT SIZE=3><B>Recent Accounting Pronouncements</B> </FONT></P>23262327<!-- MARKER FORMAT-SHEET="Para In 0" -->2328<P> In 1998, the Financial2329Accounting Standards Board issued Statement of Financial Accounting Standards2330(“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging2331Activities (as amended by SFAS No. 137 with respect to the effective date and2332SFAS No. 138 with respect to certain interpretations). SFAS No. 133 establishes2333new standards for recognizing all derivatives as either assets or liabilities,2334and measuring those instruments at fair value. The Company adopted the new2335standard on January 1, 2001. Adoption of this standard had no impact of the2336Company’s financial position or results of operations.</P>23372338<!-- MARKER FORMAT-SHEET="Para In 0" -->2339<P> In December 1999, the2340Securities and Exchange Commission (“SEC”) staff issued Staff2341Accounting Bulletin No. 101, “Revenue Recognition in Financial2342Statements” (“SAB 101”). SAB 101 summarizes certain SEC staff2343views in applying accounting principals generally accepted in the United States2344of America to revenue recognition in financials. SAB 101 was adopted by the2345Company in the fourth quarter of 2000 and had no impact on the results of2346operations.</P>23472348<!-- MARKER FORMAT-SHEET="Para In 0" -->2349<P> In 2000, the Emerging Issues2350Task Force (“EITF”) reached a consensus on Issue No. 00-14,2351“Accounting for Certain Sales Incentives”. This EITF requires2352companies to present in their statements of operations, certain sales incentives2353as sales allowances, resulting in a reduction of net sales. The Company2354currently records sales incentives covered by this EITF as operating expenses.2355The Company will be required to adopt this EITF beginning with the quarter2356ending June 30. 2001. If the Company would have applied the presentation set2357forth in this issue in 2000, 1999 and 1998, net sales would have been reduced by2358$1,527,000, $3,126,000 and $1,263,000, respectively. Operating expenses would2359have also been reduced by the same amounts in the corresponding years. This2360issue does not impact operating income (loss) for any of these years.</P>236123622363<BR><BR><BR>23642365<!-- MARKER FORMAT-SHEET="Para Center" -->2366<P ALIGN="CENTER">25</P>23672368<!-- *************************************************************************** -->2369<!-- MARKER LABEL="sheet: 25, page: 25" -->2370237123722373<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2374<P><FONT SIZE=3><B><U>Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</U></B> </FONT></P>23752376<!-- MARKER FORMAT-SHEET="Para In 0" -->2377<P> The Company's market risk exposure is2378primarily interest rate risk related to its cash and cash equivalents and investments in2379marketable securities. The Company has investment guidelines which limit the types of2380securities in which it may invest as well as the length of maturities. No investment may2381exceed 36 months in maturity and the weighted average life of the portfolio may not2382exceed 18 months.</P>23832384<!-- MARKER FORMAT-SHEET="Para In 0" -->2385<P> The table below provides information2386about the Company's cash and cash equivalents and marketable securities as of December238731, 2000:</P>23882389<PRE><FONT SIZE="1">2390(In thousands)23912392COST FAIR VALUE2393---- ----------23942395Due within one year $17,829 $17,8122396Due after one year2397through three years 13,394 13,5112398------- -------2399$31,223 $31,3232400======= =======2401</FONT></PRE>24022403<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2404<P><FONT SIZE=3><B><U>Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</U></B> </FONT></P>24052406<!-- MARKER FORMAT-SHEET="Para In 0" -->2407<P> The Consolidated Balance Sheets of the2408Company as of December 31, 2000 and 1999, and the related Consolidated Statements of2409Operations, Stockholders' Equity and Comprehensive Income (Loss), and Cash Flows for each2410of the years in the three-year period ended December 31, 2000, the Notes to the2411Consolidated Financial Statements and the Report of KPMG LLP, independent certified2412public accountants, are listed under Item 14 of this Report.</P>24132414<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2415<P><FONT SIZE=3><B><U>Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING2416AND FINANCIAL DISCLOSURE</U></B> </FONT></P>24172418<!-- MARKER FORMAT-SHEET="Para In 0" -->2419<P> None.</P>24202421242224232424<BR><BR><BR>24252426<!-- MARKER FORMAT-SHEET="Para Center" -->2427<P ALIGN="CENTER">26</P>242824292430<!-- *************************************************************************** -->2431<!-- MARKER LABEL="sheet: 26, page: 26" -->24322433243424352436243724382439<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2440<A NAME="A101"></A>2441<P ALIGN="CENTER"><B>PART III</B></P>24422443<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2444<P><FONT SIZE=3><B><U>Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</U></B> </FONT></P>24452446<!-- MARKER FORMAT-SHEET="Para In 0" -->2447<P> Certain information required under2448this Item with respect to directors is contained in the Section “Election of Directors”2449and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company's Proxy2450Statement for the Annual Meeting of Stockholders to be held on May 23, 2001 (the “20012451Proxy Statement”), a definitive copy of which will be filed with the Commission within2452120 days of the close of the last fiscal year, and is incorporated herein by reference.</P>24532454<!-- MARKER FORMAT-SHEET="Para In 0" -->2455<P> Information concerning executive2456officers is set forth in the Section entitled “Executive Officers of the Company” in Part2457I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation2458S-K.</P>24592460<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2461<P><FONT SIZE=3><B><U>Item 11. EXECUTIVE COMPENSATION</U></B> </FONT></P>24622463<!-- MARKER FORMAT-SHEET="Para In 0" -->2464<P> Information required under this item2465is contained in the section entitled “Executive Compensation” in the Company's 2001 Proxy2466Statement and is incorporated herein by reference.</P>24672468<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2469<P><FONT SIZE=3><B><U>Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND2470MANAGEMENT</U></B> </FONT></P>24712472<!-- MARKER FORMAT-SHEET="Para In 0" -->2473<P> Information required under this item2474is contained in the section entitled “Security Ownership of Principal Stockholders and2475Management” in the Company's 2001 Proxy Statement and is incorporated herein by reference.</P>24762477<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2478<P><FONT SIZE=3><B><U>Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</U></B> </FONT></P>24792480<!-- MARKER FORMAT-SHEET="Para In 0" -->2481<P> Not Applicable.</P>2482248324842485<BR><BR><BR>24862487<!-- MARKER FORMAT-SHEET="Para Center" -->2488<P ALIGN="CENTER">27</P>2489249024912492<!-- *************************************************************************** -->2493<!-- MARKER LABEL="sheet: 27, page: 27" -->24942495249624972498<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2499<A NAME="A107"></A>2500<P ALIGN="CENTER"><B>PART IV</B></P>25012502<!-- MARKER FORMAT-SHEET="FLUSH-BOLD-UNDERLINE" -->2503<P><FONT SIZE=3><B><U>Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON2504FORM 8-K</U></B> </FONT></P>25052506<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2507<P><FONT SIZE=3>(a) Documents filed as part of this Report: </FONT></P>25082509<PRE><FONT SIZE="1">2510FORM 10-K2511PAGE REFERENCE2512--------------251325141. Financial Statements.25152516Independent Auditors' Report.................................................F-12517Consolidated Statements of Operations for the Years Ended2518December 31, 2000, 1999 and 1998..........................................F-22519Consolidated Balance Sheets as of December 31, 2000 and 1999.................F-32520Consolidated Statements of Stockholders' Equity and Comprehensive2521Income (Loss) for the Years Ended December 31, 2000, 1999 and 1998........F-42522Consolidated Statements of Cash Flows for the Years Ended2523December 31, 2000, 1999 and 1998..........................................F-52524Notes to Consolidated Financial Statements...................................F-6252525262. Financial Statement Schedules.25272528None.252925303. Exhibits.25312532See "Exhibit Index" on the page following the Signature Page.2533</FONT></PRE>25342535<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2536<P><FONT SIZE=3>(b) Reports on Form 8-K. </FONT></P>25372538<!-- MARKER FORMAT-SHEET="Para In 0" -->2539<P> The Company did not file a report on2540Form 8-K during the fourth quarter ended December 31, 2000.</P>2541254225432544<BR><BR><BR><BR>25452546<!-- MARKER FORMAT-SHEET="Para Center" -->2547<P ALIGN="CENTER">28</P>25482549<!-- *************************************************************************** -->2550<!-- MARKER LABEL="sheet: 28, page: 28" -->255125522553255425552556<!-- MARKER FORMAT-SHEET="Head Major" -->2557<A NAME="A110"></A>2558<H1 ALIGN=CENTER><FONT SIZE=3>SIGNATURES</FONT></H1>25592560<!-- MARKER FORMAT-SHEET="Para In 0" -->2561<P> Pursuant to the requirements of2562Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly2563caused this report to be signed on its behalf by the undersigned, thereunto duly2564authorized.</P>25652566<TABLE WIDTH="100%">2567<TR><TD WIDTH=50%></TD>2568<TD>CNS, INC.<BR>2569("Registrant")</TD></TR>2570<TR><TD> </TD></TR>25712572<TR>2573<TD>2574Dated: March 26, 2001 </TD> <TD> <U>By /s/ Daniel E. Cohen</U><BR>2575Daniel E. Cohen<BR>2576Chairman of the Board, Chief Executive Officer2577<BR>and Director</TD></TR>2578</TABLE>25792580<!-- MARKER FORMAT-SHEET="Para In 0" -->2581<P> Pursuant to the requirements of the2582Securities Exchange Act of 1934, this Report has been signed by the following persons on2583March 26, 2001 on behalf of the Registrant in the capacities indicated.</P>25842585<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2586<P ALIGN="CENTER"><B>(Power of Attorney and Signatures)</B></P>25872588<!-- MARKER FORMAT-SHEET="Para In 0" -->2589<P> Each person whose signature appears2590below constitutes and appoints DANIEL E. COHEN and PATRICK DELANEY as his or her true and2591lawful attorneys-in-fact and agents, each acting alone, with the full power of2592substitution and resubstitution, for him or her and in his or her name, place and stead,2593in any and all capacities, to sign any or all amendments to this Annual Report on Form259410-K and to file the same, with all exhibits thereto, and other documents in connection2595therewith, with the Securities and Exchange Commission, granting unto said2596attorneys-in-fact and agents, each acting alone, full power and authority to do and2597perform each and every act and thing requisite and necessary to be done in and about the2598premises, as fully to all intents and purposes as he might or could do in person, hereby2599ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his2600substitute or substitutes, may lawfully do or cause to be done by virtue thereof.</P>260126022603<P><FONT SIZE=3>2604<U>/s/ Daniel E. Cohen</U><BR>2605Daniel E. Cohen2606Chairman of the Board, Chief Executive Officer<BR>2607and Director<BR>2608(Principal Executive Officer)</FONT></P>26092610<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2611<P><FONT SIZE="3"><U>/s/ Marti Morfitt</U> <BR>Marti Morfitt <BR>President, Chief Operating Officer and2612Director</FONT> </P>26132614<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2615<P><FONT SIZE="3"><U>/s/ David J. Byrd</U> <BR>David J. Byrd <BR>Vice President of Finance, Chief<BR>Financial2616Officer and Treasurer<BR>(Principal Financial and Accounting Officer)</FONT> </P>2617261826192620<BR><BR><BR><BR><BR><BR><BR>26212622<!-- MARKER FORMAT-SHEET="Para Center" -->2623<P ALIGN="CENTER">29</P>262426252626<!-- *************************************************************************** -->2627<!-- MARKER LABEL="sheet: 29, page: 29" -->2628262926302631<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2632<P><FONT SIZE="3"><U>/s/ Patrick Delaney</U> <BR>Patrick Delaney<BR>Director</FONT> </P>26332634<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2635<P><FONT SIZE="3"><U>/s/ H. Robert Hawthorne</U> <BR>H. Robert Hawthorne<BR>Director</FONT> </P>26362637<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2638<P><FONT SIZE="3"><U>/s/ R. Hunt Greene</U> <BR>R. Hunt Greene<BR>Director</FONT> </P>26392640<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2641<P><FONT SIZE="3"><U>/s/ Andrew J. Greenshields</U><BR> Andrew J. Greenshields<BR>Director</FONT> </P>26422643<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2644<P><FONT SIZE="3"><U>/s/ Richard W. Perkins</U> <BR>Richard W. Perkins<BR>Director</FONT> </P>264526462647<BR><BR><BR><BR><BR><BR><BR>26482649265026512652<!-- MARKER FORMAT-SHEET="Para Center" -->2653<P ALIGN="CENTER">30</P>26542655<!-- *************************************************************************** -->2656<!-- MARKER LABEL="sheet: 30, page: 30" -->26572658265926602661<!-- MARKER FORMAT-SHEET="Para Center" -->2662<A NAME="A126"></A>2663<P ALIGN="CENTER">CNS, INC.<BR><U>EXHIBIT INDEX</U></P>26642665<PRE><FONT SIZE="1">26662667<B><U>Exhibit No.</U></B> <B><U>Description</U></B>266826693.1 Company's Certificate of Incorporation as amended to date (incorporated by reference to2670Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December267131, 1995 (the "1995 Form 10-K")).267226733.2 Company's Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the2674Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form267510-K)).2676267710.1* CNS, Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to2678Exhibit 10.1 to the Company's Registration Statement on Form S-8, File No. 33-14052C).2679268010.2* CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.92681to the Company's Registration Statement on Form S-8, File No. 33-29454).2682268310.3* CNS, Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company's2684Annual Report on Form 10-K for the year ended December 31, 1990).2685268610.4* CNS, Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the2687Company's Annual Report on Form 10-K for the year ended December 31, 1997).2688268910.5* CNS, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit A of the Definitive2690Proxy Statement for the Company's Annual Meeting of Stockholders that was held on May26913, 2000).2692269310.6** License Agreement dated January 30, 1992 between the Company and Creative Integration2694and Design, Inc. (incorporated by reference to Exhibit 10.11 to the Company's Registration2695Statement on Form S-2, File No. 33-46120).2696269710.7** License Agreement dated November 10, 1997 between the Company and Onesta Nutrition,2698Inc. (incorporated by reference to Exhibit 10.9 to the 1999 Form 10-K).2699270010.8** License Agreement dated March 12, 1999 between the Company and WinEase LLC2701(incorporated by reference to Exhibit 10.10 of the 1999 Form 10-K).2702270310.9** License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen2704Cronk (incorporated by reference to Exhibit 10.11 of the 1999 Form 10-K).2705270610.10** License Agreement dated March 1, 2000 between the Company and The Procter & Gamble2707(the "P&G" License Agreement).2708270910.11** Distributor Agreement dated August 1, 2000 between the Company and Eisai Co., Ltd.2710271110.12** Repackaging Agreement dated August 1, 2000 between the Company and Herusu, Co., Ltd.2712</FONT></PRE>27132714<BR><BR><BR>271527162717<!-- MARKER FORMAT-SHEET="Para Center" -->2718<P ALIGN="CENTER">31</P>271927202721<!-- *************************************************************************** -->2722<!-- MARKER LABEL="sheet: 31, page: 31" -->272327242725272627272728<PRE><FONT SIZE="1">2729273010.13* Employment Agreement between the Company and Daniel E. Cohen dated February 12,27311999 (incorporated by referenced to Exhibit 10.9 to the Company's Annual Report on Form273210-K for the year ended December 31, 1998 (the "1998 Form 10-K")).2733273410.14* Employment Agreement between the Company and Marti Morfitt dated February 12,27351999 (incorporated by referenced to Exhibit 10.10 to the 1998 Form 10-K).2736273710.15* Employment Agreement between the Company and Kirk P. Hodgdon dated February 12,27381999 (incorporated by referenced to Exhibit 10.11 to the 1998 Form 10-K).2739274010.16* Employment Agreement between the Company and David J. Byrd dated February 12, 19992741(incorporated by referenced to Exhibit 10.12 to the 1998 Form 10-K).2742274310.17* Employment Agreement between the Company and John J. Keppeler dated February 12,27441999 (incorporated by referenced to Exhibit 10.13 to the 1998 Form 10-K).2745274610.18* Employment Agreement between the Company and Teri P. Osgood dated February 12,27471999 (incorporated by referenced to Exhibit 10.14 to the 1998 Form 10-K).2748274910.19* Employment Agreement between the Company and Carol J. Watzke dated February 12,27501999 (incorporated by referenced to Exhibit 10.15 to the 1998 Form 10-K).2751275210.20* Employment Agreement between the Company and M. W. Anderson dated February 12,27531999 (incorporated by referenced to Exhibit 10.17 to the 1998 Form 10-K).2754275510.21* Employment Agreement between the Company and Larry R. Muma dated January 2, 2001.2756275721.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the 1999 Form275810-K).2759276023.1 Consent of KPMG LLP.2761276224.1 Powers of Attorney (included on the signature page hereof).27632764</FONT></PRE>27652766<!-- MARKER FORMAT-SHEET="Footnote Rule" -->2767<P>__________27682769<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2770<P><FONT SIZE=3>*Indicates Compensatory Agreement. </FONT></P>27712772<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2773<P><FONT SIZE=3>**Certain portions of this Exhibit have been deleted and filed separately2774with the Commission pursuant to a request for confidential treatment under Rule 24b-2.2775Spaces corresponding to the deleted portions are represented by brackets with asterisks. </FONT></P>277627772778<BR><BR><BR>2779278027812782<!-- MARKER FORMAT-SHEET="Para Center" -->2783<P ALIGN="CENTER">32</P>27842785<!-- *************************************************************************** -->2786<!-- MARKER LABEL="sheet: 32, page: 32" -->27872788278927902791279227932794<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2795<P ALIGN="CENTER"><B>Independent Auditors’Report</B></P>2796<BR><BR><BR><BR><BR>2797<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2798<P><FONT SIZE=3>The Board of Directors and Stockholders<BR>CNS, Inc.: </FONT></P>2799<BR><BR>2800<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2801<P><FONT SIZE=3>We have audited the accompanying consolidated balance sheets of2802CNS, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related2803consolidated statements of operations, stockholders’ equity and2804comprehensive income (loss), and cash flows for each of the years in the2805three-year period ended December 31, 2000. These consolidated financial2806statements are the responsibility of the Company’s management. Our2807responsibility is to express an opinion on these consolidated financial2808statements based on our audits. </FONT></P>28092810<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2811<P><FONT SIZE=3>We conducted our audits in accordance with auditing standards2812generally accepted in the United States of America. Those standards require that2813we plan and perform the audit to obtain reasonable assurance about whether the2814financial statements are free of material misstatement. An audit includes2815examining, on a test basis, evidence supporting the amounts and disclosures in2816the financial statements. An audit also includes assessing the accounting2817principles used and significant estimates made by management as well as2818evaluating the overall financial statement presentation. We believe that our2819audits provide a reasonable basis for our opinion. </FONT></P>28202821<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2822<P><FONT SIZE=3>In our opinion, the consolidated financial statements referred2823to above present fairly, in all material respects, the financial position of2824CNS, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results2825of their operations and their cash flows for each of the years in the three-year2826period ended December 31, 2000 in conformity with accounting principles2827generally accepted in the United States of America. </FONT></P>2828<BR>2829<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2830<P><FONT SIZE=3>/s/ KPMG LLP</FONT></P>2831283228332834<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2835<P><FONT SIZE=3>Minneapolis, Minnesota<BR>January 18, 2001 </FONT></P>2836283728382839<BR><BR><BR><BR><BR>284028412842<P ALIGN="CENTER">F-1</p>2843<!-- *************************************************************************** -->2844<!-- MARKER LABEL="sheet: 33, page: 33" -->2845284628472848<!-- MARKER FORMAT-SHEET="Para Center" -->2849<P ALIGN="CENTER"><B>CNS, INC.</B><BR>Consolidated Statements of Operations <BR>Years ended December 2000, 19992850and 1998<BR> (in thousands, except per share amounts)</P>2851<PRE><FONT SIZE="1">2852285328542000 1999 19982855- -------------------------------------------------------------------------------------------------28562857Net sales $ 68,892 $ 46,050 $ 53,6232858Cost of goods sold 24,907 18,358 18,4852859- -------------------------------------------------------------------------------------------------2860Gross profit 43,985 27,692 35,1382861- -------------------------------------------------------------------------------------------------28622863Operating expenses:2864Marketing and selling 55,281 33,354 28,7772865General and administrative 4,825 3,383 3,6212866Product development 1,722 3,306 2,0392867Contract termination fee 0 6,345 02868- -------------------------------------------------------------------------------------------------2869Total operating expenses 61,828 46,388 34,4372870- -------------------------------------------------------------------------------------------------28712872Operating income (loss) (17,843) (18,696) 70128732874Interest income 2,234 2,596 2,7912875Gain (loss) on sales of marketable securities (51) 243 02876- -------------------------------------------------------------------------------------------------28772878Income (loss) before income taxes (15,660) (15,857) 3,49228792880Income tax benefit (expense) 0 2,101 (510)2881- -------------------------------------------------------------------------------------------------28822883Net income (loss) $(15,660) $(13,756) $ 2,9822884=================================================================================================288528862887Basic net income (loss) per share $ (1.09) $ (.89) $ .162888=================================================================================================28892890Weighted average number of common shares outstanding 14,372 15,435 18,0792891=================================================================================================289228932894Diluted net income (loss) per share $ (1.09) $ (.89) $ .162895=================================================================================================2896Weighted average number of common2897and assumed conversion shares outstanding 14,372 15,435 18,2492898=================================================================================================28992900</FONT></PRE>2901<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2902<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial2903statements. </FONT></P>29042905290629072908290929102911<!-- MARKER FORMAT-SHEET="Para Center" -->2912<P ALIGN="CENTER">F-2</P>29132914<!-- *************************************************************************** -->2915<!-- MARKER LABEL="sheet: 34, F-page: 2" -->291629172918<!-- MARKER FORMAT-SHEET="Para Center" -->2919<P ALIGN="CENTER"><B>CNS, INC.</B><BR> Consolidated Balance Sheets <BR>December 31, 2000 and 1999 <BR>(in2920thousands, except per share amounts)</P>292129222923<PRE><FONT SIZE="1">2924Assets 2000 19992925- ---------------------------------------------------------------------------------------------29262927Current assets:2928Cash and cash equivalents $ 2,079 $ 8602929Marketable securities 29,244 37,9982930Accounts receivable, net of allowance for doubtful accounts2931of $300 in 2000 and $280 in 1999 12,582 11,3702932Income taxes receivable 0 3,1782933Inventories 4,752 4,9052934Prepaid expenses and other current assets 3,257 3,6252935- ---------------------------------------------------------------------------------------------2936Total current assets 51,914 61,93629372938Property and equipment, net 3,201 2,0102939Product rights, net 1,229 1,3912940- ---------------------------------------------------------------------------------------------29412942$ 56,344 $ 65,3372943=============================================================================================294429452946Liabilities and Stockholders' Equity29472948- ---------------------------------------------------------------------------------------------29492950Current liabilities:2951Accounts payable $ 12,600 $ 5,4222952Accrued expenses 6,251 6,3312953Accrued income taxes 556 02954- ---------------------------------------------------------------------------------------------2955Total current liabilities 19,407 11,7532956- ---------------------------------------------------------------------------------------------29572958Stockholders' equity:2959Preferred stock - authorized 8,484 shares;2960none issued or outstanding 0 02961Common stock - $.01 par value; authorized 50,000 shares;2962issued and outstanding 19,295 shares in 2000 and 1999 193 1932963Additional paid-in capital 61,182 61,5312964Treasury shares - at cost; 5,179 shares in 20002965and 4,838 shares in 1999 (23,279) (22,221)2966Retained earnings (deficit) (1,259) 14,4012967Accumulated other comprehensive income (loss) 100 (320)2968- ---------------------------------------------------------------------------------------------2969Total stockholders' equity 36,937 53,58429702971Commitments (notes 9 and 10)2972- ---------------------------------------------------------------------------------------------29732974$ 56,344 $ 65,3372975=============================================================================================29762977</FONT></PRE>297829792980<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2981<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial2982statements. </FONT></P>298329842985<!-- MARKER FORMAT-SHEET="Para Center" -->2986<P ALIGN="CENTER">F-3</P>298729882989<!-- *************************************************************************** -->2990<!-- MARKER LABEL="sheet: 35, F-page: 3" -->2991299229932994<!-- MARKER FORMAT-SHEET="Para Center" -->2995<P ALIGN="CENTER"><B>CNS, INC.</B> <BR>Consolidated Statements of Stockholders' Equity and2996Comprehensive Income (Loss) <BR>Years ended December 31, 2000, 1999 and 1998 <BR>(in thousands)</P>299729982999<PRE><FONT SIZE="1">30003001Common stock Treasury shares3002--------------------- Additional -------------------------3003Number Par paid-in Number3004of shares value capital of shares Cost3005- ----------------------------------------------------------------------------------------------------------------------30063007Balance at December 31, 1997 19,295 $ 193 $ 63,496 961 $ (8,220)30083009Stock issued in connection with3010Employee Stock Purchase Plan 0 0 (25) (5) 433011Stock options exercised 0 0 (1,538) (172) 1,7773012Treasury shares purchased 0 0 0 1,908 (8,270)3013Comprehensive income:3014Net income for the year 0 0 0 0 03015Unrealized gains on marketable securities3016net of income tax effect of $154 0 0 0 0 030173018Total comprehensive income3019- ----------------------------------------------------------------------------------------------------------------------30203021Balance at December 31, 1998 19,295 193 61,933 2,692 (14,670)30223023Stock issued in connection with3024Employee Stock Purchase Plan 0 0 (98) (18) 1513025Stock options exercised 0 0 (414) (108) 8603026Warrants issued 0 0 110 0 03027Treasury shares purchased 0 0 0 2,272 (8,562)3028Comprehensive loss:3029Net loss for the year 0 0 0 0 03030Unrealized losses on marketable securities3031net of income tax effect of $154 0 0 0 0 030323033Total comprehensive loss3034- ----------------------------------------------------------------------------------------------------------------------30353036Balance at December 31, 1999 19,295 193 61,531 4,838 (22,221)30373038Stock issued in connection with3039Employee Stock Purchase Plan 0 0 (131) (26) 2143040Stock options exercised 0 0 (218) (29) 2383041Treasury shares purchased 0 0 0 396 (1,510)3042Comprehensive loss:3043Net loss for the year 0 0 0 0 03044Unrealized gains on marketable securities3045net of income tax effect of $0 0 0 0 0 030463047Total comprehensive loss3048- ----------------------------------------------------------------------------------------------------------------------30493050Balance at December 31, 2000 19,295 $ 193 $ 61,182 5,179 $ (23,279)3051======================================================================================================================30523053<PAGE>305430553056[WIDE TABLE CONTINUED FROM ABOVE]305730583059Accumulated3060Retained other Total3061earnings comprehensive stockholders'3062(deficit) income (loss) equity3063- -------------------------------------------------------------------------------------------------------------30643065Balance at December 31, 1997 $ 25,175 $ 0 $ 80,64430663067Stock issued in connection with3068Employee Stock Purchase Plan 0 0 183069Stock options exercised 0 0 2393070Treasury shares purchased 0 0 (8,270)3071Comprehensive income:3072Net income for the year 2,982 0 2,9823073Unrealized gains on marketable securities3074net of income tax effect of $154 0 253 2533075---------------3076Total comprehensive income 3,2353077- -------------------------------------------------------------------------------------------------------------30783079Balance at December 31, 1998 28,157 253 75,86630803081Stock issued in connection with3082Employee Stock Purchase Plan 0 0 533083Stock options exercised 0 0 4463084Warrants issued 0 0 1103085Treasury shares purchased 0 0 (8,562)3086Comprehensive loss:3087Net loss for the year (13,756) 0 (13,756)3088Unrealized losses on marketable securities3089net of income tax effect of $154 0 (573) (573)3090---------------3091Total comprehensive loss (14,329)3092- -------------------------------------------------------------------------------------------------------------30933094Balance at December 31, 1999 14,401 (320) 53,58430953096Stock issued in connection with3097Employee Stock Purchase Plan 0 0 833098Stock options exercised 0 0 203099Treasury shares purchased 0 0 (1,510)3100Comprehensive loss:3101Net loss for the year (15,660) 0 (15,660)3102Unrealized gains on marketable securities3103net of income tax effect of $0 0 420 4203104---------------3105Total comprehensive loss (15,240)3106- -------------------------------------------------------------------------------------------------------------31073108Balance at December 31, 2000 $ (1,259) $ 100 $ 36,9373109=============================================================================================================311031113112</FONT></PRE>311331143115<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3116<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial3117statements. </FONT></P>311831193120312131223123<!-- MARKER FORMAT-SHEET="Para Center" -->3124<P ALIGN="CENTER">F-4</P>312531263127<!-- *************************************************************************** -->3128<!-- MARKER LABEL="sheet: 36, F-page: 4" -->312931303131<!-- MARKER FORMAT-SHEET="Para Center" -->3132<P ALIGN="CENTER"><B>CNS, INC.</B> <BR>Consolidated Statements of Cash Flows<BR> Years ended December313331, 2000, 1999 and 1998 <BR>(in thousands)</P>313431353136<PRE><FONT SIZE="-2">31372000 1999 19983138- ---------------------------------------------------------------------------------------------------------------------------31393140Operating activities:3141Net income (loss) $ (15,660) $ (13,756) $ 2,9823142Adjustments to reconcile net income (loss) to net cash3143provided by (used in) operating activities:3144Depreciation and amortization 1,051 1,029 8553145Net loss on disposal of property and equipment 81 0 03146Warrants issued 0 110 03147Deferred income taxes 0 1,486 2843148Changes in operating assets and liabilities:3149Accounts receivable (1,212) (3,579) 3,6013150Inventories 153 3,918 (199)3151Prepaid expenses and other current assets 3,546 (4,009) 5003152Accounts payable and accrued expenses 7,654 2,655 1,2473153- ---------------------------------------------------------------------------------------------------------------------------31543155Net cash provided by (used in) operating activities (4,387) (12,146) 9,2703156- ---------------------------------------------------------------------------------------------------------------------------31573158Investing activities:3159Purchases of marketable securities (63,151) (97,157) (43,429)3160Sales and maturities of marketable securities 72,324 118,230 43,4973161Payments for purchases of property and equipment (2,019) (330) (1,101)3162Payments for product rights (141) (259) (229)3163Redemption of certificate of deposit, restricted 0 0 3603164- ---------------------------------------------------------------------------------------------------------------------------31653166Net cash provided by (used in) investing activities 7,013 20,484 (902)3167- ---------------------------------------------------------------------------------------------------------------------------31683169Financing activities:3170Proceeds from the issuance of common stock3171under Employee Stock Purchase Plan 83 53 183172Proceeds from the exercise of stock options 20 446 2393173Purchase of treasury shares (1,510) (8,562) (8,270)3174- ---------------------------------------------------------------------------------------------------------------------------31753176Net cash used in financing activities (1,407) (8,063) (8,013)3177- ---------------------------------------------------------------------------------------------------------------------------31783179Net increase in cash and cash equivalents 1,219 275 35531803181Cash and cash equivalents:3182Beginning of year 860 585 2303183- ---------------------------------------------------------------------------------------------------------------------------31843185End of year $ 2,079 $ 860 $ 5853186===========================================================================================================================31873188Supplemental disclosure of cash flow information:31893190Cash paid during the year for interest $ 0 $ 0 $ 03191Cash paid during the year for income taxes 0 344 7003192===========================================================================================================================31933194</FONT></PRE>31953196<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3197<P><FONT SIZE=3>The accompanying notes are an integral part of the consolidated financial3198statements. </FONT></P>31993200320132023203<!-- MARKER FORMAT-SHEET="Para Center" -->3204<P ALIGN="CENTER">F-5</P>32053206<!-- *************************************************************************** -->3207<!-- MARKER LABEL="sheet: 37, F-page: 5" -->3208320932103211<!-- MARKER FORMAT-SHEET="Para Center" -->3212<P ALIGN="CENTER"><B>CNS, INC.</B><BR> Notes to Consolidated Financial Statements <BR>December 31, 2000,32131999 and 1998</P>32143215<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3216<P><FONT SIZE=3><B>(1) Summary of Significant Accounting Policies</B> </FONT></P>32173218<!-- MARKER FORMAT-SHEET="Para Flush In 1" -->3219<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3220<TR VALIGN=TOP>3221<TD WIDTH=5%> </TD>3222<TD WIDTH=95%>3223<FONT SIZE="3"><B>Principles3224of Consolidation</B> The accompanying consolidated financial statements include the accounts3225of CNS, Inc. and its subsidiaries (“the Company”). All material intercompany3226accounts and transactions have been eliminated in consolidation.</FONT></TD>3227</TR>3228</TABLE>3229<BR>32303231<!-- MARKER FORMAT-SHEET="Para Flush In 1" -->3232<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3233<TR VALIGN=TOP>3234<TD WIDTH=5%> </TD>3235<TD WIDTH=95%>3236<FONT SIZE="3"><B>Business</B> 3237The Company designs, manufactures and markets consumer products, including Breathe Right®nasal3238strips and FiberChoice®tablets. The Company’s products are sold over-the-counter3239in retail outlets, including mass merchant, drug, grocery and club stores. The Company3240primarily uses international distributors to market Breathe Right nasal strips outside3241the U.S.</FONT></TD>3242</TR>3243</TABLE>3244<BR>32453246<!-- MARKER FORMAT-SHEET="Para Flush In 1" -->3247<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3248<TR VALIGN=TOP>3249<TD WIDTH=5%> </TD>3250<TD WIDTH=95%>3251<FONT SIZE="3"><B>Revenue3252Recognition</B> Revenue from sales is recognized at the time products are shipped.</FONT></TD>3253</TR>3254</TABLE>3255<BR>32563257<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3258<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3259<TR VALIGN=TOP>3260<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3261<TD WIDTH=95%><FONT SIZE="3"><B>Accounting Estimates</B> 3262The preparation of financial statements in conformity with accounting principles3263generally accepted in the United States of America requires management to make estimates3264and assumptions that affect the reported amounts of assets and liabilities and disclosure3265of contingent assets and liabilities at the date of the financial statements and the3266reported amounts of revenues and expenses during the reporting period. Actual results3267could differ from those estimates.</FONT></TD>3268</TR>3269</TABLE>3270<BR>32713272<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3273<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3274<TR VALIGN=TOP>3275<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3276<TD WIDTH=95%><FONT SIZE="3"><B>Fair Value3277of Financial Instruments</B> All financial instruments are carried at amounts that3278approximate fair value.</FONT></TD>3279</TR>3280</TABLE>3281<BR>32823283<!-- MARKER FORMAT-SHEET="Para In 0" -->3284<P> <B>Cash Equivalents </B> Cash3285equivalents consist primarily of money market funds.</P>32863287<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3288<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3289<TR VALIGN=TOP>3290<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3291<TD WIDTH=95%><FONT SIZE=3><B>Marketable Securities </B> The Company classifies its marketable debt securities as3292available-for-sale and records these securities at fair market value. Net3293realized and unrealized gains and losses are determined on the specific3294identification cost basis. Any unrealized gains and losses are reflected as a3295separate component of stockholders’ equity. A decline in the market value3296of any available-for-sale security below cost that is deemed other than3297temporary, results in a charge to operations resulting in the establishment of a3298new cost basis for the security.</FONT></TD>3299</TR>3300</TABLE>3301<BR>33023303<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3304<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3305<TR VALIGN=TOP>3306<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3307<TD WIDTH=95%><FONT SIZE=3><B>Inventories</B> Inventories are valued at the lower of cost (determined on a first-in,3308first-out basis) or market.</FONT></TD>3309</TR>3310</TABLE>3311<BR>33123313<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3314<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3315<TR VALIGN=TOP>3316<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3317<TD WIDTH=95%><FONT SIZE=3><B>Property and Equipment </B> Property and equipment are stated at cost. Equipment is3318depreciated using the straight-line method over five years. Leasehold3319improvements are amortized over the lesser of the estimated useful life of the3320improvement or the term of the lease.</FONT></TD>3321</TR>3322</TABLE>3323<BR>33243325<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3326<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3327<TR VALIGN=TOP>3328<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3329<TD WIDTH=95%><FONT SIZE=3><B>Product Rights</B> Product rights, consisting of patents, trademarks and other product3330rights, are stated at cost and are amortized over three to seven years using the3331straight-line method.</FONT></TD>3332</TR>3333</TABLE>3334<BR>33353336<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3337<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3338<TR VALIGN=TOP>3339<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3340<TD WIDTH=95%><FONT SIZE=3><B>Stock Based Compensation </B> The Company follows the disclosure requirements for3341employee stock based compensation plans and, accordingly, no compensation3342expense has been recognized.</FONT></TD>3343</TR>3344</TABLE>3345<BR>33463347<!-- MARKER FORMAT-SHEET="Para Flush In 1" -->3348<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3349<TR VALIGN=TOP>3350<TD WIDTH=5%> </TD>3351<TD WIDTH=95%>3352<FONT SIZE="3"><B>Foreign3353Sales</B> Foreign sales are made primarily in U.S. dollars.</FONT></TD>3354</TR>3355</TABLE>3356<BR>3357335833593360<!-- MARKER FORMAT-SHEET="Para Center" -->3361<P ALIGN="CENTER">F-6</P>336233633364<!-- *************************************************************************** -->3365<!-- MARKER LABEL="sheet: 38, F-page: 6" -->336633673368<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3369<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3370<TR VALIGN=TOP>3371<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3372<TD WIDTH=95%><FONT SIZE=3><B>Advertising </B> The Company capitalizes the production costs of advertising and expenses3373these costs the first time the advertising runs.</FONT></TD>3374</TR>3375</TABLE>3376<BR>33773378<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3379<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3380<TR VALIGN=TOP>3381<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3382<TD WIDTH=95%><FONT SIZE=3><B>Income Taxes</B> Deferred tax assets and liabilities and the resultant provision for3383income taxes are determined based on the difference between the financial3384statement and tax bases of assets and liabilities using enacted tax rates in3385effect for the year in which the differences are expected to reverse.</FONT></TD>3386</TR>3387</TABLE>3388<BR>33893390<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3391<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3392<TR VALIGN=TOP>3393<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3394<TD WIDTH=95%><FONT SIZE=3><B>Net Income Per Share </B> Basic net income (loss) per share and diluted net income3395(loss) per share have been computed based upon the weighted average number of3396common shares outstanding during the year. Assumed conversion shares were3397excluded from the net loss per share computation as their effect is3398antidilutive. Common stock options could potentially dilute basic earnings per3399share in future periods if the Company generates net income. Diluted net income3400per share has been computed based upon the weighted average number of common and3401assumed conversion shares outstanding during the year.</FONT></TD>3402</TR>3403</TABLE>3404<BR>34053406<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3407<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3408<TR VALIGN=TOP>3409<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3410<TD WIDTH=95%><FONT SIZE=3><B>Comprehensive Income (Loss)</B> Comprehensive income (loss) consists of the Company’s net3411income (loss) and unrealized gains (losses) on marketable securities and is3412presented in the consolidated statements of stockholders’ equity and3413comprehensive income (loss).</FONT></TD>3414</TR>3415</TABLE>3416<BR>34173418<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3419<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3420<TR VALIGN=TOP>3421<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3422<TD WIDTH=95%><FONT SIZE=3><B>New Accounting Standards </B> In 1998, the Financial Accounting Standards Board3423issued Statement of Financial Accounting Standards (“SFAS”) No. 133,3424Accounting for Derivative Instruments and Hedging Activities (as amended by SFAS3425No. 137 with respect to the effective date and SFAS No. 138 with respect to3426certain interpretations). SFAS No. 133 establishes new standards for recognizing3427all derivatives as either assets or liabilities, and measuring those instruments3428at fair value. The Company adopted the new standard on January 1, 2001. Adoption3429of this standard had no impact of the Company’s financial position or3430results of operations.</FONT></TD>3431</TR>3432</TABLE>3433<BR>34343435<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3436<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3437<TR VALIGN=TOP>3438<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3439<TD WIDTH=95%><FONT SIZE=3>In December 1999, the Securities and Exchange Commission (“SEC”) staff3440issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial3441Statements” (“SAB 101”). SAB 101 summarizes certain SEC staff3442views in applying accounting principals generally accepted in the United States3443of America to revenue recognition in financials. SAB 101 was adopted by the3444Company in the fourth quarter of 2000 and had no impact on the results of3445operations.</FONT></TD>3446</TR>3447</TABLE>3448<BR>34493450<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3451<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3452<TR VALIGN=TOP>3453<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3454<TD WIDTH=95%><FONT SIZE=3>In 2000, the Emerging Issues Task Force (“EITF”) reached a consensus on3455Issue No. 00-14, “Accounting for Certain Sales Incentives”. This EITF3456requires companies to present in their statements of operations, certain sales3457incentives as sales allowances, resulting in a reduction of net sales. The3458Company currently records sales incentives covered by this EITF as operating3459expenses. The Company will be required to adopt this EITF beginning with the3460quarter ending June 30. 2001. If the Company would have applied the presentation3461set forth in this issue in 2000, 1999 and 1998, net sales would have been3462reduced by $1,527,000, $3,126,000 and $1,263,000, respectively. Operating3463expenses would have also been reduced by the same amounts in the corresponding3464years. This issue does not impact operating income (loss) for any of these3465years.</FONT></TD>3466</TR>3467</TABLE>3468<BR>346934703471<!-- MARKER FORMAT-SHEET="Para Center" -->3472<P ALIGN="CENTER">F-7</P>347334743475<!-- *************************************************************************** -->3476<!-- MARKER LABEL="sheet: 39, F-page: 7" -->3477347834793480<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3481<P><FONT SIZE=3><B>(2) Marketable Securities </B> </FONT></P>34823483<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3484<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3485<TR VALIGN=TOP>3486<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3487<TD WIDTH=95%><FONT SIZE=3>Marketable securities, including estimated fair value based on quoted market prices or3488valuation models, are summarized as follows (in thousands):</FONT></TD>3489</TR>3490</TABLE>3491<BR>3492<PRE><FONT SIZE="1">3493December 313494-------------------------------------34952000 19993496------------------- ----------------3497Cost Fair Value Cost Fair Value3498- ----------------------------------------------------------------------------34993500Cash equivalents $ 2,166 $ 2,166 $ 659 $ 6593501Certificates of deposit 0 0 5,500 5,4933502Corporate bonds 24,308 24,413 24,088 23,8793503U.S. Government obligations 2,670 2,665 8,070 7,9673504- ---------------------------------------------------------------------------35053506Total marketable securities $29,144 $29,244 $38,317 $37,9983507==========================================================================3508</FONT></PRE>350935103511<!-- MARKER FORMAT-SHEET="Para In 0" -->3512<P> Maturities of marketable3513securities at December 31, 2000 are as follows (in thousands):</P>3514351535163517<PRE><FONT SIZE="1"> Cost Fair Value3518- ----------------------------------------------------------------35193520Due within one year $ 15,750 $ 15,7333521Due after one year through three years 13,394 13,5113522- ----------------------------------------------------------------35233524Total marketable securities $ 29,144 $ 29,2443525================================================================35263527</FONT></PRE>35283529<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3530<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3531<TR VALIGN=TOP>3532<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3533<TD WIDTH=95%><FONT SIZE=3>There were realized losses of $51,000 during 2000, realized gains of $243,000 during35341999 and no realized gains or losses in 1998.</FONT></TD>3535</TR>3536</TABLE>3537<BR>35383539<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3540<P><FONT SIZE=3><B>(3) Advertising</B> </FONT></P>35413542<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3543<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3544<TR VALIGN=TOP>3545<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3546<TD WIDTH=95%><FONT SIZE=3>At December 31, 2000 and 1999, $1,924,000 and $1,762,000, respectively, of3547advertising costs were reported as assets. Advertising expense was $36,221,0003548in 2000, $18,024,000 in 1999, and $15,431,000 in 1998.</FONT></TD>3549</TR>3550</TABLE>3551<BR>35523553<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3554<P><FONT SIZE=3><B>(4) Details of Selected Balance Sheet Accounts</B> </FONT></P>35553556<!-- MARKER FORMAT-SHEET="Para In 0" -->3557<P> Details of selected balance sheet3558accounts are as follows (in thousands):</P>355935603561<PRE><FONT SIZE="1"> 2000 1999 19983562- -----------------------------------------------------------------------35633564Allowance for doubtful accounts:3565Balance beginning of year $ 280 $ 210 $ 2103566Plus provision for doubtful accounts 26 96 433567Less charge offs 6 26 433568- -----------------------------------------------------------------------35693570Balance end of year $ 300 $ 280 $ 2103571=======================================================================357235733574December 313575-------------------35762000 19993577- ---------------------------------------------------------------------------------35783579Inventories:3580Finished goods $ 2,139 $ 2,9353581Raw materials and component parts 2,613 1,9703582- ---------------------------------------------------------------------------------35833584Total inventories $ 4,752 $ 4,9053585=================================================================================35863587Property and equipment:3588Production equipment $ 556 $ 4083589Office equipment and information systems 3,623 3,3303590Leasehold improvements 1,022 03591- ---------------------------------------------------------------------------------35925,201 3,7383593Less accumulated depreciation 2,000 1,7283594- ---------------------------------------------------------------------------------35953596Property and equipment, net $ 3,201 $ 2,0103597=================================================================================35983599Product rights:3600Product rights $ 2,548 $ 2,4073601Less accumulated amortization 1,319 1,0163602- ---------------------------------------------------------------------------------36033604Product rights, net $ 1,229 $ 1,3913605=================================================================================36063607Accrued expenses:3608Promotions and allowances $ 3,085 $ 3,1063609Royalties and commissions 954 6783610Salaries, incentives and paid time off 2,000 9913611Packaging transition 0 1,4263612Other 212 1303613- ---------------------------------------------------------------------------------3614Total accrued expenses $ 6,251 $ 6,3313615=================================================================================36163617</FONT></PRE>361836193620<!-- MARKER FORMAT-SHEET="Para Center" -->3621<P ALIGN="CENTER">F-8</P>36223623<!-- *************************************************************************** -->3624<!-- MARKER LABEL="sheet: 40, F-page: 8" -->362536263627<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3628<A NAME="A083"></A>3629<P><FONT SIZE=3><B>(5) Stockholders’Equity</B> </FONT></P>36303631<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3632<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3633<TR VALIGN=TOP>3634<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3635<TD WIDTH=95%><FONT SIZE=3><B>Stock Options </B>The Company’s stock option plans allow for the grant of options3636to officers, directors, and employees to purchase up to 3,650,000 shares of3637common stock at exercise prices not less than 100% of fair market value on the3638dates of grant. The term of the options may not exceed ten years and options3639vest in increments over 1 to 5 years from the grant date. The plans allow for3640the grant of shares of restricted common stock. No shares of restricted common3641stock have been granted under these plans as of December 31, 2000.</FONT></TD>3642</TR>3643</TABLE>3644<BR>36453646<!-- MARKER FORMAT-SHEET="Para In 0" -->3647<P> Stock option activity under these3648plans is summarized as follows:</P>36493650<PRE><FONT SIZE="1"> Weighted-average Shares3651Exercise Price Shares Available3652Per Share Outstanding For Grant3653- ------------------------------------------------------------------------36543655Balance at December 31, 1997 $ 5.29 1,357,300 765,3503656Granted 4.92 634,700 (634,700)3657Exercised 1.39 (171,500) 03658Canceled 10.71 (240,000) 240,0003659- ------------------------------------------------------------------------36603661Balance at December 31, 1998 4.74 1,580,500 370,6503662Granted 3.05 353,000 (353,000)3663Exercised 4.16 (115,010) 03664Canceled 4.00 (47,100) 47,1003665- ------------------------------------------------------------------------36663667Balance at December 31, 1999 4.47 1,771,390 64,7503668New 2000 Plan 700,0003669Granted 4.01 358,400 (358,400)3670Exercised 4.18 (69,690) 03671Canceled 5.18 (168,100) 168,1003672- ------------------------------------------------------------------------36733674Balance at December 31, 2000 $ 4.33 1,892,000 574,4503675========================================================================3676</FONT></PRE>36773678<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3679<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3680<TR VALIGN=TOP>3681<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3682<TD WIDTH=95%><FONT SIZE=3>Information on outstanding and currently exercisable options by price range as of December368331, 2000, is summarized as follows:</FONT></TD>3684</TR>3685</TABLE>3686<BR>368736883689<PRE><FONT SIZE="1">3690Weighted-average Weighted-average Exercisable Weighted-average3691Price Range Total Number Remaining Life Exercise Number of Exercise3692Per Share of Shares (Years) Price Shares Price3693- -----------------------------------------------------------------------------------------------3694$ 2.13 - 2.81 257,900 7.9 $ 2.78 100,700 $ 2.7336953.10 - 4.00 722,800 6.5 3.56 390,400 3.2336964.13 - 5.00 328,600 7.7 4.65 199,932 4.7436975.44 - 5.94 482,700 5.1 5.49 418,700 5.4936987.25 100,000 6.6 7.25 97,500 7.253699--------- ---------37001,892,000 1,207,2323701========= =========3702</FONT></PRE>3703<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3704<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3705<TR VALIGN=TOP>3706<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3707<TD WIDTH=95%><FONT SIZE=3>At December 31, 2000, the weighted-average remaining contractual life of3708outstanding options was 6.6 years. At December 31, 2000, 1999 and 1998,3709currently exercisable options aggregated 1,207,232, 1,091,156 and 1,051,8003710shares of common stock, respectively and the weighted-average exercise price of3711those options was $4.55, $4.73 and $4.62, respectively.</FONT></TD>3712</TR>3713</TABLE>3714<BR>37153716<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3717<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3718<TR VALIGN=TOP>3719<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3720<TD WIDTH=95%><FONT SIZE=3>The per share weighted-average fair value of stock options granted during 2000, 19993721and 1998 is estimated as $2.60, $1.98 and $3.20, respectively on the date of3722grant using the Black-Scholes option pricing model with the following3723assumptions: volatility of 65%; risk-free interest rate of 6.50% in 2000, 6.00%3724in 1999 and 6.25% in 1998; and an expected life of 6 years.</FONT></TD>3725</TR>3726</TABLE>3727<BR>37283729<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3730<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3731<TR VALIGN=TOP>3732<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3733<TD WIDTH=95%><FONT SIZE=3>The3734Company applies APB No. 25, Accounting for Stock Issued to Employees, and3735related interpretations in accounting for its stock compensation plans.3736Accordingly, no compensation expense has been recognized for its stock-based3737compensation plans. Had the Company determined compensation cost based on the3738fair value at the grant date for its stock options under SFAS No. 123,3739Accounting for Stock-Based Compensation, the Company’s net income and3740diluted earnings per share would have been reduced by approximately $900,000, or3741$.06 per share in 2000, $950,000, or $.06 per share in 1999 and $1,300,000, or3742$.07 per share in 1998.</FONT></TD>3743</TR>3744</TABLE>3745<BR>37463747<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3748<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3749<TR VALIGN=TOP>3750<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3751<TD WIDTH=95%><FONT SIZE=3>Pro3752forma net income reflects only options granted since 1995. Therefore, the full3753impact of calculating compensation cost for stock options under SFAS No. 123 is3754not reflected in the pro forma net income amounts presented because compensation3755cost is reflected over the options’ vesting period and compensation cost3756for options granted prior to January 1, 1995 is not considered.</FONT></TD>3757</TR>3758</TABLE>3759<BR>37603761<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3762<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3763<TR VALIGN=TOP>3764<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3765<TD WIDTH=95%><FONT SIZE=3><B>Employee3766Stock Purchase Plan </B>The Employee Stock Purchase Plan allows eligible3767employees to purchase shares of the Company’s common stock through payroll3768deductions. The purchase price is the lower of 85% of the fair market value of3769the stock on the first or last day of each six-month period during which an3770employee participated in the plan. The Company has reserved 200,000 shares under3771the plan of which employees as of December 31, 2000 have purchased 188,5073772shares.</FONT></TD>3773</TR>3774</TABLE>3775<BR>37763777<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3778<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3779<TR VALIGN=TOP>3780<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3781<TD WIDTH=95%><FONT SIZE=3><B>Warrants3782</B>In connection with agreements to license certain intellectual property3783rights to potential products, licensers were issued warrants. During 1999,3784warrants were issued to purchase 50,000 shares of the Company’s common3785stock exercisable at a price of $3.44 per share exercisable evenly over three3786years and for a period of 10 years. The issuance of the warrants resulted in an3787expense of $110,000. Warrants were issued during 1997 to purchase 25,000 shares3788at a price of $8.00 per share exercisable in 2000 and for a period of five3789years. Of these warrants, 31,667 hares are currently exercisable.</FONT></TD>3790</TR>3791</TABLE>3792<BR>3793379437953796<!-- MARKER FORMAT-SHEET="Para Center" -->3797<P ALIGN="CENTER">F-9</P>379837993800<!-- *************************************************************************** -->3801<!-- MARKER LABEL="sheet: 41, F-page: 9" -->380238033804<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3805<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3806<TR VALIGN=TOP>3807<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3808<TD WIDTH=95%><FONT SIZE=3><B>Preferred3809Stock </B>At December 31, 2000, the Company is authorized to issue 1,000,0003810shares of Series A Junior Participating Preferred Stock upon a triggering event3811under the Company’s stockholders’ rights plan and is authorized to3812issue up to an additional 7,483,589 shares of undesignated preferred stock.</FONT></TD>3813</TR>3814</TABLE>3815<BR>38163817<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3818<P><FONT SIZE=3><B>(6) Income Taxes</B> </FONT></P>38193820<!-- MARKER FORMAT-SHEET="Para In 0" -->3821<P> Income tax expense (benefit)3822for the three years ended December 31, 2000, is as follows (in thousands):</P>382338243825<PRE><FONT SIZE="1"> Current Deferred Total3826- ------------------------------------------------------------------------------38272000:3828Federal $ 0 $ 0 $ 03829State 0 0 03830- ------------------------------------------------------------------------------38313832Income tax expense (benefit) $ 0 $ 0 $ 03833==============================================================================383438351999:3836Federal $(3,917) $ 1,816 $(2,101)3837State 0 0 03838- ------------------------------------------------------------------------------38393840Income tax expense (benefit) $(3,917) $ 1,816 $(2,101)3841==============================================================================384238431998:3844Federal $ 128 $ 184 $ 3123845State 98 100 1983846- ------------------------------------------------------------------------------38473848Income tax expense $ 226 $ 284 $ 5103849==============================================================================3850</FONT></PRE>3851<BR><BR><BR>38523853<!-- MARKER FORMAT-SHEET="Para Center" -->3854<P ALIGN="CENTER">F-10</P>385538563857<!-- *************************************************************************** -->3858<!-- MARKER LABEL="sheet: 42, F-page: 10" -->385938603861<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3862<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3863<TR VALIGN=TOP>3864<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3865<TD WIDTH=95%><FONT SIZE=3>Income3866tax expense (benefit) differed from the amounts computed by applying the U.S.3867federal income tax rate of 35% as a result of the following (in thousands):</FONT></TD>3868</TR>3869</TABLE>3870<BR>38713872<PRE><FONT SIZE="1">38732000 1999 19983874- -----------------------------------------------------------------------------38753876Computed tax expense (benefit) $(5,481) $(5,550) $1,2223877State taxes, net of federal benefit (554) (431) 643878Tax exempt interest 0 (178) (789)3879Change in deferred tax valuation allowance 6,018 3,932 03880Other 17 126 133881- -----------------------------------------------------------------------------38823883Actual tax expense (benefit) $ 0 $(2,101) $ 5103884=============================================================================3885</FONT></PRE>38863887<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3888<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3889<TR VALIGN=TOP>3890<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3891<TD WIDTH=95%><FONT SIZE=3>The3892tax effects of temporary differences that give rise to significant portions of3893the deferred tax assets and deferred tax liabilities for 2000 and 1999 are3894presented below (in thousands):</FONT></TD>3895</TR>3896</TABLE>3897<BR>3898389939003901<PRE><FONT SIZE="1"> December 313902---------------------------39032000 19993904- ----------------------------------------------------------------------------------39053906Deferred tax assets:3907Inventory items $ 795 $ 6773908Accounts receivable allowance 111 1043909Product rights 246 1813910Accrued expenses 1,580 1,8353911Net operating loss and credit carryforwards 7,445 1.1243912Unrealized loss on marketable securities 0 1223913- ----------------------------------------------------------------------------------391410,177 4,0433915Less valuation allowance 9,950 3,9323916- ----------------------------------------------------------------------------------3917227 1113918- ----------------------------------------------------------------------------------39193920Deferred tax liabilities:3921Unrealized gains on marketable securities (35) 03922Property and equipment (192) (111)3923- ----------------------------------------------------------------------------------3924(227) (111)3925- ----------------------------------------------------------------------------------39263927Net deferred tax assets $ 0 $ 03928==================================================================================3929</FONT></PRE>39303931<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3932<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3933<TR VALIGN=TOP>3934<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3935<TD WIDTH=95%><FONT SIZE=3>In3936assessing the realization of deferred tax assets, management considers whether3937it is more likely than not that some portion or all of the deferred tax assets3938will not be realized. The ultimate realization of deferred tax assets is3939dependent upon the generation of future taxable income during the periods in3940which those temporary differences become deductible. Based on the level on3941historical taxable income and projections of future taxable income over the3942periods in which the deferred tax assets are deductible, management does not3943believe that it is more likely than not the Company will realize the benefits of3944these deductible differences. Accordingly, the Company has provided a valuation3945allowance against the net deferred assets as of December 31, 2000.</FONT></TD>3946</TR>3947</TABLE>3948<BR>39493950<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3951<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3952<TR VALIGN=TOP>3953<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3954<TD WIDTH=95%><FONT SIZE=3>As3955of December 31, 2000, the Company has reported federal net operating loss3956carryforwards of approximately $17,700,000. The federal net operating loss3957carryforwards expire in 2019 and 2020. The Company also has approximately3958$327,000 of credits for alternative minimum tax that have no expiration date.</FONT></TD>3959</TR>3960</TABLE>3961<BR>39623963<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->3964<P><FONT SIZE=3><B>(7) Sales</B> </FONT></P>39653966<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->3967<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3968<TR VALIGN=TOP>3969<TD WIDTH=5%><FONT SIZE=3></FONT></TD>3970<TD WIDTH=95%><FONT SIZE=3>The3971Company had one significant customer who accounted for approximately 19%, 24%3972and 20% of net sales in 2000, 1999 and 1998, respectively. Accounts receivable3973from this customer as of December 31, 2000 and 1999 were $2,274,000 and3974$4,330,000, respectively. Net sales by geographic area are as follows (in3975thousands):</FONT></TD>3976</TR>3977</TABLE>3978<BR>397939803981<PRE><FONT SIZE="1">39822000 1999 19983983- ------------------------------------------------------------------------39843985Domestic $ 62,735 $ 45,062 $ 51,8553986International 6,157 988 1,7683987- ------------------------------------------------------------------------39883989Net sales $ 68,892 $ 46,050 $ 53,6233990========================================================================3991</FONT></PRE>39923993<!-- MARKER FORMAT-SHEET="Para Center" -->3994<P ALIGN="CENTER">F-11</P>399539963997<!-- *************************************************************************** -->3998<!-- MARKER LABEL="sheet: 42A, F-page: 11" -->39994000<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->4001<P><FONT SIZE=3><B>(8) Contract Termination Fee</B> </FONT></P>40024003<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->4004<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4005<TR VALIGN=TOP>4006<TD WIDTH=5%><FONT SIZE=3></FONT></TD>4007<TD WIDTH=95%><FONT SIZE=3>On4008September 30, 1999, the Company and the 3M Company (“3M”) amended an4009exclusive international distribution agreement in a manner that allowed the4010Company to regain control of the marketing, sales and distribution of Breathe4011Right nasal strips in international markets. In exchange for a one-time contract4012termination fee of $6,345,000 paid in 1999, the international distribution4013agreement with 3M terminated on June 30, 2000.</FONT></TD>4014</TR>4015</TABLE>4016<BR>40174018<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->4019<P><FONT SIZE=3><B>(9) License Agreements</B> </FONT></P>40204021<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->4022<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4023<TR VALIGN=TOP>4024<TD WIDTH=5%><FONT SIZE=3></FONT></TD>4025<TD WIDTH=95%><FONT SIZE=3>The4026Company has agreements to exclusively license intellectual property rights to4027certain products. Royalties due under these agreements are based on various4028percentages of net sales. To maintain the Company’s licenses, it must make4029minimum royalty payments of $1,330,000 each year until patents for the products4030expire. Royalty expense was approximately $2,692,000 in 2000, $1,477,000 in 19994031and $1,509,000 in 1998.</FONT></TD>4032</TR>4033</TABLE>4034<BR>40354036<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->4037<P><FONT SIZE=3><B>(10) Operating Leases</B> </FONT></P>40384039<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->4040<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4041<TR VALIGN=TOP>4042<TD WIDTH=5%><FONT SIZE=3></FONT></TD>4043<TD WIDTH=95%><FONT SIZE=3>The4044Company leases equipment and office space under noncancelable operating leases4045that have initial or noncancelable lease terms in excess of one year. Future4046minimum lease payments due in accordance with these leases as of December 31,40472000 are as follows (in thousands):</FONT></TD>4048</TR>4049</TABLE>4050<BR>405140524053<PRE><FONT SIZE="1">4054Year ending December 31, Amount4055- ---------------------------------------------------------------405640572001 $ 71840582002 73240592003 74240602004 72740612005 7404062Later years 3,8594063- ---------------------------------------------------------------40644065Future minimum lease payments $ 7,5184066===============================================================4067</FONT></PRE>4068<!-- MARKER FORMAT-SHEET="Para In 0" -->4069<P> Total rental expense for4070operating leases was $559,000 in 2000, $555,000 in 1999, and $564,000 in 1998.</P>40714072<!-- MARKER FORMAT-SHEET="FLUSH-BOLD" -->4073<P><FONT SIZE=3><B>(11) Net Income (Loss) Per Share</B> </FONT></P>40744075<!-- MARKER FORMAT-SHEET="Para In 0" -->4076<P> A reconciliation of basic and4077diluted weighted average common shares outstanding is as follows (in thousands):</P>4078407940804081<PRE><FONT SIZE="1">40822000 1999 19984083- ----------------------------------------------------------------------------------------40844085Weighted average common shares outstanding 14,372 15,435 18,0794086Assumed conversion of stock options 0 0 1704087- ----------------------------------------------------------------------------------------4088Average common and assumed conversion shares 14,372 15,435 18,2494089========================================================================================4090</FONT></PRE>409140924093<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->4094<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>4095<TR VALIGN=TOP>4096<TD WIDTH=5%><FONT SIZE=3></FONT></TD>4097<TD WIDTH=95%><FONT SIZE=3>Options4098and warrants to purchase 1,967,000 shares of common stock with a range of4099exercise prices from $2.13 to $8.00 per share were outstanding during 2000 but4100were not included in the computation of 2000 diluted earnings per share because4101the effect would be anti-dilutive. The options expire from 2001 to 2010.</FONT></TD>4102</TR>4103</TABLE>4104<BR>41054106<!-- MARKER FORMAT-SHEET="Para Center" -->4107<P ALIGN="CENTER">F-12</P>41084109411041114112</BODY>4113</HTML>4114</TEXT>4115</DOCUMENT>4116<DOCUMENT>4117<TYPE>EX-104118<SEQUENCE>24119<FILENAME>cns010440_ex10-10.txt4120<DESCRIPTION>EXHIBIT 10.10 TRADEMARK LICENSE AGREEMENT4121<TEXT>4122412341244125CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH4126THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL4127TREATMENT UNDER RULE 24b-2.41284129EXHIBIT 10.104130413141324133413441354136TRADEMARK LICENSE AGREEMENT41374138BETWEEN41394140THE PROCTER & GAMBLE COMPANY41414142AND41434144CNS INC.414541464147414841494150<PAGE>415141524153TABLE OF CONTENTS415441554156PAGE4157----415841591. LICENSE....................................................................14160(a) Manufacturing.........................................................24161(b) Labeling and Packaging................................................24162(c) Sale..................................................................24163(d) Use of the Licensed Marks.............................................24164(e) Use of P&G's Name.....................................................2416541662. CNS' OBLIGATIONS...........................................................34167(a) Warranties...........................................................34168(b) Compliance with Laws.................................................34169(c) Import/Export........................................................34170(d) Samples..............................................................44171(e) Artwork..............................................................44172(f) Copy Review..........................................................54173(g) Product Preview Meetings.............................................54174(h) Improper Use.........................................................64175(i) Development of Product...............................................64176(j) Prohibition on Sales.................................................64177(k) Other Approvals......................................................7417841793. CNS' COVENANTS.............................................................74180(a) Authorization........................................................74181(b) Conflicts............................................................74182(c) Plant(s) Where Product is Manufactured...............................74183(d) Quality Control Sampling.............................................74184(e) Sub-Standard Product.................................................84185(f) Non-Competition......................................................8418641874. P&G'S RIGHTS & OBLIGATIONS.................................................94188(a) Ownership of Licensed Marks..........................................94189(b) Cooperation.........................................................104190(c) Actions.............................................................104191(d) P&G Materials.......................................................114192(e) Use of Names........................................................114193(f) Limitations.........................................................1241944195<PAGE>4196419741985. P&G'S COVENANTS...........................................................124199(a) Authorization.......................................................124200(b) Conflicts...........................................................124201(c) Enforceable License.................................................124202(d) Non-Competition.....................................................12420342046. INDEMNIFICATION AND INSURANCE.............................................134205(a) Indemnification of P&G..............................................134206(b) Insurance...........................................................144207(c) Indemnification of CNS..............................................154208(d) Promotions..........................................................15420942107. LICENSE FEES..............................................................154211(a) Calculation of Royalties............................................154212(b) Minimum Royalties...................................................164213(c) Reports.............................................................164214(d) Payment Terms.......................................................164215(e) Tax Withholding.....................................................16421642178. CNS' RECORDS..............................................................174218(a) Records.............................................................174219(b) Audit Right.........................................................174220(c) Corrections.........................................................18422142229. PROMOTION.................................................................184223422410. TERM AND TERMINATION.....................................................194225(a) Extension and Non-Renewal...........................................194226(b) Termination by P&G..................................................194227(c) Termination for CNS Bankruptcy......................................204228(d) Termination by CNS..................................................204229(e) Change of Control...................................................214230(f) Consequences of Expiration and Termination..........................214231423211. CONFIDENTIALITY..........................................................224233(a) P&G Trade Secrets...................................................224234(b) CNS Trade Secrets...................................................224235(c) Nondisclosure.......................................................234236(d) Press Releases......................................................234237423812. MARKING..................................................................234239424013. FORCE MAJEURE............................................................2442414242<PAGE>42434244424514. MISCELLANEOUS............................................................244246(a) First Line Goods....................................................244247(b) Use of Mark as Names................................................244248(c) Notice..............................................................254249(d) Relationship Between the Parties....................................254250(e) Entire Agreement....................................................264251(f) Interpretation......................................................264252(g) Waiver..............................................................264253(h) Dispute Resolution..................................................264254(i) Assignment..........................................................264255(j) Other Licenses......................................................2742564257<PAGE>425842594260TRADEMARK LICENSE AGREEMENT42614262THIS AGREEMENT (the "Agreement") is made effective as of the ______ day4263of _____________, 2000 by and between The Procter & Gamble Company, an Ohio4264Corporation with a place of business at One P&G Plaza, Cincinnati, Ohio 452024265and its affiliates and subsidiaries (collectively, "P&G"), and CNS Inc., a4266Delaware corporation with a place of business at 4400 West 78th Street,4267Minneapolis, MN 55435, ("CNS"). WHEREAS, P&G has the right to use and to license4268others to use the VICKS(R) trademark and the triangle design trademark which are4269well-known and famous marks owned and used by P&G in association with its4270advertising and marketing of cough and cold products; and WHEREAS, CNS4271recognizes the benefits to be derived from utilizing the VICKS(R) trademark and4272the triangle design trademark and desires to utilize said trademarks upon and in4273connection with the manufacture, sale, and distribution of Breathe Right(R)4274nasal strips; NOW, THEREFORE, the parties agree as follows:427542761. LICENSE.4277Subject to the terms of this Agreement, P&G hereby grants to CNS a4278non-transferable and exclusive license to use the Licensed Marks listed on4279Schedule 1 (the "Licensed Marks"), on the Product listed on Schedule 2 (the4280"Product"), in the countries listed in Schedule 3 (the "Area") and subject to4281the restrictions outlined in Schedule 4. Schedules 1, 2, 3, 4 and 5 may be4282amended at any time upon agreement by the parties in writing. Notwithstanding4283anything in Schedules 1, 2, 3 or 4 to the contrary, P&G has the right to not4284approve the launch of any Product in any country for the reasons pursuant to the4285process set forth in Section 3 hereto and, if P&G does not approve any launch,4286then CNS shall not launch such Product as set forth in Section 3 hereof. Unless4287otherwise agreed to in writing by the parties, CNS shall have the right to do4288the following:42894290<PAGE>429142924293(a) Manufacturing. To manufacture (or have manufactured by a contract4294manufacturer), in a manner and quality that is consistent with Product specimens4295approved by42964297429824299<PAGE>430043014302P&G prior to the date of this Agreement, the Product for distribution and sale4303under the grant given in 1(c).4304(b) Labeling and Packaging. To label and package Product manufactured4305under the grant given in Section 1(a), using labeling and packaging that is4306consistent in form and quality with labeling and packaging specimens approved by4307P&G prior to the date of this Agreement, for distribution and sale under the4308grant given in Section 1(c).4309(c) Sale. To distribute and sell the Product manufactured, labeled and4310packaged under the grants in Sections 1 (a) and (b) solely within the Area. CNS4311shall use commercially reasonable efforts to maximize sales of the Product in4312the Area, consistent with the terms and conditions of this Agreement. It is4313acknowledged that CNS will roll out the Product in phases over time.4314(d) Use of the Licensed Marks. To use the Licensed Marks in such form4315and manner as approved by P&G, which may include displaying the Licensed Marks4316on CNS vehicles, stationery, advertising and promotional materials used in4317connection with the sale of the Product, subject to compliance with all other4318provisions set forth herein.4319(e) Use of P&G Name. To use the words "The Vicks(R)trademark is used4320under license from The Procter & Gamble Company, Cincinnati, Ohio" or such other4321entity as P&G shall designate, or the equivalent of such language approved by4322P&G on labels or packaging for Product manufactured and packed under the grants4323in Sections 1 (a) and (b).432443252. CNS OBLIGATIONS.43264327(a) Warranties. CNS warrants that the Product shall be free of4328impurities or defects and will be produced, packaged and distributed in4329compliance with all applicable laws and regulations of the country or countries4330in which the Product is sold or distributed. CNS hereby agrees to use best4331efforts to ensure that each shipment or other delivery of the Product now or4332hereafter made by CNS shall, as of the date of such shipment or other delivery,4333conform to all the above requirements. CNS warrants that the manufacture, use,4334sale, offer for sale, or importation of the Product will not infringe the rights4335of third parties, including (without limitation) patent, trademark and4336copyrights. CNS expressly disclaims any implied warranties, including the4337implied warranties of merchantability and fitness for a particular purpose.43384339434034341<PAGE>434243434344(b) Compliance with Laws. CNS warrants that the Product will conform to4345all hazardous substance laws, consumer product safety laws, trade laws and any4346other applicable laws of the country or countries in which the Product is sold4347or distributed. CNS hereby agrees to use best efforts to ensure that each4348shipment or other delivery of the Product now or hereafter made by CNS shall, as4349of the date of such shipment or other delivery, conform to all the above4350requirements. CNS warrants that it will obtain all necessary health licenses or4351other regulatory approvals for the Product in each country or countries.4352(c) Import/Export. If the Product is to be imported into any region or4353country for sale, CNS agrees that CNS or a CNS distributor shall be the importer4354of record and shall pay all duties and information costs in connection with the4355importation of the Product into such region or country. CNS shall be liable for4356all customs duties accruing at the time of such importation or at any time4357thereafter and that P&G shall not appear as importer nor as the "account party"4358on any documents submitted for purposes of customs procedures. Neither CNS nor4359any agent of CNS shall submit any documents of any kind to any customs agency or4360authority that reflect that the Product in question are to be imported for the4361account of P&G without the prior written consent of P&G.4362(d) Samples. Prior to the first shipment by CNS or a contract4363manufacturer of the Product to a distributor, licensee or customer in each4364country in the Area, and at least once each calendar year thereafter during the4365Term, CNS shall provide to P&G the reasonable number of pre-production samples4366requested (only once prior to first shipment) and the reasonable number of4367production samples of such Product requested. Each of the foregoing items shall4368be sent to the person and location designated by P&G's Marketing Director, North4369America, Respiratory. P&G shall examine any such samples of the Product pursuant4370to the foregoing to determine the nature and quality of the Product. P&G4371designee shall review and respond in writing with regard to its approval (needed4372for initial samples only) or non-approval of such samples within ten (10) of4373P&G's business days after receipt of such samples from CNS. Neither CNS nor any4374contract manufacturer shall make any first shipment of Product to a distributor,4375licensee or customer in a region or a country in the Area unless and until CNS4376has received P&G's written approval of the production samples of the Product for4377such country. CNS shall immediately cease any and all43784379438044381<PAGE>438243834384shipments of Product by CNS or by a contract manufacturer to distributors,4385licensees and/or customers in any region or country if CNS receives P&G written4386disapproval of the provided production samples of such Product. In view of the4387substantial tooling and other costs which will be incurred by CNS prior to its4388delivery to P&G of the representative production samples, P&G agrees that it4389will not unreasonably withhold its approval of such samples. CNS shall not ship4390Product which has not been approved by P&G to trade customers.4391(e) Artwork. Prior to the first public release of any artwork or other4392materials which incorporate or otherwise include the Licensed Marks, or which4393otherwise relate to the Product, in any country in the Area, CNS shall provide4394to P&G the reasonable number of copies of the rough artwork requested and the4395reasonable number of copies of the final artwork for each such piece of material4396(together with English translations if needed) requested. Each of the foregoing4397items shall be sent to the person and location designated by P&G's Marketing4398Director, North America, Respiratory. P&G shall examine any such materials4399received from CNS pursuant to the foregoing. P&G's designee shall review and4400respond in writing with regard to its approval or non-approval of such materials4401within ten (10) of P&G's business days after receipt of such materials from CNS.4402Such approval will not be unreasonably withheld. CNS shall not make any first4403release of such material in a region or country in the Area unless and until CNS4404has received P&G's written approval of the final artwork for such material. If4405either party fails to respond in writing in ten (10) days in accordance with the4406above, such party will pay any late charges arising from the delay that may be4407incurred by the submitting party.4408(f) Copy Review. Both parties shall submit all printed materials,4409advertising and promotional copy (and English translations thereof) (including4410but not limited to audio and video materials) pertaining to Product and4411Promotion outlined in Section 9 to the other party for written approval prior to4412any release of such materials to the general public. Each of the foregoing items4413shall be sent to the person and location designated by each party. Each party's4414designee shall review and respond in writing with regard to its approval or4415non-approval of such materials within ten (10) business days after receipt of4416such materials from the other party. Approval of the submitted materials will4417not be unreasonably withheld. If either party fails to respond in44184419442054421<PAGE>442244234424writing in ten (10) days in accordance with the above, such party will pay any4425late charges arising from the delay that may be incurred by the submitting4426party.4427(g) Product Preview Meetings. In order to facilitate review and4428approval of samples, artwork and copy, CNS and P&G shall meet at least once per4429year to review plans for the next year. Such review shall include, but shall not4430be limited to, new registrations and/or changes to existing registrations, new4431product launches, product and packaging changes and planned copy that is related4432to the Product. CNS shall propose the timing for these meetings and shall4433coordinate them with P&G's Marketing Director, North America, Respiratory or4434his/her designee.4435(h) Improper Use. Notwithstanding anything herein to the contrary, if4436at any time CNS is using the Licensed Marks on the Product, or on labels or tags4437or in advertising in any country in the Area in a manner not consistent with4438this Agreement, or if the standard of quality of the Products in any country in4439the Area does not conform to the standards set by P&G or is not of a quality at4440least equal to similar "first line" products manufactured by CNS, then P&G may4441give CNS written notice to that effect, identifying in such notice the situation4442to which it objects. CNS shall have fifteen (15) days after receipt of any such4443notice to notify P&G of the means by which CNS intends to correct the situation4444to which P&G has objected, and, notwithstanding Sections 1 or 10 thereof, if CNS4445fails to complete such corrective action within a reasonable time, then P&G may4446by further written notice to CNS cancel this Agreement forthwith with respect to4447the country(ies) affected. If P&G so cancels, then CNS shall immediately4448discontinue use of the Licensed Marks in such country(ies) and shall not4449thereafter adopt any conflicting or confusingly similar mark or symbol for use4450on any goods. CNS shall bear all costs of any corrective action.4451(i) Development of Product. Subject to the right of approval by P&G4452under Paragraph 1(a) and the other rights to P&G under this Agreement, CNS shall4453have sole responsibility for research, development and design of the Product(s)4454sold under this Agreement.4455(j) Prohibition on Sales. The parties hereto shall cooperate to avoid4456and resolve conflicts. If P&G is prohibited from selling any goods under the4457Licensed Marks in any country because CNS is selling the Product, then P&G shall4458give CNS at least 180 days notice of P&G's44594460446164462<PAGE>446344644465desire to sell goods in such country. Upon receipt of such notice, CNS shall4466cease selling the Product in such country as soon as is reasonably commercially4467possible, but in no event later than 180 days from the date of such notice, and4468shall take all steps necessary to enable P&G to sell goods under the Licensed4469Marks in that country. Subject to the preceding, P&G shall use commercially4470reasonable efforts to cooperate with CNS in a phase out plan to sell out4471finished goods of the Product and any unique materials specifically identified4472to the manufacture of the Product for such country.4473(k) Other Approvals. In addition, CNS shall submit the Product to a4474testing laboratory identified by P&G for tests reasonably requested by P&G. P&G4475may withhold final approval of the Product pending P&G's reasonable satisfaction4476with said test results, such approval not to be unreasonably withheld. All costs4477of such testing will be borne by CNS.44783. CNS COVENANTS4479With regard to its actions hereunder, CNS expressly covenants as4480follows:4481(a) Authorization. CNS is a corporation duly organized, validly4482existing, and in good standing under the laws of the state of Delaware and is4483duly authorized to do business therein, with full corporate power to enter into4484this Agreement.4485(b) Conflicts. To the knowledge of CNS, the execution and delivery of4486this Agreement does not violate any law, rule or regulation or order, judgment,4487or decree within the Area binding on either party and will not result in a4488breach of any contract, agreement or other instrument to which either CNS is a4489party.4490(c) Plant(s) Where Product is Manufactured. CNS and its contract4491manufacturer(s) (if any) shall maintain and operate a plant or plants with4492manufacturing and packaging equipment adequate to produce and supply Product in4493quantities adequate to meet reasonably anticipated consumer demand. CNS agrees4494that in the manufacturing, packaging, distributing and selling of Product, it4495shall, and CNS will use best efforts to determine that all contract4496manufacturers it utilizes shall, comply with all applicable laws, regulations4497and ordinances pertaining to the operation of its plants and will maintain such4498plant(s) at all times in a clean, wholesome and sanitary condition consistent4499with the laws of the country or countries in which the plants are located.45004501450274503<PAGE>450445054506(d) Quality Control Sampling. P&G representatives shall be permitted to4507enter and inspect, at reasonable times during business hours and with at least4508forty-eight (48) hours' prior notice, CNS's plants and warehouses where Product4509is being manufactured or stored and the plants and warehouses of CNS's contract4510manufacturer(s) (if any) where Product is being manufactured or stored.4511(e) Sub-Standard Product.4512(i) CNS covenants, warrants and guarantees that none of the4513Product will be in violation of the drug, medical device or other laws of the4514United States or any applicable country, and that the Product will not be4515produced or shipped in violation of any applicable laws of the United States or4516other country; provided, however, that CNS does not covenant, warrant or4517guarantee against the Product becoming violative within the meaning of the4518applicable drug, medical device, health or consumer product safety laws after4519shipment by reason of causes beyond CNS's control.4520(ii) If CNS learns that it has manufactured or has in its4521possession or control or has shipped or sold Product which is in violation of4522drug, medical device, health or other applicable laws, then CNS agrees to notify4523P&G of such fact promptly and in writing. Upon notice to P&G from CNS, or upon4524notice given by P&G to CNS of the existence of this Substandard Product, CNS4525will promptly take whatever action is reasonably necessary to correct this4526situation. If requested by P&G, CNS shall, solely at CNS's expense, promptly4527retrieve from CNS's warehouse or plant and from all trade customers all such4528Substandard Product. CNS must seek and receive P&G consent as to its proposed4529handling of the retrieved Substandard Product. In the event of any consumer4530recall, however or by whomever the recall is initiated, CNS shall, solely at4531CNS's expense, promptly retrieve all such Substandard Product and CNS must seek4532and receive P&G's consent as to its proposed handling of the retrieved4533Substandard Product.4534(f) Non-Competition. During the Term of this Agreement and in the event4535that P&G has Terminated this Agreement or if CNS has determined not to renew4536this Agreement upon the Expiration of its Term, then for [* * *] after such4537Termination or Expiration of this Agreement CNS shall not manufacture,4538distribute or sell, directly or indirectly (whether for its own account or as4539agent for any other party), within the Area, any products marketed for4540cough/cold symptom45414542454384544<PAGE>454545464547relief that are substantially similar, in the reasonable opinion of P&G, to the4548Product, if such products are produced by CNS under license from another4549manufacturer or distributor of cough/cold products, for example, but not limited4550to, manufacturers/distributors of Tylenol, Robitussin, Contac, Sudafed, Comtrex,4551Dristan, Alka Seltzer, Drixoral, Bayer, Tavist, Dimetapp, Benedryl, Benalyn,4552Ricola, Ludens, Nice, Halls, Sucrets or TheraPatch. However, the preceding4553provisions of this paragraph shall not apply to prevent CNS from continuing to4554distribute or sell any product which, on the date of this Agreement, it is then4555selling or distributing. For clarification, the above non-competition provision4556does not apply if CNS Terminates the Agreement or if P&G determines not to renew4557this Agreement upon the Expiration of its Term.4558During the Term of this Agreement, CNS will not manufacture, distribute4559or sell, directly, within the Area, its own products for cough/cold symptom4560relief that are substantially similar to the Product. Notwithstanding the above,4561CNS may manufacture, distribute or sell, directly, within the Area, its own4562products for cough/cold symptom relief that are not substantially similar to the4563Product. In addition, upon any Termination of Expiration of this Agreement, CNS4564may manufacture, distribute or sell, directly, within the Area, its own products4565for cough/cold symptom relief that are substantially similar to the Product.456645674. P&G RIGHTS & OBLIGATIONS45684569(a) Ownership of Licensed Marks. CNS agrees and acknowledges that all4570use of the Licensed Marks by CNS will inure to the benefit of P&G for purposes4571of trademark registration and establishment of trademark rights. CNS will at any4572time, whether during or after the term of this Agreement, execute any documents4573reasonably required by P&G to confirm P&G ownership rights. Rights in the4574Licensed Marks other than those specifically granted in this Agreement are4575reserved by P&G for its own use and benefit. Rights to the Product (including4576without limitation design rights and other intellectual property rights), other4577than those specifically granted to P&G, are retained by CNS for its own use.4578P&G warrants to CNS that P&G is the owner of all rights, titles and4579interests in and to the Licensed Marks with respect to cough and cold products4580in the Area (except for those regions and/or countries where P&G does not market4581or sell cough/cold products). Sales by CNS shall be deemed to have been made by4582P&G for purposes of trademark registration and all uses of the45834584458594586<PAGE>458745884589Licensed Marks by CNS shall inure to the benefit of P&G for purposes of4590trademark registration and establishment of trademark rights.4591(b) Cooperation. CNS will cooperate with P&G in the execution, filing4592and prosecution of any trademark applications relating to the Product that P&G4593may desire to file at its own expense, and for that purpose CNS will supply to4594P&G from time to time such samples, containers, labels and similar material as4595may reasonably be required.4596(c) Actions. CNS hereby agrees that it will not acquire any copyright,4597trademark, or other right in the Licensed Marks. CNS agrees that it will not4598contest or assist any other party in contesting the validity of or P&G's4599ownership of the Licensed Marks. CNS agrees to give P&G prompt notice of any4600apparent infringement of the Licensed Marks which comes to the attention of CNS.4601When requested by CNS, P&G agrees to file applications to register the Licensed4602Marks for use with the Product in any region or country where required.4603(i) P&G, at its sole cost and expense and in its own name, may4604in its sole discretion prosecute and/or defend any action or proceeding which4605P&G deems necessary or desirable to protect the Licensed Marks including but not4606limited to actions or proceedings involving infringement of the Licensed Marks.4607CNS shall cooperate with P&G in any such action or proceeding and upon written4608request by P&G, shall join P&G in any such action or proceeding at P&G sole4609cost. CNS may prosecute and defend at its sole cost and expense and in its own4610name any action or proceeding to protect its own designs, styles, trademarks and4611other intellectual property rights.4612(ii) CNS shall not commence any action or proceeding alleging4613infringement of the Licensed Marks without the prior written consent of P&G. Any4614and all damages recovered in any action or proceeding commenced by P&G shall4615belong solely and exclusively to P&G, but P&G shall have no liability to CNS or4616to any other person for any damages awarded or recovered against CNS or such4617other person, including but not limited to any action or proceeding alleging any4618violation of any antitrust, trade regulation or similar statute, or unfair4619competition, unless arising out of breach by P&G of its warranties and covenants4620hereunder.4621(iii) CNS shall indemnify and hold harmless P&G from any claim4622of trademark infringement, unfair competition, passing off, etc. arising from4623CNS use of the Licensed Marks462446254626104627<PAGE>462846294630on the Product. All Costs associated with such a claim shall be exclusively CNS4631although P&G will cooperate as reasonably necessary.4632(iv) CNS shall be responsible for submitting this Agreement to4633the respective trademark office or authorities in the country or countries which4634require it as proof of use of the Licensed Marks.4635(d) P&G Materials. P&G shall have the right, without payment or4636obligation to CNS, to produce and distribute catalogs, promotional brochures or4637inserts, point of sale displays or other advertising matter displaying the4638Product in conjunction with other products of P&G and/or others subject to the4639other provisions of this Agreement and subject to the written approval of CNS.4640(e) Use of Names. Both CNS and P&G shall have the right, but not the4641obligation, to use the name of the other party in programs without any payment4642or obligation to the other party whatsoever subject to the other provisions of4643this Agreement. P&G and CNS agree that such publicity will be in good taste in4644accordance with industry standards.4645(f) Limitations. P&G specifically makes no representations or4646warranties with respect to the availability and/or registrability of the4647Licensed Marks for the Product to be marketed or sold in the Area, but P&G shall4648use commercially reasonable efforts to obtain rights to the Licensed Marks for4649the Product in the Area, including registration of the Licensed Marks where4650necessary.465146525. P&G COVENANTS46534654With regard to its actions hereunder, P&G expressly covenants as4655follows:4656(a) Authorization. P&G is a corporation duly organized, validly4657existing, and in good standing under the laws of the state of Ohio and is duly4658authorized to do business therein, with full corporate power to enter into this4659Agreement.4660(b) Conflicts. To the knowledge of P&G, the execution and delivery of4661this Agreement does not violate any law, rule or regulation or order, judgment,4662or decree within the Area binding on either party and will not result in a4663breach of any contract, agreement or other instrument to which either P&G is a4664party. P&G is under a contractual obligation to offer a right466546664667114668<PAGE>466946704671of first refusal for use of the Licensed Marks on healthcare appliances or4672devices associated with the field of cough/cold; such right of first refusal has4673been offered and not exercised.4674(c) Enforceable License. To the knowledge of P&G, this is a valid and4675enforceable License Agreement.4676(d) Non-Competition. During the Term of this Agreement and in the event4677that CNS has Terminated this Agreement or if P&G has determined not to renew4678this Agreement upon the Expiration of its Term, then for [ * * * ] after4679such Termination or Expiration of the Term of this Agreement P&G shall not use,4680or offer or grant to any other party any right to use the Licensed Marks on any4681other item or good which is substantially similar to the Product. For4682clarification, the above noncompetition provision does not apply if P&G4683Terminates the Agreement or if CNS determines not to renew this Agreement upon4684the Expiration of its Term.468546866. INDEMNIFICATION AND INSURANCE46874688(a) Indemnification of P&G. CNS shall indemnify and save harmless P&G,4689Its subordinates and affiliated companies, and any of their agents, servants,4690officers, directors and employees from and against any liability, claim,4691administrative action, cause of action, suit, damages, and expenses (including4692reasonable attorney fees and costs), including but not limited to any damages4693for personal injuries, including death, and property damage, which:4694(i) result from Product which is sold, shipped, manufactured4695or distributed in violation of any applicable law; or4696(ii) result from any disputes with the trade resulting from4697CNS dealings or relations therewith; or4698(iii) result from any advertising, promotion, or other actions4699or inactions by CNS in furtherance of its rights under this Agreement; or4700(iv) are due to CNS breach of any warranty, covenant or4701agreement by CNS contained herein; or4702(v) result from any consumer's use or possession of the4703Product; or4704(vi) arise from or by reason of any acts, whether of omission4705or commission, that may be committed by CNS or any of its servants, agents,4706employees, sub licensees, distributors or customers in connection with CNS4707performance under this Agreement, or which470847094710124711<PAGE>471247134714arise from or by reason of the importation, manufacture, sale and/or other4715transfer or disposition by CNS of the Product. P&G and its affiliated companies4716and their agents, officers, directors and employees shall have no liability4717whatsoever to CNS or any other firm, corporation, organization or person for or4718on account of any injury, loss, damage of any kind or nature, cost or expense4719incurred by or imposed upon CNS or any other firm, corporation, organization or4720person arising out of or in connection with or resulting from CNS performance of4721this Agreement, including, without limitation, (a) the production, use, sale,4722transfer or other disposition of any Product; or (b) any labeling, packaging,4723advertising or promotion activities with respect to any of the foregoing; or4724(vii) result from any governmental action, I.E., federal,4725state or local.4726(b) Insurance. In furtherance of CNS covenants contained in the4727preceding subparagraph, CNS agrees to carry product liability insurance with4728respect to the Product with a limit of liability of at least Five Million US4729Dollars (US $5,000,000) per occurrence and this insurance policy shall endorse4730P&G as an additional insured party. Such insurance may be obtained in4731conjunction with a policy of product liability insurance which covers goods4732other than the Product, and shall provide for at least thirty (30) days prior4733written notice to P&G of the cancellation or material modification thereof. CNS4734shall deliver to P&G a certificate evidencing the existence of such insurance4735policies within thirty (30) days of signing this Agreement.4736CNS agrees and covenants to maintain such insurance, including the4737endorsement of P&G as an additional insured party, in full force and effect from4738the effective date of this Agreement until three (3) years after the eventual4739Expiration or Termination of any license hereunder. CNS may not remove P&G as an4740additional insured party from CNS insurance policy without written consent from4741P&G. All costs associated with CNS insurance policy, including the endorsement4742of P&G as an additional insured party, will be borne by CNS.4743(c) Indemnification of CNS. P&G shall indemnify and save harmless CNS,4744its affiliated companies and any of their agents, servants, officers, directors4745and employees from and against any liability, claim, administrative action,4746cause of action, suit, damages and expenses (including reasonable attorney fees4747and costs), including but not limited to any damages for personal injuries,4748including death, and property damage, which are due to P&G breach of any474947504751134752<PAGE>475347544755warranty, covenant or agreement by P&G contained herein or which arise from P&G4756production, use, sale or other disposition of its own products or any labeling,4757packaging, advertising or promotion activities of its own products in connection4758with or arising from any promotional activities outlined herein. Notwithstanding4759the above, CNS obligations of indemnification for its Product under section 6(a)4760shall apply to any sample Product that may be provided pursuant to any4761promotional agreements contained herein, unless such loss or damage is caused by4762the action or inaction of P&G.4763(d) Promotions. For clarification, the aforementioned indemnification4764provisions shall extend to any promotional efforts or activities conducted by4765either party pursuant to Section 9 and any Scheduled promotional activities.47667. LICENSE FEES4767(a) Calculation of Royalties. CNS agrees to pay to P&G royalties as4768shown in Schedule 5, such payment to be in United States dollars determined by4769the quarterly average exchange rate for the previous quarter as published by the4770International Monetary Fund in International Financial Statistics (or nearest4771equivalent). As used herein, Net Sales means gross sales, less discounts,4772standard promotional allowances, returns and credits specific to the Product4773less overseas freight and duties paid by CNS and billed to the customer. As used4774herein, the term standard promotional allowances means costs incurred for4775promotional events which: (i) provide payment to the trade for specific trade4776performance; (ii) pay for display materials or wall components; or (iii) grant4777temporary price reductions.4778(b) Minimum Royalties. CNS agrees to pay minimum royalties for each4779region as set forth in Schedule 6. Minimum royalty payments, if applicable,4780shall be made in the final quarter of each calendar year.4781(c) Reports. On or before the thirtieth (30th) day following the end of4782each calendar quarter during the Term, CNS shall furnish to P&G complete and4783accurate statements certified to be accurate by an officer of CNS showing, for4784each country in which CNS distributed and/or sold the Product during the4785preceding calendar quarter, the description and number of units of the Product4786sold, the gross sales price, net sales price of the Product covered by this4787Agreement and the royalty due under this Agreement. Such statement shall be4788furnished to P&G whether or not478947904791144792<PAGE>479347944795any of the Product was sold during the preceding calendar quarter. The statement4796should be sent to The Procter & Gamble Company, Attention: Finance Manager,4797Personal Health Care, One Procter & Gamble Plaza, Cincinnati, OH 45202.4798(d) Payment Terms. All royalty amounts in this Agreement are stated in4799United States dollars, and all royalty statements shall be made in United States4800dollars. There shall be no deductions for the transfer of funds or royalties or4801the conversion of currency into United States dollars. Payments should be sent4802quarterly via wire transfer to an account specified by P&G on or before the 30th4803day following the end of each calendar quarter during the Term. The receipt or4804acceptance by P&G of any of the statements furnished pursuant to this Agreement4805or of any royalties paid hereunder (or the cashing of any royalty checks paid4806hereunder) shall not preclude P&G from questioning the accuracy, completeness or4807sufficiency thereof at any time, and in the event that any inconsistencies or4808mistakes are discovered in such statements or payments, they shall immediately4809be rectified and the appropriate payment made by CNS.4810(e) Tax Withholding. CNS shall be responsible for the payment of any4811foreign taxes, fees or assessments with regard to the Product sold by CNS or by4812an Affiliate or Subcontractor of CNS. If taxes or other fees are required to be4813withheld on any payments due P&G, CNS shall pay such tax or similar fee on4814behalf of P&G with a corresponding reduction in royalties due P&G. If CNS does4815not withhold such taxes or other fees and P&G is subsequently found liable for4816payment of such taxes or other fees by any governmental jurisdiction, CNS will4817reimburse P&G for any amounts P&G is liable to pay. To the extent a withholding4818tax or other fee is deducted with respect to any payment between CNS and P&G,4819the amount of tax or other fee withheld shall be for the account of P&G. CNS4820will provide to P&G certified copies of all receipts from any governmental or4821taxing authority evidencing payment of such taxes and will assist P&G in4822claiming relief from double taxation.48238. CNS RECORDS4824(a) Records. CNS shall keep and maintain at its regular place of4825business complete books and records of all business transacted by CNS in4826connection with the Product, including but not limited to books and records4827relating to shipments, orders, and sales of the Product. Such482848294830154831<PAGE>483248334834records shall be retained by CNS for at least five (5) years following the year4835to which they pertain.4836(b) Audit Right. P&G, or its duly authorized agents or representatives,4837shall have the right to inspect said books and records at CNS premises during4838regular business hours, provided that P&G shall give to CNS at least ten (10)4839days' advance written notice of its intention to do so. CNS shall pay to P&G the4840amount of any underpayment of royalties with interest within fifteen (15)4841business days after the determination of the amount of such underpayment. CNS4842shall credit the amount of any overpayment of royalties made by CNS to the next4843royalty payment due after the determination of the amount of such overpayment.4844In the event of any dispute between the parties as to the amount of any4845underpayment or overpayment of royalties, the parties shall select an4846independent third party auditor who shall inspect the parties' books and records4847relating to any alleged underpayment or overpayment of royalties and whose4848determination with respect hereto shall be determinative and final.4849(c) Corrections. If the auditor selected pursuant to Section 8(b) above4850determines that there was a net underpayment or overpayment of royalties, then4851CNS shall either pay to P&G the amount of any such underpayment or shall credit4852the amount of any such overpayment as set forth in 8(b) above. If such auditor4853accepts P&G calculations of royalties due and owing, then CNS shall bear the4854costs and fees of such auditor; if such auditor accepts CNS calculations of4855royalties due and owing, then P&G shall bear the costs and fees of such auditor.4856If such auditor does not accept either party's calculations, then the parties'4857shall share equally the costs and fees of such auditor.485848599. PROMOTION48604861Because the Product carries the Licensed Marks, P&G agrees to treat the4862Product as a member of the Vicks(R) family of products. P&G will use4863commercially reasonable efforts to include the Product in trade and consumer4864communications where the Vicks(R) family of products is featured. P&G agrees to4865expend efforts similar to the efforts P&G has taken on other products licensed4866under the Vicks(R) trademark. In regions where such activities are possible,4867examples of such efforts may include, but are not limited to:486848694870164871<PAGE>487248734874(a) Trade communications such as annual respiratory/cough-cold retail4875sales presentations, planograms, end-aisle display recommendations and suggested4876shelving structure, and retail buyer, pharmacy and physician education4877advertising.4878(b) Consumer communications such as TV, radio and print advertising4879when the Vicks(R) family is featured and website inclusion with a link to4880BreatheRight.com. From time to time the parties may choose to collaborate on4881additional joint Promotional events. The parties will coordinate the execution4882and cost to each party of the Promotion on a case-by-case basis. Both P&G and4883CNS must provide their approval of any such Promotion before it is commenced,4884such approval not to be unreasonably withheld. Both parties shall conduct any4885promotion described herein in conformity with all federal, state and local4886statutes and regulations as such laws are interpreted and enforced as of the4887date any promotion detailed above is first introduced to the public. Both4888parties shall file all bonds, guarantees, and/or duties that may be required and4889shall obtain all necessary federal, state, and local authorizations and/or4890approvals that may be required to conduct the promotion described herein. An4891agreed upon promotion for the United States is set forth in Schedule 7.489210. TERM AND TERMINATION4893The term of this Agreement (the "Term") shall commence on the date of this4894Agreement and shall Expire, unless otherwise Terminated earlier pursuant hereto,4895at the end of the Initial Term (as defined herein) or, if the Term has been4896extended beyond the end of the Initial Term, at the end of the last extension4897period. As used herein, the Initial Term means the period of three (3) years4898from the date of this Agreement.4899(a) Extension and Non-Renewal. On each anniversary of the date of this4900Agreement, the Term shall be automatically extended for a period of one (1)4901year, so that the remainder of the Term shall be three (3) years from such4902anniversary date (unless the Term is otherwise terminated earlier pursuant4903hereto). At any time, either party may give the other written notice hereunder4904that it does not wish to extend the Term pursuant hereto. If either party gives4905such notice to the other, then this Agreement shall not be further extended and4906at the conclusion of the remaining period of time will be deemed Expired.490749084909174910<PAGE>491149124913(b) Termination by P&G. If any one or more of the following events4914occurs, and CNS fails to remedy such condition within thirty (30) days after4915receipt of written notice to CNS from P&G of such condition, then P&G may4916terminate this Agreement by written notice:4917(i) If CNS shall commit any material breach of any obligation,4918warranty, covenant or agreement contained herein; or4919(ii) if CNS ceases to do business; or4920(iii) if CNS ceases to sell the Product for [* * *]4921consecutive months; or4922(iv) if CNS shall not have begun the bona fide national sale4923and distribution of the Product in at least [* * *] of the Area by January 1,49242001; or4925(v) if CNS fails to make any payments required by the4926Agreement on the date specified unless such failure is inadvertent or4927unavoidable; or4928(vi) if CNS knowingly makes any false report under paragraph49297(c); or4930(vii) if CNS fails to sell at least [* * *] package units of4931Product worldwide in any calendar year beginning January 1, 2001.4932(c) Termination for CNS Bankruptcy. This Agreement and all the rights4933of CNS hereunder shall forthwith terminate automatically if a bankruptcy4934petition is filed against CNS, if CNS becomes insolvent or goes into4935receivership, or if CNS makes an assignment for the benefit of creditors, or4936files a petition for a reorganization or rearrangement under the Bankruptcy4937Code.4938(d) Termination by CNS. If any of the following conditions occurs, and4939P&G shall fail to remedy such condition within thirty (30) days after written4940notice to P&G by CNS of such condition, CNS may terminate this Agreement by4941written notice:4942(i) If P&G shall commit any breach of any obligation,4943warranty, covenant or agreement contained herein; or4944(ii) If P&G ceases to do business.4945(e) Change of Control. Either party may terminate this Agreement at any4946time upon six (6) months written notice if there shall be, directly or4947indirectly, a change in the ownership or control of the other party and/or the4948other party's business relating to the Product; provided, however, that P&G4949shall consider a request by CNS to consent to such change in ownership or4950control; such consent shall not be unreasonably withheld.495149524953184954<PAGE>495549564957(f) Consequences of Expiration and Termination. Upon any Expiration or4958Termination of this Agreement:4959(i) Except as permitted under paragraph 10(f)(iv), CNS shall4960not use any of the written, printed, or graphic material on the package carton4961or inserts for any purpose without first obtaining the written consent of P&G,4962which consent may be withheld at P&G sole discretion;4963(ii) Unless otherwise notified by P&G, CNS will immediately4964discontinue use of the Licensed Marks and shall not manufacture or import, nor4965sell, distribute or otherwise transfer, nor permit to be manufactured or4966imported, nor sold, distributed or otherwise transferred, the Product or other4967items bearing the Licensed Marks, except as permitted under paragraph 10(f)(iv);4968(iii) CNS shall use its best efforts to execute any and all4969documents necessary to terminate of record any of CNS rights hereunder or to4970transfer such rights to P&G or P&G designee, which documents shall be prepared4971by P&G at its expense;4972(iv) CNS shall immediately destroy, and return to P&G4973according to P&G directions, all material associated with any Promotion as4974contemplated in Section 9 that has not already been affixed to or inserted into4975the Product packaging and P&G shall have the option of buying existing packaged4976Product at CNS cost. If P&G does not exercise this option and the Agreement has4977Expired or has been Terminated, then CNS may sell its existing inventory of4978packaged Product at a discount off CNS best published price for a period not to4979exceed twelve (12) months after the Expiration or Termination of this Agreement.4980498111. CONFIDENTIALITY49824983(a) P&G Trade Secrets. The parties agree that any of P&G trade secrets4984which may be disclosed to or acquired by CNS pursuant to this Agreement are to4985be used solely in connection with CNS performance under the terms of this4986Agreement and are not to be disclosed to any persons other than employees or4987agents of CNS. CNS shall use the same standard of care protecting against4988publication or dissemination of P&G trade secrets by CNS and its directors,4989officers, employees and agents as CNS uses with respect to information as to its4990own business which it desires not to have published or disseminated and will so4991inform and direct its directors,499249934994194995<PAGE>499649974998officers, employees and agents receiving such trade secrets. Any memoranda or4999papers containing trade secrets of P&G which CNS may receive in connection5000herewith are to be returned at P&G request. However, the above requirement shall5001not apply to information which is, or subsequently may become, within the public5002domain or the knowledge of the general public through no fault of CNS. CNS5003obligations and duties hereunder shall survive for five years after Termination5004or Expiration of this Agreement.5005(b) CNS Trade Secrets. The parties agree that any of CNS trade secrets5006which may be disclosed to or acquired by P&G pursuant to this Agreement are to5007be used solely in connection with P&G performance under the terms of this5008Agreement and are not to be disclosed to any persons other than employees or5009agents of P&G. P&G will use the same standard of care protecting against5010publication or dissemination of CNS trade secrets by P&G and its directors,5011officers, employees and agents as P&G uses with respect to information as to its5012own business which it desires not to have published or disseminated and will so5013inform and direct its directors, officers, employees and agents receiving such5014trade secrets. Any memoranda or papers containing trade secrets of CNS which P&G5015may receive in connection herewith are to be returned at CNS request. However,5016the above requirement shall not apply to information which is, or subsequently5017may become, within the public domain or the knowledge of the general public5018through no fault of P&G. P&G obligations and duties hereunder shall survive for5019five years after Termination or Expiration of this Agreement.5020(c) Nondisclosure. CNS and P&G agree not to divulge, permit or cause5021their officers, directors, employees or agents to divulge this document or the5022specific details of this Agreement except to their representatives and attorneys5023in the course of any legal proceeding to which either of the parties hereto is a5024party for the purpose of securing compliance with this Agreement.5025Notwithstanding the above, either party may disclose the existence of this5026Trademark License Agreement and the names of the Licensed Marks and Product that5027are the subject of said Agreement. Upon Termination or Expiration of this5028Agreement, at P&G request, CNS shall return within thirty (30) days to P&G all5029materials furnished by P&G to CNS in connection with the program and at CNS5030request, P&G shall return within thirty (30) days to CNS all materials furnished5031by CNS to P&G in connection with the program.503250335034205035<PAGE>503650375038(d) Press Releases. Neither party shall make any press release with5039respect to this Agreement or any matter arising from this agreement without5040first obtaining the other party's prior written approval, such approval shall5041not be unreasonably withheld. Such press releases shall be submitted to the5042person designated by each party. Each party's designee shall review and respond5043in writing with regard to its approval or non-approval of such materials within5044three (3) business days after receipt of such materials from the other party.5045Approval of the submitted materials will not be unreasonably withheld.5046504712. MARKING50485049CNS shall affix permanently to the Product or its container the legend "The5050Vicks(R) trademark is used under license from The Procter & Gamble Company,5051Cincinnati, Ohio" or such other entity as P&G shall designate, or the equivalent5052such language approved by P&G.5053505413. FORCE MAJEURE50555056Neither P&G nor CNS shall be liable to the other for any failure to comply with5057any terms of the Agreement to the extent any such failure is caused directly or5058indirectly by fire, strike, union disturbance, injunction or other labor5059problems, war (whether or not declared), riots, insurrection, government5060restrictions or other government acts, or other causes beyond the control of or5061without fault on the part of either P&G or CNS. However, CNS shall continue to5062be obligated to pay P&G when due any and all amounts which it shall have duly5063become obligated to pay in accordance with the terms of this Agreement. Upon the5064occurrence of any event of the type referred to in this Section, the party5065affected thereby shall give prompt notice thereof to the other party, together5066with a description of such event and the duration for which such party expects5067its ability to comply with the provisions of this Agreement to be affected5068thereby. The party affected shall thereafter devote reasonable efforts to remedy5069to the extent possible the condition giving rise to such event and to resume5070performance of its obligations hereunder as promptly as possible.5071507214. MISCELLANEOUS50735074(a) First-Line Goods. It is the essence of this Agreement that only5075first-line goods shall be sold by CNS under the Licensed Marks. No factory5076damaged, seconds, or goods not of first quality shall be sold by CNS pursuant to5077this Agreement without first removing or507850795080215081<PAGE>508250835084obliterating any and all labels, tags, decals, or other material (including5085promotional inserts and trademark imprints) bearing the Licensed Marks.5086(b) Use of Mark as Names. CNS will not use the Licensed Marks as all or5087a portion of a corporate name or as all or a portion of any trade name or other5088designation used by it to identify its business. CNS employees will not5089represent themselves as being representatives of or otherwise employed by P&G.5090(c) Notice. Any notice, inquiries, or other communication in connection5091with this Agreement shall be in writing and sent by certified mail, return5092receipt requested, postage prepaid and addressed to the respective parties as5093follows:50945095To CNS: CNS Incorporated50964400 West 78th Street5097Minneapolis, Minnesota 554355098Attn: Vice President Business Development50995100Copy to: Patrick Delaney5101Lindquist & Vennum51024200 IDS Center5103Minneapolis, Minnesota 5540251045105To P&G: The Procter & Gamble Company5106One Procter & Gamble Plaza5107Cincinnati, Ohio 452025108Attn: Marketing Director, North America,5109Respiratory51105111Copy to: The Procter & Gamble Company5112Legal Division5113One Procter & Gamble Plaza5114Cincinnati, Ohio 452025115Attn: Associate General Counsel, Health Care51165117or such other addresses as shall be designated by written notice.5118(d) Relationship Between the Parties. This Agreement does not5119constitute CNS as the agent or legal representative of P&G or P&G as the agent5120or legal representative of CNS for any purpose whatsoever. CNS is not granted5121any right or authority to assume or to create any obligation or responsibility,5122expressed or implied, on behalf of or in the name of P&G or to bind P&G in any5123manner or thing whatsoever; nor is P&G granted any right or authority to assume5124or512551265127225128<PAGE>512951305131create any obligation or responsibility, expressed or implied, on behalf of or5132in the name of CNS or to bind CNS in any manner or thing whatsoever. No joint5133venture or partnership between CNS and P&G is intended or shall be inferred.5134(e) Entire Agreement. This writing contains the entire agreement5135between the Parties with respect to the subject matter hereof. This Agreement5136supersedes any prior verbal or written agreements with CNS. This Agreement5137between the parties may not be altered except by an instrument in writing signed5138by authorized representatives of the parties.5139(f) Interpretation. Any provision of this Agreement which shall be, or5140shall be determined to be, invalid shall be ineffective, but such invalidity5141shall not affect the remaining provisions hereof. The titles to sections hereof5142are for convenience only and have no substantive effect.5143(g) Waiver. If either party shall at any time waive any of its rights5144under this Agreement or the performance by the other party of any of its5145obligations hereunder, such waiver shall not be construed as a continuing waiver5146of the same rights or obligations or a waiver of any other rights or5147obligations.5148(h) Dispute Resolution. If P&G or CNS shall commence any action or5149proceeding against the other by reason of any breach or claimed breach of the5150performance of any of the terms and conditions of this Agreement, or to seek a5151judicial declaration of rights hereunder, the prevailing party in such action or5152proceeding shall be entitled to reasonable attorney fees to be fixed by the5153trial court. Any legal action or proceeding of any sort commenced or instituted5154against either party (or its assignee in any of the countries in the Area) by or5155on behalf of either party shall be brought in a court of competent jurisdiction5156in the State of Ohio. In any legal action or proceeding brought in which any5157right(s) arising from this Agreement shall be issued, the law applicable thereto5158shall be the law of the State of Ohio.5159(i) Assignment. This Agreement is entered into because of P&G reliance5160upon the knowledge, experience, skill and integrity of CNS and is personal to5161CNS. This Agreement, the License and any rights hereunder granted to CNS and/or5162any duties to be performed by CNS hereunder may not be assigned, transferred,5163hypothecated, sub-licensed, encumbered or otherwise disposed of without first5164obtaining the consent in writing of P&G. If P&G shall grant516551665167235168<PAGE>516951705171such consent, any and all future assignments, transfers, hypothecations,5172sublicenses, encumberments or other disposals of any new party's rights and/or5173duties under this Agreement shall not occur without written consent from P&G,5174which consent may be withheld in P&G sole discretion. P&G reserves the right to5175assign this Agreement to any third party whether or not affiliated with P&G.5176Notwithstanding the foregoing, transfer of CNS rights and duties in the case of5177a change of control shall be governed by paragraph 10(e).5178(j) Other Licenses. CNS understands that this License may not5179constitute all the consents or licenses required in order to manufacture,5180import, and/or sell the Product, and expressly covenants to obtain all other5181such licenses or consents that may be so required. IN WITNESS WHEREOF, the5182parties hereto have duly executed this Agreement.518351845185For The Procter & Gamble Company For CNS Incorporated51865187/s/ Thomas C. Blinn /s/ Daniel Cohen5188- -------------------------------------- ---------------------------------------5189Title: V.P. Personal Health Care Title: CEO5190-------------------------------- ---------------------------------5191Date: 3-1-00 Date: 2-28-005192--------------------------------- ----------------------------------51935194P&G approvals:51955196Form: /s/ Paul Franz5197-----------------------------5198Counsel51995200Finance:5201------------------------------52025203Execution: /s/ Richard A. Armstrong5204----------------------------52055206Associate Director for Heathcare Alliances520752085209245210<PAGE>521152125213SCHEDULE 152145215Vicks(R)5216Vicks triangle design mark5217521852195220255221<PAGE>522252235224SCHEDULE 252255226Breathe Right(R) mentholated vapor nasal strips5227522852295230265231<PAGE>523252335234SCHEDULE 3523552365237REGIONS COUNTRIES5238North America United States5239Canada52405241Latin America Argentina5242Brazil5243Chile5244524552465247275248<PAGE>524952505251SCHEDULE 452525253In all regions/countries of the world the Licensed Mark "Vicks" must be used on5254all packages with the well known triangle design Licensed Mark and may not be5255used as the primary brand name.5256525752585259285260<PAGE>526152625263SCHEDULE 5526452655266COUNTRY ROYALTY AS % OF CNS52675268NET SALES OF PRODUCTS52695270WHICH INCLUDE THE LICENSED MARKS527152725273United States [* * *]5274Canada [* * *]52755276Argentina [* * *]5277Brazil [* * *]5278Chile [* * *]5279528052815282295283<PAGE>528452855286SCHEDULE 6528752885289REGION MINIMUM ROYALTY OBLIGATION5290- ------ --------------------------52915292North America [* * *] per calendar year in which5293Product is offered for sale for at least5294[* * *] months52955296Any Region Outside North America52975298Introductory Year 1 [* * *] per Introductory calendar year5299in which Product is offered for sale5300for fewer than [* * *] months53015302Calendar Year 2 [* * *] per calendar year in which5303Product is offered for sale for at least5304[* * *] months53055306Calendar years 3 and beyond [* * *] per calendar year in which5307Product is offered for sale for at least5308[* * *] months5309531053115312305313<PAGE>531453155316SCHEDULE 7531753185319P&G and CNS agree to jointly collaborate on the following marketing effort5320(hereinafter the "Promotion") within the United States for the 2000/2001 Rollout5321year for the Product:532253231. SAMPLING.53245325(a) P&G agrees to distribute samples of the Product on or in packages of5326specified Sample Vehicles. P&G agrees to make available a combination5327of the following products to carry the Product samples: Vicks(R)Sinex,5328Vicks(R)4 oz. Children's NyQuil(R)and Vicks(R) twin 10 oz. NyQuil(R),5329in the quantities and for the sampling costs listed in Table 1 for the5330samples of the Product to be carried on or in. CNS agrees to notify P&G5331in writing no later than February 28, 2000 of the number of each5332quantity of Sample Vehicles listed that CNS would like to specify for5333the sampling program. The combination and quantity of products5334specified by CNS are herein called "Sample Vehicles."53355336(b) As part of this sampling effort, CNS will supply wrapped sample units5337of two strips of the Product to P&G at [* * *] to P&G in an amount5338equal to the number of Sample Vehicles specified by CNS. P&G will5339attach or in-pack samples of the Product to P&G Sample Vehicles and5340will distribute the samples of the Product with the Sample Vehicles at5341the sole expense of CNS according to costs set forth in Table 1. The5342costs in Table 1 include the cost of stickering the Sample Vehicles.5343Depending on the quantity of Sample Vehicles ordered by CNS, and5344depending on P&G's internal timing constraints, P&G will use reasonable5345efforts to change package artwork for Sample Vehicles in order to avoid5346the necessity of utilizing a sticker on the Sample Vehicles that have5347the samples of the Product. If P&G is able to change the Sample5348Vehicles package artwork, it shall do so at P&G's sole expense and the5349costs listed in Table 1 may be reduced by the cost of stickering. All5350sales of Sample Vehicles (including samples) are for P&G's account.53515352(c) The samples of the Product with the Sample Vehicles will be timed to5353ship during the P&G July 3, 2000 to January 31, 2001 cough-cold5354packaging period. P&G will use535553565357315358<PAGE>535953605361reasonable efforts to facilitate key account merchandising and trade5362ads featuring the samples of the Product with the Sample Vehicles.53635364TABLE 1536553665367VICKS(R) PRODUCT SAMPLING COST NUMBER5368PER UNIT AVAILABLE5369(DOLLARS) (MILLION UNITS)5370- --------------------------------------------------------------------------------5371SINEX (SKU'S) [* * *]5372open box + sticker* [* * *]5373- --------------------------------------------------------------------------------53744 OZ. CHILDREN'S NYQUIL [* * *]5375shrink to side + sticker* [* * *]5376- --------------------------------------------------------------------------------537710 OZ. NYQUIL TWIN PACK [* * *]5378inset + sticker* [* * *]5379- --------------------------------------------------------------------------------53805381*costs may be reduced by the cost of stickering pursuant to section 1(b) above.538253832. PROMOTION.53845385CNS agrees to place a front-page, full-page, free standing coupon5386insert ("FSCI") for January 28, 2001 for the Product. CNS agrees to5387bear the cost of this placement. CNS cost of placing this ad would be5388[* * *]. Upon CNS providing P&G with reasonable documentation of5389running the FSCI, P&G will grant CNS a credit of [* * *] (one half the5390amount of CNS placement costs of the FSCI) against royalties payable5391under Section 7 hereof. CNS will produce the artwork for this FSCI. CNS5392will submit such artwork to P&G for approval pursuant to Section 2(f)5393of the Agreement. CNS will bear the redemption and other administrative5394costs of the CNS coupon.539553963. ADVERTISING.53975398(a) CNS will support the launch of the Product with national TV5399advertising during the cough-cold season (Q4 2000-Q1 2001) at5400its own expense. This advertising will feature the Product and5401will include a visual of the package and the Licensed Marks.5402(b) In addition to promotional efforts outlined in Section 9 of5403the Agreement, P&G agrees to include an advertisement on the5404Product in its Pharmacy Digest mailing which is mailed to5405pharmacists. P&G agrees to explore the option of placing a540654075408325409<PAGE>541054115412sample of the Product in the Pharmacy Digest mailing. If5413logistically feasible, and upon CNS approval, P&G will include5414a sample of the Product in Pharmacy Digest mailing at CNS sole5415expense.541654174. SALES COORDINATION. P&G and CNS will use reasonable efforts to5418coordinate sales information and materials to support the launch of the5419Product by sharing with each other 1-2 page sell sheets and fact sheets5420about the Product and Sample Vehicles respectively. These materials5421will educate each company's sales force on the basics of the Product5422and the Vicks family of products and prepare them for retailer5423questions. Notwithstanding the above, should either party's sales5424personnel receive questions about the other party's products, each5425party agrees that such sales personnel will use reasonable efforts to5426take action to refer the retailer's question to the other party's5427appropriate sales representative.542854295430335431</TEXT>5432</DOCUMENT>5433<DOCUMENT>5434<TYPE>EX-105435<SEQUENCE>35436<FILENAME>cns010440_ex10-11.txt5437<DESCRIPTION>EXHIBIT 10.11 DISTRIBUTOR AGREEMENT5438<TEXT>54395440CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH5441THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL5442TREATMENT UNDER RULE 24b-2.54435444EXHIBIT 10.115445544654475448DISTRIBUTOR AGREEMENT5449BETWEEN5450CNS, INC.5451AND5452EISAI CO., LTD.54535454<PAGE>545554565457TABLE OF CONTENTS Page5458----------------- ----54595460ARTICLE I - DEFINITIONS........................................................154611.1 Party...........................................................154621.2 Products........................................................154631.3 Term of this Agreement..........................................254641.4 Territory.......................................................254651.5 Trademarks......................................................254661.6 Year............................................................254675468ARTICLE II - DISTRIBUTION AND OTHER RESPONSIBILITIES...........................254692.1 Appointment.....................................................254702.2 Acceptance, Activity, and Compensation..........................254712.3 Facilities and Capability.......................................354722.4 Promotion.......................................................354732.5 Market Information..............................................354742.6 Business Planning and Review....................................454752.7 Not an Agent....................................................454762.8 Conflict of Interest............................................554772.9 Expenses........................................................554782.10 Goodwill........................................................554792.11 Nondisclosure...................................................554802.12 Performance Objectives..........................................654812.13 Other Responsibilities of EISAI.................................654825483ARTICLE III - PURCHASE AND SUPPLY OF PRODUCTS..................................654843.1 Purchase and Supply.............................................654853.2 Prices, Terms, and Conditions...................................654863.3 Inventories:....................................................654875488ARTICLE IV - TRADEMARKS........................................................754894.1 Trademarks......................................................754904.2 Infringement....................................................854915492ARTICLE V - TERM AND TERMINATION...............................................854935.1 Duration........................................................854945.2 Termination by Either Party.....................................854955.3 Termination by CNS..............................................954965.4 Reasonable Notice:..............................................954975.5 Effect of Termination or Expiration.............................9549854995500i5501<PAGE>550255035504ARTICLE VI - INDEMNIFICATION..................................................1055056.1 Indemnification by CNS.........................................1055066.2 Indemnification by EISAI.......................................1055076.3 Qualifications.................................................1055085509ARTICLE VII - MISCELLANEOUS PROVISIONS........................................1055107.1 Notice:........................................................1055117.2 Validity:......................................................1155127.3 Compliance with Law; Governing Law; Disputes...................1155137.4 Assignment.....................................................1255147.5 Non-waiver.....................................................1255157.7 Headings.......................................................1255167.8 Entire Agreement...............................................125517Schedule A - Products and Territory...................................145518Schedule B - Trademarks...............................................155519Schedule C - Performance Objectives...................................16552055215522ii5523<PAGE>5524552555265527CNS DISTRIBUTOR AGREEMENT55285529EISAI CO., LTD.55305531Agreement made effective as of the 1st day of August, 2000 (the5532"Effective Date") by and between CNS, Inc., a corporation whose principal5533offices are located 7615 Smetana Lane, Eden Prairie, Minnesota 55344 USA5534(hereinafter referred to as "CNS") and EISAI Co., Ltd., a Japanese company whose5535principal offices are located at 4-6-10 Koishikawa, Bunkyo-ku, Tokyo 112-80885536Japan (hereinafter referred to as "EISAI").55375538WHEREAS, CNS wishes to arrange for the promotion, sale and distribution5539of the Products (hereinafter defined) in the Territory (hereinafter defined) on5540the terms and conditions set forth below; and55415542WHEREAS, EISAI wishes to become a distributor of the Products for CNS in5543the Territory and represents that it possesses qualified personnel and5544sufficient financial and physical resources to promote fully CNS's Products in5545the Territory.55465547NOW, THEREFORE, in consideration of the above and of the mutual promises5548set forth below, the parties hereby agree as follows:554955505551ARTICLE I - DEFINITIONS55525553In this Agreement each of the terms listed below has the meaning5554indicated. Words incorporating the singular shall also include the plural and5555vice versa where context requires.555655571.1 PARTY: CNS or EISAI as the case may be, when used in the singular,5558and both CNS and EISAI when used in the plural.555955601.2 PRODUCTS: CNS's tan and clear Breath Right(R) nasal strips, in5561finished, packaged form, and any other Products defined in Schedule A, attached5562hereto, as such Schedule A may be updated from time to time by agreement of the5563Parties; provided, however, that (a) CNS may elect not to offer all of its5564products to EISAI for distribution under this Agreement; (b) CNS may5565unilaterally delete from the list of Products at any time, upon one hundred and5566eighty (180) days'55675568556915570<PAGE>557155725573notice to EISAI, those products which CNS no longer offers generally for sale to5574distributors in the same form or with the same specifications; and (c) CNS may5575delete any Products from the list of Products at any time, for any reason, upon5576one hundred twenty (120) days' notice thereof to EISAI, with the agreement of5577EISAI or if CNS offers a comparable replacement for the Product to be deleted5578from the list. The quality agreement which contains the specifications, handling5579instructions, special precautions and other information relating to the Products5580shall be separately agreed by CNS, EISAI and HERUSU.558155821.3 TERM OF THIS AGREEMENT: That period from the Effective Date until5583the expiration or termination of this Agreement as provided herein, including5584any extension or renewal.558555861.4 TERRITORY: All areas and territories of Japan.558755881.5 TRADEMARKS: Trademarks as shown on Schedule B of this Agreement5589attached hereto and made a part hereof, and including any other trademarks,5590trade names and designs that EISAI knows or are associated with the Products,5591whether registered or unregistered. CNS may from time to time add trademarks to5592the list on Schedule B through simple notice thereof to EISAI or by unilaterally5593providing to EISAI a new Schedule B.559455951.6 YEAR: The first Year of this Agreement shall be the period from5596August 1, 2000, to March 31, 2001. Thereafter, Years of this Agreement shall be5597the twelve (12) month periods commending on April 1 and ending on the following5598March 31.559956005601ARTICLE II - DISTRIBUTION AND OTHER RESPONSIBILITIES560256032.1 Appointment: CNS hereby appoints EISAI as its exclusive distributor5604for the Territory with the right to appoint sub-distributors and agrees that CNS5605will not appoint or sell the Products to another distributor in the Territory,5606except to HERUSU as supplier to EISAI, so long as EISAI is not in breach of any5607terms or provisions of this Agreement subject to Clause 5.2, 5.3 and 5.4 herein.5608CNS will attempt to ensure EISAI's exclusivity for sale of Products in the5609Territory, but in cases where CNS is prevented by law from restricting sales by5610CNS's other distributors or representatives out of their respective territories5611into the Territory, CNS assumes no responsibility for such sales. Without paying5612any fees or incurring any similar liabilities or obligations, CNS shall exert5613reasonable efforts to arrange a smooth transition of information and business to5614EISAI from CNS's previous distributor for the Territory.561556162.2 Acceptance, Activity, and Compensation: EISAI hereby accepts the5617appointment and agrees that it will diligently promote, sell, and distribute the5618Products in the Territory in accordance with the terms and conditions of this5619Agreement. Eisai shall also provide all customary distributor services,5620including without limitation delivery, distribution, stock counts and inventory5621control, regulatory responsibilities, order taking, invoicing, collection,5622credit risk,56235624562525626<PAGE>562756285629sales promotion, merchandising, free goods, trade discounts, rebates and5630year-end bonuses, and reporting on and analysis of competitive activities and5631products. Eisai further agrees to perform other related activities described5632herein, including but not limited to those referenced in Section 2.13 below.5633Among other obligations, EISAI agrees to purchase Products exclusively from5634HERUSU for the Territory. EISAI shall not itself or through an affiliated party5635solicit orders for Products from customers outside the Territory or sell5636Products to customers outside the Territory. The sole compensation to EISAI for5637its sales, marketing, information, enhancement of goodwill, and other aspects of5638distribution pursuant to this Agreement but not as indemnification as provided5639in Sections 4.2 and 6.1 below shall be its profit on the resale of the Products5640in the Territory, and such profit shall be deemed to include all termination5641obligations and other payments which CNS might, but for this provision, have had5642to pay EISAI under the Agency law or applicable Laws in the Territory5643("Compensation for Termination").564456452.3 Facilities and Capability: EISAI shall maintain a suitable place of5646business and adequate facilities to enable it to perform its obligations under5647this Agreement. EISAI shall not establish or maintain an office or warehouse5648outside the Territory in connection with the sale of the Products outside the5649Territory. EISAI represents that it already possesses sufficient facilities and5650employs sufficient personnel to perform its responsibilities under this5651Agreement, that it does not need to expand or to hire additional people in order5652to represent and distribute the Products as provided herein.565356542.4 Promotion:565556562.4.1 EISAI shall use its best efforts to acquire5657sub-distributors that EISAI deems reasonably acceptable to CNS and5658otherwise to expand the market for the Products in the Territory and5659carry out a merchandising policy designed to preserve the goodwill that5660is currently associated with the name of CNS and with the Products.566156622.4.2 EISAI shall provide advice and assistance to CNS in CNS's5663efforts to advertise the Products to consumers in the Territory, such5664advice and assistance to include but not be limited to the placement of5665advertising; provided, however, that CNS shall bear the expense of all5666such consumer advertisement.566756682.4.3 CNS shall supply EISAI with samples of package design and5669promotional and sales materials from the U.S. market for adaptation to5670the market of the Territory at the expense of EISAI. All promotion and5671packaging materials or programs that relate to the Products and that are5672developed by or for EISAI shall be submitted to CNS for approval prior5673to the distribution, use or implementation thereof.567456752.4.4 EISAI shall be responsible for the development and5676implementation of all sales promotions, including but not limited to5677special trade56785679568035681<PAGE>568256835684discounts, and other trade incentives. Any direct or indirect expenses5685associated with such sales promotions shall be the sole responsibility5686of EISAI.568756882.5 Market Information: If so required by CNS, EISAI shall remain fully5689knowledgeable about the market for the Products in the Territory and shall keep5690CNS fully informed with respect thereto, and shall advise CNS of any changes in5691applicable laws and regulations pertaining to the quality and marketability of5692the Products in the Territory.56935694569545696<PAGE>5697569856992.6 Business Planning and Review:570057012.6.1 After the second Year of this Agreement, EISAI shall5702supply to CNS at least two (2) months before the end of each Year during5703the term hereof an annual business plan for promotion and sale of the5704Products in the Territory ("Business Plan"). The Business Plan presented5705by EISAI shall include such matters as targeted levels for CNS's5706advertising spending in the Territory, supply of free samples to be5707distributed to consumer at the cost of CNS ("Consumer Samples"), and the5708supply of ten (10) strip samples to be distributed to customer at the5709cost of EISAI ("Customer Sample"). CNS and EISAI shall consult and5710decide on the Business Plan. In the event that the parties can not reach5711an agreement on such Business Plan prior to the commencement of the5712Year, final decisions on consumer activities shall be vested in CNS and5713final decisions on customer activities shall be vested in EISAI.571457152.6.2 EISAI shall furnish quarterly to CNS, upon CNS's request,5716such other periodic forecasts, budgets, promotional schedules, and5717recommendations for the Territory as CNS may reasonably request and5718shall confer with CNS quarterly to provide an update and progress report5719with respect to the Business Plan.572057212.6.3 In addition to the quarterly updates provided for in5722Section 2.6.2, during the Term of this Agreement, EISAI shall submit to5723CNS good faith twelve-month forecasts of quantities to be supplied by5724HERUSU by the end of January each year and monthly sales reports5725transmitted no later than ten (10) business days after the end of each5726month, including at least (1) Product sales by type and number of5727Product units sold; (b) a comparison of current sales against the sales5728forecast; and (c) inventory on hand at the end of such month, as well as5729other information and reports in such form as agreed by the Parties or5730as CNS may reasonably request for the purpose of keeping CNS advised of5731the current competitive conditions in the Territory and the progress of5732EISAI in promoting and selling the Products, including but not limited5733to wholesaler information such as names, addresses, purchase volumes,5734phone and fax numbers, upon request by CNS.573557362.6.4 For efficient ordering and execution of volume sales as5737forecast in this Agreement, EISAI shall provide promptly to HERUSU Co.,5738Ltd., ("HERUSU") copies of all forecasts that EISAI supplies to CNS.573957402.7 NOT AN AGENT: At all times during the term of this Agreement, EISAI5741shall act as an independent contractor. Neither the making of this Agreement nor5742the performance of any of the provisions hereof shall be construed to constitute5743EISAI as an agent or legal representative of CNS for any purpose; nor shall this5744Agreement be deemed to establish a joint venture or partnership. Each purchase5745of the Products by EISAI from CNS pursuant to this Agreement, each sale of the5746Products made by EISAI and each agreement or commitment made by EISAI to any5747person, firm or corporation with respect thereto shall be made by EISAI for its5748own account57495750575155752<PAGE>575357545755as principal and at its own expense. EISAI will have no authority to represent5756CNS in the Territory or elsewhere as agent nor to bind CNS by any conduct,5757representations, or understanding concern CNS or the Products. The Parties agree5758that they do not intend to create and do not hereby create a franchise5759relationship under the laws of any jurisdiction.576057612.8 Conflict of Interest: During the term of this Agreement, EISAI shall5762not, directly or indirectly, manufacture, distribute or sell products in the5763Territory which in CNS's reasonable judgment are similar to or might compete or5764interfere with the sale of the Products except the products which EISAI sells5765prior to the launch of the Products. In the event that the parties agree to add5766a new product to Schedule A, EISAI shall inform CNS if EISAI has any similar5767product currently on sale which may compete with the CNS product to be added to5768Schedule A. Eisai shall so inform CNS early in the course of discussions and5769before the Parties agree to add the product to Schedule A.577057712.9 Expenses: Except as provided elsewhere in this agreement or as the5772Parties may otherwise expressly agree in writing from time to time, EISAI shall5773bear the costs and expenses for the performance of EISAI's obligation hereunder,5774including, but not limited to, bad debt expenses, inventory losses, commissions,5775taxes, and promotion to the distribution network. In no event shall CNS be5776liable for any such costs and expenses therefor incurred by EISAI unless CNS has5777specifically agreed in writing, in advance, to pay such expenses.577857792.10 Goodwill: EISAI shall use its best efforts to preserve and enhance5780the goodwill of the Products and the Trademarks. The Parties agree that all5781goodwill associated with the Products and the Trademarks in the Territory shall5782accrue solely to the benefit of CNS.578357842.11 Nondisclosure: The Parties agree that, to the extent that the5785confidentiality agreement in force between them as of May 19, 2000, may be5786limited, invalidated, or terminated, and the following terms and conditions5787shall apply to the confidential information disclosed by the Parties5788("Confidential Information").578957902.11.1 The party which receives the Confidential Information5791("Receiving Party") shall not disclose to any third party any5792Confidential Information relating to business or methods of carrying on5793business or any other information it receives from the Party which5794discloses Confidential Information ("Disclosing Party") without prior5795written consent of the Disclosing Party. Receiving Party shall return5796all such information to Disclosing Party upon termination or expiration5797of this Agreement. Except as indicated in Section 2.11.2, information5798that shall be considered to be confidential is all information5799concerning the Products, future unpublished product tests and5800specifications, future product plans, marketing and sales information,5801technical dossiers, product drawings, customer names, customer5802addresses, customer order history, and other customer data and5803information that the Receiving Party should reasonably understand to be5804confidential; however, in the case of termination of this Agreement,5805information relating to customer names, addresses, and order history5806directly or indirectly supplied by Eisai to CNS shall58075808580965810<PAGE>581158125813be excluded from this confidentiality obligation for the purpose of5814disclosure to EISAI's successor.581558162.11.2 Information is not considered as confidential if a) it5817becomes public through no fault of the Receiving Party; b) the Receiving5818Party develops the information independently prior to the receipt of5819such information; c) the Receiving Party has already possessed the5820information at the time of receiving it; d) the Receiving Party receives5821the information from a third party without restriction and without5822breach of any confidentiality agreement.582358242.12 Performance Objectives: Performance Objectives for the initial two5825Years of this Agreement are as specified in Schedule C. For each Year thereafter5826during the Term of this Agreement, the Parties shall agree in writing on5827Performance Objectives, as an update to Schedule C, at least two (2) months5828before the end of the current Year. Performance Objectives shall be updated as a5829part of the business plan referenced in Section 2.6.1 and shall include sales5830objectives of EISAI, volume of Customer Samples, trade promotion spending by5831EISAI, CNS's volume of Consumer Samples of Products, and CNS's advertising5832spending.583358342.13 Other Responsibilities of EISAI: EISAI agrees to perform certain5835additional duties specific to EISAI and/or the Territory, which duties are5836detailed in Schedule D and are considered by the Parties to be material to this5837Agreement.583858395840ARTICLE III - PURCHASE AND SUPPLY OF PRODUCTS584158423.1 Purchase and Supply: EISAI shall purchase for its own account and in5843its own name exclusively from HERUSU, such quantities of the Products as may be5844deemed necessary or desirable to meet fully and promptly all demand therefor5845from the customers in the Territory and to market the Products effectively in5846the Territory, subject to the terms and conditions herein. EISAI shall give to5847CNS and to HERUSU as much advance notice of supply requirements for the Products5848as reasonably practicable and shall observe the combined lead times specified by5849CNS and HERUSU. However, EISAI shall be released from this obligation during the5850three (3) months period prior to any termination.585158523.2 Prices, Terms, and Conditions: EISAI shall purchase Products, only5853from HERUSU, at the prices and on the terms and conditions agreed between EISAI5854and HERUSU.585558563.3 Inventories: EISAI shall establish and maintain at all times at5857least sufficient inventory of the Products to supply, fully and promptly, all5858demand for the Products by the customers in the Territory for one month. Such5859demand will be measured at any time by the greater of (a) the most recent5860month's sales and (b) EISAI's sales projections that include the next month.5861However, EISAI shall be released from this obligation during the three (3)5862months period prior to any termination.58635864586575866<PAGE>5867586858693.4 Warranties and Claims:587058713.4.1 Warranties: CNS warrants the Products only as specified in5872a warranty provided by CNS on the packaging of the Products or packed5873with the Products. The Parties recognize that a substitute warranty may5874be provided by HERUSU on the packaging of the Products or packed with5875the products. The Parties agree that any and all warranty-related claims5876concerning the Products must be presented by EISAI to HERUSU, rather5877than CNS, for action.587858793.4.2 Claims: EISAI shall as a courtesy notify CNS immediately5880of any likelihood of claim under the foregoing warranty and shall give5881such notification to CNS at substantially the same time as EISAI5882notified HERUSU of the likelihood of claim. EISAI shall also inform CNS5883immediately of any likelihood of claim from any consumer or consumers5884with regard to any of the Products. The Parties shall provide each other5885all reasonable assistance and cooperation with regard to any such claim5886by consumers. Indemnification with respect to such claims shall be5887conducted as provided in Section 6.3 below.588858893.4.3 Disclaimer of Liability: The warranty referred to in5890Clause 3.4.1 is the only warranty or representation made by CNS with5891respect to the Products. ALL OTHER EXPRESSED AND IMPLIED WARRANTIES ARE5892SPECIFICALLY DISCLAIMED, INCLUDING THOSE OF MERCHANTABILITY AND FITNESS5893FOR A PARTICULAR PURPOSE. IN NO CASE WILL CNS BE LIABLE FOR SPECIAL,5894INCIDENTAL OR CONSEQUENTIAL DAMAGES EVEN IF CNS HAS BEEN ADVISED OF THE5895POSSIBILITY OF SUCH DAMAGES.589658975898ARTICLE IV - TRADEMARKS589959004.1 Trademarks: CNS has registered or otherwise gained rights in the5901Territory with respect to some or all of the Trademarks referenced in Schedule5902B. CNS hereby licenses EISAI to use the Trademarks, free of charge, only during5903the term of this Agreement, only as provided herein and only in connection with5904EISAI's sale of the Products, to indicate the source of such Products. EISAI5905shall have no rights under this Agreement in or to the Trademarks, and shall not5906during or after the term of this Agreement represent that it is the owner of the5907Trademarks, whether or not such Trademarks are registered nor shall EISAI5908dispute the validity of the Trademarks during or after the Term of this5909Agreement.591059114.1.1 EISAI shall sell the Products only (a) with labeling and5912packaging of which the format and type have been supplied or approved by5913CNS and (b) under the Trademarks specified or approved by CNS.59145915591685917<PAGE>5918591959204.1.2 EISAI shall not at any time register or cause to be5921registered in its name or in the name of another, nor use or employ5922during or after the term of this Agreement, any of the Trademarks or any5923trade name or design resembling or similar to any of the Trademarks.592459254.1.3 EISAI agrees that upon termination or expiration of this5926Agreement EISAI will discontinue forthwith all use of the Trademarks,5927subject to Section 5.5 herein and shall not thereafter directly or5928indirectly sell or distribute any products bearing trademarks, names, or5929designs confusingly similar to the Trademarks or otherwise use trade5930names or designs confusingly similar to the Trademarks.593159324.2 Infringement: EISAI shall, for the benefit of CNS, undertake to5933monitor the infringement of the Trademarks in the Territory. EISAI shall5934promptly send a report to CNS in the event EISAI should become aware of any5935infringement or threatened infringement by a third party of the Trademarks or5936any patents of CNS in the Territory. CNS shall promptly take all necessary steps5937to remove or prevent such infringement and EISAI shall fully cooperate with CNS5938upon request. EISAI shall not pay, settle, or otherwise compromise or conclude5939any action or claim based on or involving any of the Trademarks or any patents5940without the prior written approval of CNS.594159425943ARTICLE V - TERM AND TERMINATION594459455.1 Duration: This Agreement shall become effective as of the Effective5946Date, shall continue in effect until March 31, 2003, and shall be automatically5947renewed thereafter for successive two-year terms, unless either Party gives5948notice to the other at least one hundred and eighty (180) days before the end of5949the then current term, indicating such Party's intent not to renew unless5950renewal is enforced under other provisions of this Agreement. Terms and5951conditions shall remain unchanged upon renewal.595259535.2 Termination by Either Party: Notwithstanding any other provisions of5954this Agreement, either Party, at its option, may terminate this Agreement5955immediately upon written notice to the other Party in the event that the5956repackaging agreement between CNS and HERUSU for the Territory terminates or5957upon written notice hereunder that the other Party to this Agreement:595859595.2.1 commences or has commenced against it any proceeding in5960bankruptcy, insolvency, dissolution, composition, or reorganization5961pursuant to bankruptcy or similar laws, or makes an assignment for the5962benefit of its creditors;596359645.2.2 becomes insolvent or unable to pay its debts when due or5965admits its inability to pay its debts;59665967596895969<PAGE>5970597159725.2.3 is in material breach or material default in the5973performance of any of the provisions of this Agreement; provided that5974such breach or default has not been remedied within such thirty (30)5975days;597659775.2.4 receives notice that all or any substantial portion of its5978capital stock or assets will be expropriated by any governmental5979authority; or598059815.2.5 is acquired by, merges with, or comes under the control of5982another company, person or firm. In this context, control means that5983fifty percent (50%) or more of the securities representing voting5984control of the other party comes under the control of third party,5985another company, person or firm.598659875.3 Termination by CNS: Notwithstanding anything to the contrary above,5988CNS may also terminate this Agreement effective immediately upon written notice5989to EISAI if EISAI sells Products to other countries without CNS's prior written5990authorization.599159925.4 Reasonable Notice: The parties recognize and agree that the5993termination notice periods provided in this Sections 5.2 and 5.3 are reasonable5994under the circumstances, and they agree not to assert otherwise at any time.599559965.5 Effect of Termination or Expiration: In the event of termination or5997expiration of this Agreement EISAI shall immediately cease acquiring and5998distributing the Products, except that EISAI shall have the right during the5999three (3) months immediately following termination to sell off its inventory of6000the Products in compliance with good business practices, and the Parties agree6001further that:600260035.5.1 Such termination shall not prejudice the rights and6004obligations of CNS and EISAI accrued up to and including the date of6005such termination.600660075.5.2. Provisions of Sections 2.11, 3.4, 5.5, 5.5.3, 7.2, and60087.3 shall survive termination of this Agreement.600960105.5.3 In the event of any expiration, termination or non-renewal6011of this Agreement pursuant to the terms hereof, except as provided in6012Article 6, EISAI shall not be entitled to any compensation, damages,6013payment for goodwill that has been established, severance pay,6014Compensation for Termination, or any other amount for any other cause,6015by reason of the termination of the relationship between CNS and EISAI,6016or the expiration, termination, or non-renewal of this Agreement or any6017rights hereunder, despite any applicable law within or without the6018Territory to the contrary.601960205.5.4 In the event of termination or non-renewal of this6021Agreement, EISAI shall return to CNS all unused promotional or other6022materials relating to the sale of the Products and any and all other6023property of CNS in the possession or control of EISAI.602460256026106027<PAGE>6028602960305.5.5 In the event of termination or non-renewal of this6031Agreement, EISAI shall, upon request of CNS, assist CNS in the transfer6032of the distribution business of the Products to CNS's designee.603360346035ARTICLE VI - INDEMNIFICATION603660376.1 Indemnification by CNS: Subject to provisions of Section 6.3 below,6038CNS shall indemnify and hold EISAI harmless from and against any losses,6039obligations, liabilities, costs and expenses, including legal and other fees,6040due to any claim of a third party arising from the act of omission or negligence6041of CNS or its employees and agents in connection with its obligations hereunder.604260436.2 Indemnification by EISAI: Subject to provisions of Section 6.36044below, EISAI shall indemnify and hold CNS harmless from and against any losses,6045obligations, liabilities, costs and expenses, including legal and other fees,6046due to any claim of a third party arising from the act or omission or negligence6047of EISAI or its employees and agents in connection with its obligations6048hereunder.604960506.3 Qualifications: To qualify for indemnification with respect to any6051claim as provided in Section 6.1 or 6.2 above, the Party seeking indemnification6052(the "Requesting Party') must (a) give the other Party (the "Indemnifying6053Party") prompt notice of the claim with regard to which indemnification is being6054sought (the "Claim"); (b) allow the Indemnifying Party, upon reasonable notice6055to the Requesting Party and at the Indemnifying Party's option, to conduct or6056participate in the defense, negotiation, and settlement of the Claim, at the6057expense of the Indemnifying Party; (c) render all reasonable assistance to the6058Indemnifying Party in the defense, negotiation, or settlement of the Claim; and6059(d) refrain from settling or compromising the Claim or the position or defense6060of the Indemnifying Party without prior written consent of the Indemnifying6061Party, which consent the Indemnifying Party shall not unreasonably deny or6062delay. The parties agree that any portion of the losses, obligations,6063liabilities, costs and expenses referred to in Section 6.1 or 6.2 above that is6064attributable to a willful or negligent act or failure to act, on the part of the6065Requesting Party or any of its employees or agents is excluded from the6066indemnification provided herein.606760686069ARTICLE VII - MISCELLANEOUS PROVISIONS607060717.1 Notice: Any notice required or permitted to be given under this6072Agreement shall be deemed to have been duly given if hand delivered or delivered6073by facsimile, registered mail, or commercial messenger service to the address6074listed at the beginning of this Agreement for the Party to be notified. If a6075Party gives notice according to this Section 7.1, updating and amending that6076Party's address, then the address required for such notification by the other6077Party shall be the607860796080116081<PAGE>608260836084address as so updated or amended. All notices are effective upon receipt or6085rejection by the Party to be notified.608660877.2 Validity: In the event that a provision of this Agreement is held6088invalid by a court of competent jurisdiction, the remaining provisions shall6089nonetheless be enforced in accordance with their terms. Further, in the event6090that any provision is held to be overbroad as written, such provision shall be6091deemed amended to narrow its application to the extent necessary to make the6092provision enforceable according to applicable law and shall be enforced as6093amended.609460957.3 Compliance with Law; Governing Law; Disputes:609660977.3.1 Compliance: EISAI shall comply with all applicable6098statutes, regulations, and ordinances and other laws.609961007.3.2 Governing Law: This Agreement shall be deemed to have been6101made in the State of Minnesota, USA, and shall be governed by and6102interpreted in accordance with the laws of the State of Minnesota,6103without regard to the rules of any jurisdiction with respect to6104conflicts of laws.610561067.3.3 Arbitration: In the event of any disputes arising in6107connection with this Agreement, both Parties agree to make every effort6108to resolve the disputes amicably between themselves. Any disputes not so6109settled shall be finally settled by binding arbitration under the6110arbitration rules of the American Arbitration Association ("AAA"), with6111the following stipulations: (a) the language of the arbitration shall be6112English; provided, however, that documents in other languages shall be6113permitted as exhibits if mutually acceptable English translations are6114supplied by the offering party at its expense; (b) there shall be three6115(3) arbitrators, CNS shall appoint one of such arbitrators and EISAI6116shall appoint one of such arbitrators. Another arbitrator shall be6117appointed jointly by the Parties or, should they be unable to agree on a6118single arbitrator within thirty (30) days after notification by one6119Party to the other and to the AAA of invocation of provisions of this6120Section 7.3 to commence arbitration, then the arbitrator shall be the6121arbitrator chosen by the AAA under its rules; (c) the arbitrator is6122authorized to grant any relief appropriate under the applicable law,6123including without limitation declaratory relief and/or specific6124performance, and is further authorized and encouraged to award costs and6125fees in accordance with his or her assessment of the relative equities6126and validity and reliability of claims and defenses in the controversy,6127but is not empowered to award punitive damages against either Party.6128Both Parties consent to the jurisdiction of any court for enforcement of6129any arbitral award issued hereunder. During the pendency of any6130arbitration or court action initiated by EISAI against CNS in connection6131with this Agreement, EISAI's exclusivity with respect to sales in the6132Territory is suspended, and CNS may sell Products into the Territory6133either directly or through distributors or agents located inside or6134outside the Territory. The place of arbitration shall be Minneapolis,6135Minnesota, USA.613661376138126139<PAGE>6140614161427.4 Assignment: This Agreement shall be binding upon and shall inure to6143the benefit of the Parties hereto and their respective successors and assigns.6144EISAI shall not directly or indirectly transfer, assign, or otherwise encumber6145this Agreement without the prior written consent of CNS.614661477.5 Non-waiver: The failure of either Party to terminate this Agreement6148or exercise any of its other rights under this Agreement, even after breach of6149this Agreement by the other Party or after such other Party's failure to comply6150with any provision hereof, shall not be deemed a waiver of rights of termination6151or any other rights, with regard to either the event or incident in question or6152any future event or incident, whether similar or dissimilar.615361547.6 Force Majeure: If the performance of any obligation under this6155Agreement, other than payment of money, is prevented or delayed for any cause6156beyond the reasonable control of the Party whose performance is prevented or6157delayed, such Party shall be excused from performance so long as and to the6158extent that such cause continues to prevent or delay performance; provided,6159however, that such defaulting Party shall promptly notify the other Party of the6160existence of such cause and shall at all times use its best efforts to resume6161promptly and complete its performance.616261637.7 Headings: The titles and headings used in this Agreement are solely6164for convenience and are not to be used in the interpretation of any provisions6165hereof.616661677.8 Entire Agreement: This Agreement, together with its Schedules,6168constitutes the entire Agreement between the Parties and supersedes any and all6169prior and contemporaneous oral or written understandings between the Parties6170relating to the subject matter hereof. No amendment is valid unless in writing6171and signed by both Parties. Notwithstanding any translation hereof, the English6172language version shall control.61736174IN WITNESS WHEREOF, the Parties have caused this Agreement to be6175executed by their duly authorized offices in two copies each of which shall be6176deemed an original as of the Effective Date:61776178CNS, INC. EISAI CO., LTD.617961806181/s/ Marti Morfitt /s/ Mitsuhiro Ebata6182- ----------------------------------- ----------------------------------6183Name: Marti Morfitt Name: Mitsuhiro Ebata6184Title: President and COO CNS, Inc. Title: Cooperate Officer6185Consumer Health Division6186Eisai Co., Ltd.618761886189136190<PAGE>619161926193CNS DISTRIBUTOR AGREEMENT61946195EISAI CO., LTD.61966197SCHEDULE A - PRODUCTS AND TERRITORY61986199PRODUCTS:62006201From the Effective Date forward until otherwise agreed or terminated,6202Breathe Right(R) nasal Strips, both tan and clear.62036204In and after the second Year of this Agreement,6205Breathe Right(R) nasal strips for colds and for children.6206The Parties shall exert their best efforts jointly to launch6207these products in the market in the Territory in the second year6208of this Agreement.620962106211And other such products as may be added from time to time.62126213Unless otherwise expressly agreed in writing, the rights of EISAI do not include6214or apply to any products of CNS not listed above.621562166217146218<PAGE>621962206221CNS DISTRIBUTOR AGREEMENT62226223EISAI CO., LTD.62246225SCHEDULE B - TRADEMARKS62266227Trademarks:62286229Breathe Right(R)62306231623262336234And other such trademarks as may be added from time to time.623562366237156238<PAGE>623962406241CNS DISTRIBUTOR AGREEMENT6242EISAI CO., LTD.6243SCHEDULE C - PERFORMANCE OBJECTIVES624462456246EISAI and CNS shall agree on annual volume targets, support and business plans6247that will be executed by CNS and EISAI as follows:62486249The volume targets shall not be construed as a commitment of minimum purchase or6250sales quantity. Advertising spend and sample quantities shall not be construed6251as commitments of CNS.62526253<TABLE>6254<CAPTION>6255- ------------------------------ ---------------- -----------------------------------------------------62566 months 12 months from April each year6257- ------------------------------ ---------------- -----------------------------------------------------6258Oct 00-Mar 01 2001 2002*** 2002*** 2004***6259- ------------------------------ ---------------- -----------------------------------------------------6260<S> <C> <C> <C> <C> <C>6261Volume* [* * *] [* * *] [* * *] [* * *] [* * *]6262- -----------------------------------------------------------------------------------------------------6263CNS Ad Spend [* * *] [* * *] [* * *] [* * *] [* * *] [* * *]6264- -----------------------------------------------------------------------------------------------------6265CNS Free Strips for [* * *] [* * *] [* * *] [* * *] [* * *]6266Consumer Sample [* * *]6267- -----------------------------------------------------------------------------------------------------6268EISAI Trade Spend [* * *] [* * *] [* * *] [* * *] [* * *] [* * *]6269- -----------------------------------------------------------------------------------------------------6270EISAI Customer Sample [* * *] [* * *] [* * *]6271- -----------------------------------------------------------------------------------------------------6272</TABLE>62736274* Products (unit boxes of 10 strips) [* * *], includes Eisai inventory6275purchase in Year 1.6276** Volume Target in year 2001 includes the sales of Breathe Right(R)6277nasal strips for colds and for children.6278*** All figures above for years 2002 to 2004 are suggestive only and are not6279to be considered as agreed between the parties until the parties have6280agreed to them in connection with the business plans for the respective6281years.62826283CNS and EISAI shall review and agree on the amount of sales volume6284target, CNS Ad Spend, Consumer Sample, Eisai Trade Spend and EISAI Customer6285Sample for years 2002 to 2004 prior to the commencement of each year.628662876288166289<PAGE>629062916292CNS DISTRIBUTOR AGREEMENT62936294EISAI CO., LTD.62956296SCHEDULE D - ADDITIONAL DUTIES OF EISAI62976298In addition to the activities of EISAI as specified in this Agreement,6299EISAI shall perform the duties outlined below:63006301630263036304(NONE SPECIFIED AT THE TIME OF EXECUTION OF THIS AGREEMENT)630563066307176308</TEXT>6309</DOCUMENT>6310<DOCUMENT>6311<TYPE>EX-106312<SEQUENCE>46313<FILENAME>cns010440_ex10-12.txt6314<DESCRIPTION>EXHIBIT 10.12 AGREEMENT6315<TEXT>63166317CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH6318THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL6319TREATMENT UNDER RULE 24b-2.63206321EXHIBIT 10.1263226323AGREEMENT63246325This Agreement made effective the lst day of August, 2000 (hereinafter6326called the "Effective Date"), by and between: CNS, INC., of 7615 Smetana Lane,6327Eden Prairie, Minnesota 55344 U.S.A. (hereinafter called "CNS") and HERUSU, Co.,6328Ltd., of 665 Kasikehongo, Matsuo- machi, Sanbu-gun, Chiba, Japan 289-15376329(hereinafter called "HERUSU").63306331WITNESSETH:63326333WHEREAS, CNS intends to market and distribute the Products (hereinafter6334defined) in the Territory (hereinafter defined) and wishes to export Bulk6335Products (hereinafter defined) to HERUSU for repackaging and supply to the CNS6336distributor in the Territory (hereinafter referred to as "EISAI");63376338WHEREAS, HERUSU has the necessary facilities to repackage the Products6339and is willing to import, repackage and sell the same to EISAI for marketing and6340distribution in the Territory under terms and conditions hereinafter set forth;63416342NOW, THEREFORE, in consideration of the mutual covenants herein6343contained, the parties hereto agree as follows:634463451. DEFINITIONS63466347(a) "Bulk Products" shall mean the bulk strips manufactured by CNS and ready6348for repackaging.63496350(b) "Other Materials" shall mean packaging, labeling and other materials to6351be used in the repackaging of the Products.63526353(c) "Party" means CNS or HERUSU, as the case may be, and "Parties" means6354both CNS and HERUSU.63556356(d) "Products" shall mean tan and clear BREATHE RIGHT(R) nasal strips and6357other products as may be agreed between the Parties from time to time in6358writing, in finished form, appropriately packaged and labeled for the6359Territory; provided, that (a) CNS may elect not to offer all of its6360products to HERUSU; (b) CNS may unilaterally delete from the list of6361Products at any time, upon one hundred and eighty (180) days' notice to6362HERUSU,63636364<PAGE>636563666367those products which CNS no longer offers generally to distributors in6368the same form or with the same specifications; CNS may delete any6369Product from the list of Products at any time, for any reason, upon one6370hundred twenty (120) days' notice thereof to HERUSU, with the agreement6371of HERUSU or if CNS offers a comparable replacement for the Product to6372be deleted from the list.63736374(e) "Quality Agreement" shall mean the Agreement separately agreed to by the6375parties which contains the Specifications (hereinafter defined),6376handling instruction, special precautions and other information relating6377to the Repackaging (hereinafter defined) of the Products. CNS and HERUSU6378may, during the term of this Agreement, modify or supplement the Quality6379Agreement by mutual agreement of the parties. The Parties (hereinafter6380defined) acknowledge that the Quality Agreement shall be executed by6381CNS, HERUSU and EISAI.63826383(f) "Repackaging" shall mean the act of repackaging and labeling the Bulk6384Products appropriately for sale to EISAI, in compliance with the Quality6385Agreement and local laws, regulations, and market requirements.63866387(g) "Specifications" shall mean specifications, descriptions of the Products6388and Bulk Products, instructions, quality control and other information6389relating to the Products as defined by CNS.63906391(h) "Territory" shall mean all areas and territories of Japan.63926393(i) "Trademarks" shall mean any trademark and/or trade name to be used in6394the manufacture, repackaging, use and sale of the Products as listed in6395Schedule 2 hereof.63966397(f) "Year" shall mean the period from August 1, 2000, to March 31, 2001 for6398the first Year of this Agreement. Thereafter, Years of this Agreement6399shall mean the twelve (12) month periods commencing on April 1 and6400ending on the following March 31.640164022. PURCHASE AND SUPPLY OF PRODUCTS64036404(a) HERUSU shall purchase all its requirements for the Bulk Products from6405CNS. CNS shall exclusively supply the Bulk Products to HERUSU in the6406Territory. HERUSU shall perform Repackaging of the Bulk Products and6407sell the finished Products exclusively to EISAI in the Territory.64086409(b) CNS undertakes to supply HERUSU with such quantities of Bulk Products as6410may be agreed upon by the parties to be necessary and desirable to meet6411fully and promptly all demands from customers in the Territory as may be6412informed to HERUSU by the EISAI from time to time.64136414641526416<PAGE>641764186419(c) Subject to the provisions of 2(b) above, HERUSU shall provide to CNS a6420good faith written estimate of its requirements of the Bulk Products for6421one (1) year, divided into monthly calendar periods two (2) months prior6422to the commencement of such year. Further, HERUSU shall provide monthly6423to CNS a three (3) months good faith written estimate of its6424requirement. If any of HERUSU's purchase orders issued in accordance6425with Section 4(a) for delivery in any month call for more than one6426hundred and twenty five percent (125%) of HERUSU's most recent three (3)6427months written estimate for that particular calendar month, CNS shall6428not be obligated, but shall use its reasonable endeavors to meet such6429order in full provided that CNS may extend the shipping date for such6430exceeding order by such reasonable period of time as is necessary in the6431circumstances.64326433(d) HERUSU shall promptly obtain customs clearances and other documentation6434for the importation of the Bulk Products.643564363. SPECIFICATIONS AND OTHER INFORMATION64376438(a) CNS and HERUSU shall enter into the Quality Agreement separately from6439and after their execution of this Agreement.64406441(b) The Quality Agreement shall include, but not be limited to, the6442following items:64436444(i) Standards applicable to the Products, printing, lot coding,6445inventory method, repackaging methods and procedures, storage6446conditions, and other matters necessary for the proper6447Repackaging of the Products.64486449(ii) Matters requiring attention at the time of receiving, storing and6450shipping the Bulk Products and/or the Products, transport6451conditions and other matters essential to the Repackaging6452environment.64536454(iii) Matters necessary for quality control including, but not limited6455to, methods of selecting samples for inspection upon delivery of6456the Products and methods for assessing results of inspections.64576458(c) In the event that it is necessary to amend the Specifications, the6459parties shall discuss and agree on such amendments as appropriate and6460signify in writing their acceptance of such amendments, in compliance6461with Section 21 below.64626463(d) HERUSU shall not, without the prior written consent of CNS, make any6464alterations or modifications in the Specifications of the Products or6465the methods or procedures of Repackaging.646664674. PURCHASE ORDERS64686469647036471<PAGE>647264736474(a) HERUSU shall place a written order for its requirement of the Bulk6475Products not later than forty five (45) days prior to the required date6476of delivery to HERUSU ("Purchase Order"). The Purchase Order shall6477indicate the quantity, expected date of delivery, point of delivery and6478other terms and conditions for such particular order. CNS shall, upon6479receipt of HERUSU's Purchase Order, promptly issue a confirmation and6480acceptance of such Purchase Order. No order submitted by HERUSU shall be6481binding upon CNS unless confirmed and accepted by CNS. Confirmation and6482acceptance shall not be unreasonably withheld by CNS. All confirmed6483orders may not be canceled without the prior written consent of CNS.64846485(b) HERUSU shall work closely with EISAI in the Territory and shall always6486order Bulk Products sufficiently in advance that the time permitted for6487CNS's delivery under this Agreement allows HERUSU to meet the lead time6488requirement for the transaction between HERUSU and EISAI.64896490(c) The terms and conditions of this Agreement shall prevail and control6491over any conflicting terms and conditions used in the Purchase Order.649264935. DELIVERY AND SHIPMENT64946495(a) Delivery terms for the Bulk Products include CNS's export standard6496packing. Ownership and risk of loss of or damage to the Bulk Products6497shall transfer from CNS to HERUSU upon landing of the Bulk Products in6498Japan, before entering Customs.64996500(b) CNS shall send a sample of the Bulk Product manufactured prior to6501shipment to HERUSU for HERUSU's inspection, and HERUSU shall inspect it6502within seven (7) business days after the receipt of such sample. If in6503HERUSUs inspection the sample of the Bulk Products to be shipped is6504found to be defective or not conforming to the Specifications, HERUSU6505shall immediately notify CNS and send to CNS such defective sample for6506CNS's verification. CNS may thereupon either demonstrate to HERUSU that6507the Bulk Product is acceptable or designate a different lot of Bulk6508Products for shipment to HERUSU and send a sample of such different lot6509to HERUSU, thereby re-commencing the process described in this6510paragraph, including seven (7) business days limit for inspection by6511CNS. CNS shall not ship the bulk Product to HERUSU until the sample from6512the lot designated for shipment to HERUSU is confirmed acceptable by6513HERUSU. HERUSU shall not unreasonably withhold, condition, or delay its6514confirmation. Absence of HERUSU's rejection within any seven (7)6515business days time limit provided in this Section shall be deemed6516confirmation of HERUSU's acceptance of the relevant shipment of Bulk6517Products, and such Bulk Products shall not be subject to further6518inspection prior to shipment. In the event that the Bulk Product is6519found to be defective, CNS and HERUSU shall discuss and agree on new6520delivery date.65216522(c) Upon the arrival of each shipment of Bulk Products at the point of6523delivery in Japan, and65246525652646527<PAGE>652865296530no later than seven (7) business days after such arrival, HERUSU or its6531designee shall examine and inspect such shipment of the Bulk Products6532for damage, defect or shortage. In the event that, upon HERUSU's timely6533inspection, the Bulk Product supplied is found to be defective or does6534not conform to Specifications, CNS agrees to replace such shipment6535within forty-five (45) days, at CNS's cost. However, CNS shall be6536entitled to verify such claimed defect or non-conformity of the6537delivered Bulk Products prior to replacement. Defective or6538non-conforming Bulk Products shall either be returned to CNS or disposed6539of locally upon prior agreement between the parties.654065416. REPACKAGING OF PRODUCTS65426543(a) HERUSU shall Repackage the Bulk Products in accordance with the Quality6544Agreement and shall observe all Japanese laws and regulations pertinent6545to such Repackaging. However, prior to the commencement of the first6546Repackaging under this Agreement, and prior to the first Repackaging6547after any change in the Repackaging process, HERUSU shall submit to CNS6548the proposed package design of the Products for approval, consistent6549with CNS's specifications, and shall thereafter submit to CNS by fax or6550otherwise a legible copy of the test printed approved design as rendered6551on the package by HERUSU's printer for CNS' approval prior to use. CNS6552shall not unreasonably withhold any approval provided for in this6553section.65546555(b) HERUSU shall be responsible for procuring all repackaging and labeling6556materials to be used in the Repackaging of the Bulk Products. Prior to6557the first usage and procurement of such repackaging and labeling6558materials, and prior to the first usage and procurement of any6559repackaging and labeling materials different from those approved before6560by CNS, HERUSU shall submit to CNS the list of suppliers of such6561repackaging and labeling materials for approval (which approval shall6562not be unreasonably withheld). HERUSU shall ensure by contract or other6563arrangement that CNS has the right to audit or inspect such suppliers6564upon reasonable notice.656565667. PRICE AND PAYMENTS65676568(a) The price of the Bulk Products shall be as listed in the attached6569Schedule 1. From the Year 2001, such price(s) shall be fixed for a6570period of one (1) Year or as otherwise stated in Schedule 1. Generally,6571such price(s) shall be reviewed in good faith by the end of January each6572year during the term of this Agreement. However, if neither party gives6573written notice to the other to review such price(s) or to change such6574price(s), the previously agreed upon price(s) shall continue in effect6575for another one (1) year period. Provided, however, that upon mutual6576consultations and agreement of the parties, such price(s) may be changed6577at any time in consideration of changes in market and economic6578conditions and such other factors affecting the business of the parties.6579If the parties do not agree on pricing changes by the end of January in6580any Year, or at the latest on the day before the beginning of the6581following Year, the prices then in effect shall continue in65826583658456585<PAGE>658665876588effect for such following Year. The parties may then elect to make6589other, compensating adjustment for such Year as may be permitted by the6590terms of this Agreement65916592(b) All payments due under this Agreement are payable to CNS in U.S.6593Dollars. Unless otherwise specified in this Agreement, all required6594payments shall be due within ninety (90) days after issuance of the bill6595of lading, provided that the invoice has been received within a6596reasonable time thereafter, and shall be sent by telegraphic transfer to6597a designated bank account of CNS.65986599(c) All freight, insurance, forwarding and handling charges, customs duties,6600taxes, storage fees, and all other charges applicable to the Bulk6601Products and/or the Products and all samples shall be the responsibility6602of HERUSU. To the extent that the Parties consider practical, HERUSU6603will pay actual freight and insurance charges directly. If for any6604reason CNS should prepay reasonable freight and insurance charges,6605HERUSU shall reimburse CNS for such charges immediately upon receipt of6606an invoice for such charges, supported by evidence of payment by CNS.660766088. DEVIATIONS AND CHANGE CONTROL66096610(a) If CNS desires to make any change in the raw materials (including change6611of supplier or manufacturer of raw materials), manufacturing process, or6612manufacturing facilities of the Products and/or the Bulk Products, CNS6613shall notify HERUSU ninety (90) days prior to apply such change into6614manufacturing of the Products to be delivered to HERUSU under this6615Agreement66166617(b) If CNS notices, or has any reason to suspect, any abnormality in the6618quality of the Products during manufacture or while in storage, CNS6619shall immediately notify HERUSU to that effect so that the parties can6620agree upon appropriate procedures and/or remedies.662166229. CLAIMS66236624(a) In the event that HERUSU has any claim to be made with respect to the6625quantity, condition, loss or damage of the strips (hereinafter referred6626to as "Deficiency"), HERUSU shall notify CNS of any such claim within 76627days from the date HERUSU detects such deficiency and shall furnish CNS6628with a copy of HERUSU's written inspection report made upon arrival of6629the shipment in question and a description of any such defect or6630non-conformity. No such claim may be asserted by HERUSU later than six6631(6) months after delivery of the Products in question, "delivery" being6632agreed by the parties to occur upon transfer of title of the Products6633pursuant to this Agreement.66346635(b) No Bulk Products claimed to be defective may be returned to CNS or6636scrapped by HERUSU without the prior written consent of CNS. CNS shall6637bear the reasonable actual out-of-pocket costs of HERUSU for destruction6638of Bulk Products following CNS's approval.66396640664166642<PAGE>66436644664510. HANDLING OF CONSUMER CLAIM66466647(a) The procedure for handling claims by consumer relating to the defective6648Products shall be separately agreed to by the Parties in the Quality6649Agreement.66506651(b) In the case of a claim by a consumer alleging personal injury, damage or6652loss caused by the Products, HERUSU shall advise CNS immediately of such6653claim, ascertaining all relevant and necessary facts to permit CNS to6654conduct a prompt investigation. CNS shall initially advise HERUSU of its6655position on such claim within seven (7) days after the receipt of6656HERUSUs notice of claim and shall furnish to HERUSU a detailed report on6657such claim within a reasonable time thereafter, considering the pendency6658of the claim.6659666011. HANDLING OF PRODUCT RETURNS66616662CNS and HERUSU agree to share the cost of all product returns received6663from EISAI in the Territory (hereinafter referred to as "Product Returns"). CNS6664shall bear the cost of Bulk Strips and HERUSU shall bear the rest of the cost of6665the Products returned by EISAI provided that the limit of CNS's liability in any6666Year under this provision shall be the supply of replacement Bulk Product for6667returned Products not suitable for resale, to a maximum of [* * *] of the gross6668number of Products sold by CNS to HERUSU during such year; provided further,6669however, that the cost of Product returns caused by a defect or non-conformity6670shall be borne by the party hereto that is responsible for such defect or6671non-conformity. "Not suitable for resale" means that the 10-strip box of the6672Products has been opened or damaged by the customer or retailers.6673667412. INDEMNIFICATION66756676(a) Subject to provisions of Section 11(c) below, CNS shall indemnify and6677hold HERUSU harmless from and against any losses, obligations,6678liabilities, costs and expenses, including legal and other fees, due to6679any claim of a third party arising from any defect in the Bulk Products,6680or from any act or omission or negligence of CNS or its employees and6681agents, in connection with its obligations under this Agreement.66826683(b) Subject to provisions of Section 11(c) below, HERUSU shall indemnify and6684hold CNS harmless from and against any liability, claims, losses, legal6685and other fees, costs or expenses, including legal and other fees, due6686to any claim of a third party arising from any defect in the repackaging6687of the Products or any acts or omission or negligence of HERUSU or its6688employees and agents in connection with its obligations under this6689Agreement.66906691(c) To qualify for indemnification with respect to any claim as provided in6692Section 11(a) or66936694669576696<PAGE>66976698669911(b) above, the Party seeking indemnification (the "Requesting Party")6700must (a) give the other Party (the "Indemnifying Party") prompt notice6701of the claim with regard to which indemnification is being sought (the6702"Claim"); (b) allow the Indemnifying Party, upon reasonable notice to6703the Requesting Party and at the Indemnifying Party's option, to conduct6704or participate in the defense, negotiation, and settlement of the Claim,6705at the expense of the Indemnifying Party; (c) render all reasonable6706assistance to the Indemnifying Party in the defense, negotiation, or6707settlement, of the Claim; and (d) refrain from settling or compromising6708the Claim or the position or defense of the Indemnifying Party without6709prior written consent of the Indemnifying Party, which consent the6710Indemnifying Party shall not unreasonably deny or delay. The parties6711agree that any portion of the losses, obligations, liabilities, costs6712and expenses referred to in Section 11(a) or 11(b) above that is6713attributable to a willful or negligent act or failure to act, on the6714part of the Requesting Party or any of its employees or agents is6715excluded from the indemnification provided herein.6716671713. LEGAL RELATIONSHIP67186719For purposes of this Agreement, the parties herein are separate and6720independent contractors. Nothing herein contained shall be construed or6721deemed to create a principal- agent relationship or any form of6722partnership or joint venture. Neither party has and shall not hold6723itself as having any right, power, or authority to create any contract6724or obligation in the name of or binding upon the other party unless such6725contract or obligation is created with the prior written consent of the6726other party.6727672814. REGISTRATION, LICENSES AND INFORMATION67296730(a) HERUSU shall be responsible for obtaining registration/ license for the6731importation of the Bulk Products and Products into Japan and for the6732sale of the Products, and provision of the Products to retailers and6733consumers, in Japan. However, CNS shall assist HERUSU with the English6734language versions of all relevant documentation necessary for such6735registration/ license of the Products within Japan.67366737(b) Upon termination of this Agreement, HERUSU shall immediately, upon CNS's6738request, transfer any or all such registrations or licenses to CNS or a6739party designated by CNS for a reasonable actual out-of-pocket cost of6740transfer. CNS shall reimburse such cost incurred by HERUSU within 306741days after the receipt of the invoice sent by HERUSU.67426743(c) CNS shall appoint a member of its staff whom HERUSU can immediately6744contact for information and customer service as required.6745674615. TRADEMARKS67476748(a) CNS grants HERUSU the right to use Trademarks free of charge to6749repackage and sell the67506751675286753<PAGE>675467556756Products in the Territory pursuant to this Agreement.67576758(b) HERUSU recognizes the validity and ownership by CNS of the Trademarks.6759Therefore, HERUSU shall not, during the term of this Agreement or6760thereafter, represent that it is the owner of any Trademark pertaining6761to the Products nor shall it assert any right or interest in such6762Trademark or of any joint trademarks of the Trademark anywhere in the6763world. HERUSU shall not do or cause to be done any act or thing which6764may impair the validity or ownership by CNS of the Trademark at any time6765during and after the term of this Agreement.67666767(c) The Trademarks shall be used by HERUSU only with respect to the6768repackaging and sale of the Products to EISAI in the Territory and in6769strict conformity with the Specifications and instructions of CNS.67706771(d) CNS shall, to the best of its ability, protect the Trademark and shall6772at its own expense prosecute infringers of such Trademark. CNS's6773decision as to whether or not such action shall be taken shall be6774accepted by HERUSU as final. HERUSU shall immediately bring to the6775attention of CNS any improper or wrongful use in the Territory of CNS's6776patents, trademarks, emblems, designs, models or other similar6777industrial or commercial monopoly rights. Upon CNS's request and6778expense, HERUSU shall assist CNS in taking all steps to defend the6779rights of CNS with respect to the trademarks. In such a case, CNS shall6780reimburse HERUSU its reasonable, actual, out-of-pocket expenses for such6781assistance. However, HERUSU agrees not to initiate on its own motion or6782in its own name any protective action or legal proceedings with respect6783to the Trademarks or the Products without the prior written6784authorization of CNS. Also, HERUSU shall act with care in its use of the6785Trademarks so as not to compromise, reduce, or injure CNS's rights in6786the Trademarks.6787678816. CONFIDENTIALITY67896790(a) CNS and HERUSU acknowledges that all information transmitted by one6791party to the other under this Agreement, including but not limited to,6792information relating to research, development, manufacturing, testing,6793purchasing, accounting and marketing, are confidential (the6794"Confidential Information"). The parties undertake to hold such6795Confidential Information confidential and shall not disclose such6796information to third parties unless otherwise agreed to in writing by6797the parties to disclose such information. However, such obligation of6798confidentiality and non-disclosure shall not apply to information that.67996800(i) is or becomes publicly available through no fault of the party6801receiving the information;68026803(ii) is disclosed to the party receiving the information by a third6804party entitled to disclose it;68056806680796808<PAGE>680968106811(iii) is already known to the party receiving the information as is6812shown by prior written documentation; or68136814(iv) is developed independently by the party receiving the6815information as is proven by proper evidence.68166817(b) The parties hereto undertakes to hold the Confidential Information in6818confidence and shall use the same degree of care as if they are6819protecting their own information. The party receiving the Confidential6820Information shall use such information only for purposes of exercising6821its rights and fulfilling its obligations under this Agreement. Further,6822the parties agree not to use the other party's Confidential Information6823for their own benefit or for the benefit of any third party.68246825(c) The parties hereto covenant and agree that they will limit the6826disclosure of such Confidential Information only to their employees to6827whom such disclosure is necessary and appropriate to permit the party6828receiving the information to exercise its rights and carry out its6829obligations under this Agreement. Notwithstanding the foregoing, each6830party shall be free to disclose Confidential Information to: (i) an6831appropriate governmental agency properly requiring such disclosure or in6832order to comply with applicable law, and (ii) to its Affiliates and6833consultants who are bound by the same conditions of confidentiality as6834are undertaken by each party herein.68356836The obligations herein contained shall survive the termination of this6837Agreement and shall continue for five (5) years after termination6838hereof.6839684017. WARRANTIES68416842(a) CNS warrants that all Bulk Products shipped to HERUSU under this6843Agreement have been manufactured in accordance with applicable laws and6844regulations and are free from defects in materials and workmanship and6845conform to the Specifications and quality control tests pertinent to6846such Bulk Products. CNS further warrants that all documentation6847(including records maintenance) relating to manufacturing and testing of6848the Bulk Products was made in accordance with relevant laws, regulations6849and the Specifications. THE FOREGOING ARE ALL OF CNS'S WARRANTIES. CNS6850DOES NOT WARRANT THAT THE BULK PRODUCTS OR THE PRODUCTS ARE6851MERCHANTABLE: NOR DOES CNS WARRANT THAT THE BULK PRODUCTS OR THE6852PRODUCTS ARE FIT FOR ANY PARTICULAR PURPOSE.68536854(b) CNS'S LIABILITY WITH RESPECT TO ITS WARRANTIES FOR THE BULK PRODUCTS AND6855THE PRODUCTS IS LIMITED IN THE AGGREGATE TO THE PAYMENTS OF SALES PRICES6856CNS HAS RECEIVED UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTHS6857PRIOR TO THE EVENT (OR FIRST EVENT, IF MORE THAN ONE EVENT IS ALLEGED)6858GIVING RISE TO THE WARRANTY CLAIM. THE LIMITATION EXPRESSED IN THIS6859PARAGRAPH686068616862106863<PAGE>686468656866DOES NOT APPLY TO INDEMNIFICATION BY CNS UNDER SECTION 11.68676868(c) EXCEPT AS EXPLICITLY PROVIDED IN THIS AGREEMENT, CNS SHALL NOT BE6869RESPONSIBLE FOR ANY LOSS, DAMAGE, EXPENSES, CLAIMS, COSTS OR ANY ACTION6870WHATSOEVER ARISING FROM THE SUPPLY OR SALE OF THE PRODUCTS BY HERUSU.6871HERUSU SHALL NOT MAKE ANY REPRESENTATION TO THIS EFFECT WHATSOEVER ON6872CNS'S BEHALF. IN NO EVENT SHALL CNS BE LIABLE FOR ANY INCIDENTAL,6873SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT, THE6874BULK PRODUCTS, OR THE PRODUCTS.6875687618. INSPECTIONS68776878(a) CNS or its authorized representative shall have the right to inspect6879HERUSU's records and facilities relating to the Repackaging of the6880Products, and HERUSU shall ensure that CNS has the right to inspect the6881related records and facilities of HERUSU's subsidiaries and suppliers6882used in connection with the Products, the Repackaging, or the Bulk6883Products, and CNS shall conduct such inspection(s) in the presence of a6884HERUSU representative during normal business hours. Such inspection(s)6885shall be notified in writing to obtain an approval in advance, upon6886reasonable notice (such approval not to be unreasonably withheld,6887conditioned, or delayed). If, upon inspection, CNS finds that any6888Products Repackaged by HERUSU or that any Repackaging process does not6889conform to relevant laws, regulations or the standard rules and agreed6890specifications on Quality Agreement, CNS shall notify HERUSU in writing6891of such findings. HERUSU undertakes to correct such defect within thirty6892(30) days upon receipt of notice from CNS.68936894(b) HERUSU or its authorized representative shall have the right to inspect6895CNS's records and facilities relating to the Bulk Products. HERUSU shall6896conduct such inspection(s) in the presence of a CNS representative6897during normal business hours. Such inspections shall be notified in6898writing to obtain an approval in advance, upon reasonable notice (such6899approval not to be unreasonably withheld, conditioned, or delayed). If,6900upon inspection, HERUSU finds that any Bulk Products or that any6901manufacturing process does not conform to relevant laws, regulations or6902the standard rules and agreed specifications on Quality Agreement,6903HERUSU shall notify CNS in writing of such findings. CNS undertakes to6904correct such defect within thirty (30) days upon receipt of notice from6905HERUSU.6906690719. TERM AND TERMINATION69086909This Agreement shall become effective on the date first above written6910and shall continue in full force and effect from August 1, 2000 to March691131, 2003, renewing automatically thereafter for consecutive two-year6912periods unless either party gives notice to the other at least one6913hundred eighty (180) days prior to the end of the then current term,6914indicating691569166917116918<PAGE>691969206921such party's intent not to renew. However, in the event that one party6922defaults in or breaches any of its obligations under this Agreement or6923any provisions thereof, the other party shall have the right to6924terminate this Agreement upon thirty (30) days written notice to the6925party in default, provided that such default is not remedied within such6926thirty (30) days. Furthermore, either party may terminate this6927Agreement, immediately without notice, if one party becomes insolvent or6928is adjudicated by a voluntary or involuntary bankruptcy or a6929receivership of its assets or properties, and CNS may terminate this6930Agreement upon notice to HERUSU in the event that the Distribution6931Agreement between CNS and EISAI is terminated.6932693320. NON-ASSIGNABILITY69346935HERUSU shall not assign, transfer, sub-license or encumber any of its6936rights and obligations under this Agreement without the prior written6937consent of CNS. Notwithstanding this provision, HERUSU may assign or6938delegate some or all of its rights and obligations under this Agreement6939to any of its affiliates or subsidiaries, provided that HERUSU shall6940remain primarily responsible for the performance of such obligations and6941subject to an acceptable Agreement between the parties hereto. This6942Agreement shall be binding and inure to the benefit of the successors6943and assigns of CNS.6944694520. NOTICES69466947To be effective, all notices and statements to be given hereunder shall6948be in writing and shall be sent at the respective addresses of the6949parties as set forth below unless notification of a change of address is6950given in writing pursuant to this notice provision:69516952If to CNS:6953CNS, Inc.69547615 Smetana Lane6955Eden Prairie MN 553446956USA6957Attention: Ms. Marti Morfitt, President69586959If to HERUSU:6960HERUSU Co., Ltd. Chiba Factory6961665 Kasikehongo, Mastuo-machi, Sanbu-gun6962Chiba, Japan 289-15376963Yosuke Murashima6964Director, Manufacturing Department69656966All notices given pursuant to this Section 21 shall be deemed effective6967upon receipt or rejection by the Party to be charged with notice.696869696970126971<PAGE>69726973697422. ENTIRE AGREEMENT69756976This Agreement comprises the entire agreement of the parties hereto and6977supersedes all prior provisions, negotiations, agreements and6978conunitments with respect thereto and shall not be released, discharged,6979changed or modified in any manner except by instruments signed by the6980duly authorized officers or representatives of each of the parties6981hereto.6982698323. SEVERABILITY69846985If any provision of this Agreement is determined to be illegal, invalid6986or otherwise unenforceable, then to the extent necessary to make such6987provision and/or this Agreement legal, valid or otherwise enforceable,6988such provision shall be limited, construed or severed and deleted from6989this Agreement, and the remaining portion of such provision and the6990remaining other provisions hereof shall survive, remain in full force6991and effect and continue to be binding, and shall be interpreted to give6992effect to the intention of the parties insofar as that is possible.6993699424. FORCE MAJEURE69956996Except for the obligation of HERUSU to make payment when due, neither6997party shall be liable to the other for its failure to perform any of its6998obligations under this Agreement for so long and to the extent that such6999failure is due to causes beyond its reasonable control such as but not7000limited to prohibition in exportation or importation, refusal to issue7001export or import license, Acts of God, war, blockade, revolution,7002insurrection, strike, lockout, civil commotion, riot, plague or other7003epidemics, destruction of the Products by fire or flood or any other7004cause beyond the reasonable control of either party. However, the7005failure of either party to perform its obligations under this Agreement7006due to the foregoing reasons or events shall be limited and/or suspended7007only for a long as such reasons or events are existing. The performance7008of either party's obligations shall resume as soon as these reasons or7009events have been resolved or has ended; provided that for such reasons7010or events which are remediable or preventable, the failure to perform7011shall be excused only for as long as it is proven that the party so7012affected has exerted an efforts to remedy or prevent such reasons or7013events from occurring.7014701525. ARBITRATION70167017(a) Any disputes, controversies, difficulties or differences which may arise7018out of or in relation to this Agreement shall be settled amicably7019between the parties. However, in case of the failure to settle amicably7020such disputes, controversies, difficulties or differences, the parties7021hereto agree to settlement through arbitration in accordance with the7022International Arbitration Rules of the American Arbitration Association7023("AAA"). The arbitration shall be conducted by three (3) arbitrators.7024CNS shall appoint one of such702570267027137028<PAGE>702970307031arbitrators and EISAI shall appoint one of such arbitrators. Another7032arbitrator shall be chosen jointly by the parties or, if they fail to7033agree within thirty (30) days after notice by one of the parties of7034initiation of the arbitration, then such arbitrator shall be appointed7035by the AAA in accordance with said Rules.70367037(b) The place of arbitration shall be Minneapolis, Minnesota, USA.70387039(c) The language of the arbitration shall be English. Documents in other7040languages shall be permitted as exhibits but mutually acceptable English7041translations shall be provided by the offering Party.70427043(d) The award may grant any relief appropriate under the applicable law,7044including without Station declaratory relief and/or specific7045performance. However, the Parties agree that notwithstanding the7046applicable law, the arbitral tribunal shall not be empowered to award7047punitive damages against either Party.70487049(e) Judgment on the award may be entered in any court having jurisdiction7050over the award or any of the Parties or their assets.7051705226. COMPLIANCE WITH LAW: GOVERNING LAW70537054HERUSU shall comply with all applicable statutes, regulations,7055ordinances and other laws. This Agreement shall be governed by and7056interpreted in accordance with the Laws of the State of Minnesota,7057without regard to the rules of any jurisdiction with respect to7058conflicts of law.7059706027. HEADINGS70617062The titles, captions and headings used in this Agreement are for7063convenience only and must not be used in any way to interpret, construe7064or otherwise determine the meanings of any of the provisions or terms7065thereof.706670677068147069<PAGE>707070717072IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be7073executed by their duly authorized representatives.7074707570767077CNS, Inc. HERUSU Co., Ltd.70787079/s/ Marti Morfitt /s/ Tadanari Hiraku7080- ---------------------------------- ------------------------------------7081Name: Marti Morfitt Name: Tadanari Hiraku7082Title: President and COO Title: President7083CNS, Inc. HERUSU CO., LTD.7084Date: November 13, 2000 Date: November 10, 2000708570867087157088<PAGE>708970907091SCHEDULE 17092TO7093AGREEMENT7094BETWEEN7095HERUSU CO., LTD., AND CNS, INC.7096709770987099BULK PRODUCTS:7100Initially, tan and clear Breathe Right(R) nasal strips.7101Thereafter, additional products, as the Parties may agree upon in7102writing.7103710471057106PRICES:71077108For tan and clear Breathe Right(R) nasal strips, HERUSU shall pay the following7109prices, which reflect the parties' recognition of the advertising investment in7110the Market by CNS. The parties also recognize that CNS's advertising investment7111will vary substantially from Year to Year and is not proportional to any change7112in prices for the Bulk Products:71137114For the first three months from the date of the first order.71157116- --------------------------------------------------------------------------------7117Exchange Rate Price per Strip7118- --------------------------------------------------------------------------------7119[* * *] [* * *]7120- --------------------------------------------------------------------------------7121[* * *] [* * *]7122- --------------------------------------------------------------------------------7123[* * *] [* * *]7124- --------------------------------------------------------------------------------71257126From the fourth month until August 1, 200171277128- --------------------------------------------------------------------------------7129Exchange Rate Price per Strip7130- --------------------------------------------------------------------------------7131[* * *] [* * *]7132- --------------------------------------------------------------------------------7133[* * *] [* * *]7134- --------------------------------------------------------------------------------7135[* * *] [* * *]7136- --------------------------------------------------------------------------------71377138*The exchange rate used for calculation shall be the Mitsubishi Bank (Tokyo) TTS7139rate on the order date by HERUSU.714071417142167143<PAGE>714471457146Before March 31, 2001, CNS and HERUSU shall review and agree on the price for7147the period from August 1, 2001 to March 31, 2002.71487149CNS shall supply free samples of Products in quantities agreed with7150EISAI. HERUSU shall pay only the transportation, taxes, insurance, import7151duties, and other such costs for shipment and importation of such free samples7152into Japan.71537154CNS shall supply in reasonable quantities agreed with EISAI Bulk7155Products for EISAI to provide to customers and potential customers as boxed7156samples, including two strip boxes of Products to be sold to customers such as7157airlines or rail road companies which will purchase such Products not for resale7158but for their customer service. The price to be paid by HERUSU for Bulk Products7159intended for and limited to such resale is reduced to a standard US [* * *] per7160strip, and HERUSU shall pay all other costs and charges related to such sales,7161as provided above.716271637164177165<PAGE>716671677168SCHEDULE 27169TO7170AGREEMENT7171BETWEEN7172HERUSU CO., LTD., AND CNS, INC.7173717471757176Trademarks:71777178Breathe Right(R) and other trademarks, according to notice provided to7179HERUSU from time to time by CNS either adding or subtracting trademarks from the7180list of active trademarks subject to the provisions of this Agreement.718171827183187184</TEXT>7185</DOCUMENT>7186<DOCUMENT>7187<TYPE>EX-107188<SEQUENCE>57189<FILENAME>cns010440_ex10-21.txt7190<DESCRIPTION>EXHIBIT 10.21 EXECUTIVE EMPLOYMENT AGREEMENT7191<TEXT>71927193Exhibit 10.21719471957196EXECUTIVE EMPLOYMENT AGREEMENT71977198This Agreement is made as of January 2, 2001 (the "Effective Date") between CNS,7199INC. a Delaware corporation ("CNS") and Larry R. Muma ("Employee").72007201WHEREAS, CNS considers the establishment and maintenance of a sound and vital7202management to be essential to protecting and enhancing the best interests of CNS7203and its shareholders; and72047205WHEREAS, Employee has made and is expected to continue to make, due to his7206experience and knowledge, a significant contribution to the profitability,7207growth and financial strength of CNS; and72087209WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of7210a change in control may exist and that such possibility and the uncertainty and7211questions which it may raise among management may result in the departure or7212distraction of the performance of Employee's duties to the detriment of CNS and7213its shareholders; and72147215WHEREAS, Employee is willing to continue his employment with CNS upon the7216understanding that CNS will provide income security if Employee's employment is7217terminated under certain terms and conditions;72187219WHEREAS, it is in the best interests of CNS and its stockholders to employ7220Employee and to reinforce and encourage his continued attention and dedication7221to his assigned duties without distraction and to ensure his continued7222availability to CNS in the event of a Change in Control; and72237224WHEREAS, it is further in CNS's best interests to receive certain assurances7225from Employee regarding CNS's confidentiality, competition and other proprietary7226business concerns;72277228THEREFORE, in consideration of the foregoing and of this agreement, certain7229change in control protection, continued employment and other benefits hereunder,7230as well as other mutual covenants and obligations hereinafter set forth, CNS and7231Employee agree as follows:723272331. Employment. CNS agrees to continue to employ Employee as its VP,7234Operations under the terms, conditions and benefits set forth herein7235and Employee accepts continued employment with CNS on said terms,7236conditions and benefits.723772382. Term. The term of Employee's employment shall continue until terminated7239pursuant to paragraph 6, 7, or 8 herein.72407241<PAGE>724272437244Executive Employment Agreement7245Page 27246724772483. Duties. In his position as VP, Operations, Employee will continue to7249faithfully and diligently perform such executive management7250responsibilities as may be assigned to him from time to time by the7251Chief Executive Officer, President or Chairman of the Board of7252Directors of CNS (the "Board"); devote his full time, energy and skill7253to CNS's business, as is reasonably necessary to execute fully his7254duties hereunder, except for vacations, absences made necessary because7255of illness, and service on other corporate, civic, or charitable boards7256or committees not significantly interfering with his duties hereunder;7257and promote CNS's best interests. The principal place of employment and7258the location of Employee's principal office and normal place of work7259shall be in the Minneapolis, Minnesota metropolitan area. Employee will7260be expected to travel to other locations, as necessary, in the7261performance of his duties during the term of this Agreement. Employee7262shall notify the President of any other paid position which he is7263considering accepting, including but not limited to a board of7264directors position, a position as an employee or an independent7265consultant, or any position, whether or not for pay, which could7266constitute a conflict of interest with CNS. The Employee agrees not to7267accept any such position without the President of CNS's prior approval.726872694. Compensation. For all services rendered by Employee, CNS shall pay7270Employee the compensation described in Exhibit A, payable at such times7271as salaried employees of CNS are customarily paid. The President of CNS7272shall, from time to time during Employee's employment, review his7273annual salary in connection with possible increases, giving7274consideration to inflation factors, performance of Employee and CNS,7275salaries paid for positions of similar responsibility for other7276companies, and other relevant factors, and shall provide for such7277increases when deemed appropriate. Employee shall in addition be7278eligible to participate in the annual management incentive bonus7279program, as approved by the Board of Directors. In the event of7280termination of this Agreement by CNS without Good Cause, as defined in7281paragraph 7 herein, the Board may, in good faith and in its sole7282discretion, determine and cause to be paid a partial bonus based on7283Employee's performance through the date of termination, and such7284determination shall be final and binding.728572865. Benefits. Employee shall be entitled to Paid Time Off consistent with7287CNS policy and such insurance, 401(k) program and other benefits7288available to all salaried employees of CNS, subject to any limitations7289on such benefits to officers, directors or highly paid employees in7290order that such benefit programs qualify under federal or state law for7291favored tax or other treatment. Such benefit programs may be changed7292from time to time by the Board. Employee shall also be entitled to7293reimbursement of his reasonable and necessary expenses incurred in7294connection with the performance of his duties hereunder.729572966. Termination by Employee. Employee may resign his employment with CNS7297effective upon 30 days' advance written notice to the President. If7298Employee resigns under this72997300<PAGE>730173027303Executive Employment Agreement7304Page 3730573067307paragraph, the President retains the right to terminate his employment,7308effective upon written notice to Employee, at any time during the730930-day notice period, provided, however, that base salary and the7310employer portion of his health insurance premiums will continue to be7311paid by CNS for the duration of the 30-day notice period. In connection7312with his termination, Employee will receive any accrued unused Paid7313Time Off to which he is entitled.731473157. Termination by CNS. CNS shall have the right to terminate Employee's7316employment in any of the following ways:73177318a. CNS may, by written notice to Employee, terminate his7319employment without Good Cause, in which event Employee will be7320paid his base salary up to the date of termination. Employee7321is also entitled to receive Salary Continuation for one year7322from his termination date. "Salary Continuation" shall mean7323payment by CNS of the Employee's base salary as of his7324termination date, payable to Employee on the same schedule and7325in the same amount as the payment of base salary prior to7326termination of his employment, until such time as the full7327Salary Continuation obligation shall be discharged, as7328provided in this paragraph 7. During the period when Salary7329Continuation is payable to Employee, CNS will also continue to7330provide to Employee all group medical, dental and life plan7331benefits provided to its other senior executives. Employee7332shall also receive any accrued unused Paid Time Off to which7333he is entitled. Receipt of Salary Continuation is subject to7334Employee's compliance with his obligations under paragraphs 9,733510, 11 and 12 of this Agreement and his execution of a7336standard release agreement which includes, in addition to7337release of claims against CNS and related releasees, an7338obligation not to speak negatively about or harm CNS,7339confidentiality with respect to the termination process, and7340cooperation with the transition of responsibilities. Payment7341of the employer portion of Employee's group medical, dental7342and life plan premiums under this paragraph and under7343paragraphs 6 and 8 herein shall cease as of the date on which7344Employee is covered under other such group plans if such7345coverage occurs prior to termination of any salary7346continuation periods set forth in said paragraphs.73477348b. CNS, by written notice to Employee, may terminate his7349employment for Good Cause, as defined below. In the event of7350termination under this subparagraph 7.b., Employee shall be7351paid his base salary up to the date of termination. "Good7352Cause" for the purpose of this Agreement shall mean one or7353more of the following: (i) willful and premeditated failure or7354refusal of Employee to render services to CNS in accordance7355with his obligations under paragraph 3; (ii) the commission by7356Employee of an act of fraud or embezzlement against CNS; (iii)7357the commission by Employee of any other willful or reckless7358act which injures CNS in a substantial or material way (it7359being understood that mere negligence in73607361<PAGE>736273637364Executive Employment Agreement7365Page 4736673677368performance of duties is not Good Cause under this Agreement);7369(iv) the breach by Employee of any provision of this7370Agreement; or (v) the commission of a substantial act of moral7371turpitude by Employee which is deemed by CNS's Board to have a7372material adverse effect on CNS; or (vi) unsatisfactory7373performance after specific notice of performance deficiencies,7374description of expectations and opportunity to cure.73757376c. CNS, by written notice to Employee, may terminate Employee's7377employment under this Agreement if he becomes physically or7378mentally disabled during the term so that he has not been able7379to substantially perform, for a period of 120 consecutive7380days, with reasonable accommodation, the usual duties assigned7381to him hereunder ("Disability"). Upon such determination, CNS7382shall pay to Employee his base salary up to the date of such7383termination to the extent not covered by any disability plan.73847385d. This Agreement shall terminate upon the Employee's death7386during its term, except that CNS shall pay to the legal7387representative of Employee's estate all base salary due him up7388to the date of his death.738973908. Termination Following a Change in Control.73917392DEFINITION.73937394a. For purposes of this Agreement, "Change in Control" shall mean7395the occurrence of one of the following events:73967397i. ACQUISITION OF 25% OF STOCK IN CNS7398any "person" [as such term is used in Section 13(d)7399and 4(d) of the Securities Exchange Act of 1934, as7400amended ("Exchange Act")], other than a trustee or7401other fiduciary holding securities under an employee7402benefit plan of CNS is or becomes the "beneficial7403owner" (as defined in Rule 13d-3 under the Exchange7404Act), directly or indirectly of securities7405representing 25% or more of the combined voting power7406of CNS's then outstanding securities;74077408ii. CHANGE IN 50% OF BOARD DIRECTORS WHO WERE NOT7409APPROVED BY BOARD7410during any period of two consecutive years (not7411including any period ending prior to the effective7412date of this Agreement), individuals who at the7413beginning of such period constitute the Board of7414Directors of CNS, and any new director [other than a7415director designated by a person who has entered into7416agreement with CNS to effect a transaction permitted7417by Section 6(a)(I), (iii) or (iv)] whose election by7418the Board of Directors of74197420<PAGE>742174227423Executive Employment Agreement7424Page 5742574267427CNS or nomination for election by CNS's stockholders7428was approved by vote of at least two-thirds of the7429directors then still in office who either were7430directors at the beginning of the period or whose7431election or nomination for election was previously so7432approved ("Continuing Directors"), cease for any7433reason to constitute at least a majority of the Board7434of Directors of CNS;74357436iii. MERGER OR CONSOLIDATION WHERE CNS SHAREHOLDERS OWN7437LESS THAN 50% OF SURVIVING COMPANY'S STOCK7438the stockholders of CNS approve a merger or7439consolidation of CNS with any other corporation,7440other than (A) a merger or consolidation which would7441result in the voting securities of CNS outstanding7442immediately prior thereto continuing to represent7443(either by remaining outstanding or by being7444converted into voting securities of the merged or7445consolidated entity) 50% or more of the combined7446voting power of the voting securities of CNS or such7447merged or consolidated entity outstanding immediately7448after such merger or consolidation, or (B) a merger7449or consolidation effected to implement a7450recapitalization of CNS or similar transaction in7451which no "person" acquires more than 25% of the7452combined voting power of CNS's then outstanding7453securities;74547455iv. SALE OF CNS ASSETS FOR VALUE TOTALING 50% OR MORE OF7456CNS STOCK MARKET VALUE7457the stockholders of CNS approve a plan of complete7458liquidation or a sale or disposition by CNS of all or7459substantially all of CNS's assets. "The sale or7460disposition by CNS of all or substantially all of7461CNS's assets" shall mean a sale or other disposition7462transaction or series of related transactions7463involving assets of CNS or of any direct or indirect7464subsidiary of CNS (including the stock of any direct7465or indirect subsidiary of CNS) in which the value of7466the assets or stock being sold or otherwise disposed7467of (as measured by the purchase price being paid7468therefor or by such other method as the Board of7469Directors of CNS determines is appropriate in a case7470where there is no readily ascertainable purchase7471price) constitutes more than 50% of the fair market7472value of CNS. For purposes of the preceding sentence,7473the "fair market value of CNS" shall be the aggregate7474market value of CNS's outstanding common stock (on a7475fully diluted basis) plus the aggregate market value7476of CNS's other outstanding equity securities. The7477aggregate market value of CNS's common stock shall be7478determined by multiplying the number of shares of CNS7479common stock (on a fully diluted basis) outstanding7480on the date of the execution and delivery of a7481definitive agreement ("Transaction Date") with7482respect to the sale or disposition by CNS of all or7483substantially all of CNS's assets by the74847485<PAGE>748674877488Executive Employment Agreement7489Page 6749074917492average closing price for CNS's common stock for the7493ten trading days immediately preceding the7494Transaction Date. The aggregate market value of any7495other equity securities of CNS shall be determined in7496a manner similar to that prescribed in the7497immediately preceding sentence for determining the7498aggregate market value of CNS's common stock or by7499such other method as the Board of Directors of CNS7500shall determine is appropriate; and75017502Employee agrees that, subject to the terms and conditions of7503this Agreement, in the event of a Change in Control of CNS7504occurring after the date hereof, Employee will remain in the7505employ of CNS for a period of 30 days from the occurrence of7506such Change in Control.75077508b. Applicability. In the event of a Change in Control, the terms7509of this subparagraph 8.b shall be effective for a period of 247510months following the Change in Control. At the expiration of7511such 24 month period this Agreement in its entirety shall be7512terminated and be of no further effect. Employee shall be7513entitled to receive the benefits set forth in subparagraph 8.f7514if, within 24 months of such Change in Control, his employment7515is terminated by CNS or its successor without Good Cause (as7516defined in paragraph 7.a above), or by Employee for Good7517Reason (as defined in subparagraph 8.b.i, below). Employee7518shall, in return for the benefits provided under subparagraph75198.f., sign a standard release agreement with CNS, in which he7520agrees to release any and all claims and causes of action7521which he might have against CNS and in which he affirms and7522acknowledges his obligations under paragraphs 9, 10, 11 and 127523of this Agreement.75247525i. Termination for Good Reason shall be effective7526immediately upon written notice from the Employee to7527the President. Good Reason shall exist if CNS has7528materially breached any of the terms of this7529Agreement; Employee is assigned duties which are7530materially inconsistent with his position, duties,7531responsibilities and status as VP, Operations; his7532compensation, including any incentive compensation or7533bonus plan, is reduced; or relocation of CNS would7534require him to relocate his principal residence7535outside reasonable commuting distance of the Twin7536Cities Metropolitan area.75377538ii. Termination without Good Cause shall be effective7539upon 30 days' advance notice by CNS to the Employee.7540For purposes of this paragraph 8, Good Cause shall be7541defined as in subparagraph 7.b.75427543c. Notice of Termination. Any purported termination of employment7544under this paragraph 8 and also under paragraphs 6 and 7 shall7545be communicated by written75467547<PAGE>754875497550Executive Employment Agreement7551Page 7755275537554Notice of Termination to the other party hereto in accordance7555with paragraph 20 hereunder. For purposes of this Agreement, a7556"Notice of Termination" shall mean a notice which indicates7557the specific termination provision in this Agreement relied7558upon and which sets forth the facts and circumstances claimed7559to provide a basis for termination of Employee's employment.75607561d. Date of Termination. For purposes of this paragraph 8 and also7562paragraphs 6 and 7 of this Agreement, "Date of Termination"7563shall mean:75647565i. if Employee's employment is terminated for7566Disability, as defined in paragraph 7.c. hereunder,756730 days after Notice of Termination is given7568(provided that Employee shall not have returned to7569the full-time performance of Employee's duties during7570such 30 day period); and75717572ii. if Employee's employment is terminated pursuant to a7573provision contained in paragraph 6, 7 or 8 herein or7574for any other reason (other than Disability), the7575date specified in the Notice of Termination,7576consistent with the provisions in said paragraphs.75777578e. Dispute of Termination. If, within ten days after any Notice7579of Termination is given under this paragraph 8, the party7580receiving such Notice of Termination notifies the other party7581that a dispute exists concerning the termination, the Date of7582Termination shall be the date on which the dispute is finally7583determined, either by mutual written agreement of the parties,7584or by a final judgment, order or decree of a court of7585competent jurisdiction (which is not appealable or the time7586for appeal therefrom having expired and no appeal having been7587perfected); provided, that the Date of Termination shall be7588extended by a notice of dispute only if such notice is given7589in good faith and the party giving such notice pursues the7590resolution of such dispute with reasonable diligence.7591Notwithstanding the pendency of any such dispute, CNS shall7592continue to pay Employee full compensation in effect when the7593notice giving rise to the dispute was given (including, but7594not limited to, base salary) and continue Employee as a7595participant in all compensation, benefit and insurance plans7596in which Employee was participating when the notice giving7597rise to the dispute was given, to the extent permissible under7598the terms of the applicable group plans and state and federal7599law, until the dispute is finally resolved in accordance with7600this subparagraph. Amounts paid under this subsection are in7601addition to all other amounts due under this Agreement and7602shall not be offset against or reduce any other amounts under7603this Agreement.76047605<PAGE>760676077608Executive Employment Agreement7609Page 8761076117612f. Compensation Upon Termination. Following a Change in Control,7613as defined in subparagraph 8.a. above, to the extent provided7614in subparagraph 8.b. above, Employee shall be entitled to the7615following benefits in lieu of any benefits which would7616otherwise be available to him upon termination under7617paragraphs 6 or 7 hereunder:76187619i. CNS shall pay Employee through the Date of7620Termination Employee's base salary at the rate in7621effect at the time the Notice of Termination is given7622and any other form or type of other compensation7623otherwise payable for such period, including any7624applicable incentive bonus, commensurate with his7625performance and the performance of CNS.76267627ii. In lieu of any further salary payments for periods7628subsequent to the Date of Termination, CNS shall pay7629a severance payment (the "Severance Payment") equal7630to 24 months of Employee's Compensation as defined7631below based on the average monthly Compensation paid7632to Employee during the 24 month period ending7633immediately prior to the Date of Termination (without7634giving effect to any reduction in such Compensation7635which would constitute a breach of this Agreement).7636If the Employee has not been employed by CNS for 247637months as of the Date of Termination, average monthly7638Compensation shall be the Employee's average monthly7639Compensation for the number of months during which7640the Employee has been employed at CNS. For purposes7641of this subparagraph, Compensation shall mean and7642include every type and form of compensation paid to7643Employee by CNS (or any corporation ("Affiliate")7644affiliated with CNS within the meaning of Section76451504 of the Internal Revenue Code of 1986, as may be7646amended from time to time (the "Code")) and included7647in Employee's gross income for federal income tax7648purposes, but excluding compensation income arising7649from (1) hiring bonuses and (2) compensation income7650recognized as a result of the exercise of stock7651options or sale of the stock so acquired. All of7652Employee's contributions to any qualified plan7653pursuant to Section 401(k) of the Code or any7654flexible benefit plan pursuant to Section 125 of the7655Code shall be deemed to be included in gross income7656for federal tax purposes for purposes of this7657subparagraph. The Severance Payment shall be made in7658a single lump sum within 60 days after the Date of7659Termination.76607661iii. For 18 months following the Employee's Date of7662Termination, CNS shall arrange to provide, at its7663sole expense, Employee with group medical, dental and7664life plan benefits substantially similar to those7665which Employee was receiving or entitled to receive7666immediately prior to the Notice of Termination. The7667cost of providing such benefits shall be in addition7668to76697670<PAGE>767176727673Executive Employment Agreement7674Page 9767576767677(and shall not reduce) the Severance Payment.7678Benefits otherwise receivable by Employee pursuant to7679this paragraph (iii) shall be reduced to the extent7680comparable benefits are actually received by Employee7681during such period from any third party, and any such7682benefits actually received by Employee shall be7683reported to CNS.76847685iv. CNS shall also pay to Employee all legal fees and7686expenses incurred by Employee as a result of such7687termination (including all such fees and expenses, if7688any, incurred in contesting or disputing any such7689termination or in seeking to obtain or enforce any7690right or benefit provided by this paragraph).76917692v. The Severance Payment shall be reduced and offset by7693the amount of any other payment received or to be7694received by Employee in connection with his7695termination of employment pursuant to any policies of7696CNS.76977698vi. If a determination is made by legislation,7699regulations, rulings directed to CNS or Employee, or7700court decision that the aggregate amount of any7701payment made to Employee hereunder, or pursuant to7702any plan, program or policy of CNS in connection7703with, on account of, or as a result of, a Change of7704Control constitutes an "excess parachute payment" as7705defined in Section 280G of the Code subject to the7706excise tax provisions of Section 4999 of the Code, or7707any successor sections thereof, Employee shall be7708entitled to receive from CNS, in addition to any7709other amounts payable hereunder, an amount which7710shall be equal to such excise tax, plus, on a net7711after-tax basis, an amount equal to the aggregate7712amount of any interest, penalties, fines or additions7713to any tax, including income tax, which are imposed7714in connection with the imposition of such excise tax.7715Such amount shall be payable to Employee as soon as7716may be practicable after such final determination is7717made. Employee and CNS shall mutually and reasonably7718determine whether or not such determination has7719occurred or whether any appeal to such determination7720should be made.77217722vii. Employee shall be entitled to receive all benefits7723payable to Employee under the CNS, Inc. Profit7724Sharing Plan and Trust or any successor of such Plan7725and Trust and any other plan or agreement relating to7726retirement benefits, and, in addition, if Employee is7727not fully vested in his account balance under such7728Plan, a single lump sum payment in cash from CNS7729representing the nonvested portion of his account,7730which shall be in addition to, and not reduced by,7731any other amounts payable to Employee under this7732paragraph 8.77337734<PAGE>773577367737Executive Employment Agreement7738Page 10773977407741viii. Employee shall not be required to mitigate the amount7742of any payment provided for in this paragraph 8 by7743seeking other employment or otherwise, nor shall the7744amount of any payment or benefit provided for in this7745paragraph 8 be reduced by any compensation earned by7746Employee as the result of employment by another7747employer or by retirement benefits after the Date of7748Termination, or otherwise except as specifically7749provided in this paragraph 8.77507751ix. In order to assure the performance of CNS or its7752successor of its obligations under this paragraph,7753CNS may deposit in trust an amount equal to the7754maximum payment that will be due Employee under the7755terms hereof. Under a written trust instrument, the7756Trustee shall be instructed to pay to Employee (or7757Employee's legal representative, as the case may be)7758the amount to which Employee shall be entitled under7759the terms hereof, and the balance, if any, of the7760trust not so paid or reserved for payment shall be7761repaid to CNS. If CNS deposits funds in trust,7762payment shall be made no later than the occurrence of7763a Change in Control. If and to the extent there are7764not amounts in trust sufficient to pay Employee under7765this Agreement, CNS shall remain liable for any and7766all payments due to Employee. In accordance with the7767terms of such trust, at all times during the term of7768this Agreement, Employee shall have no rights, other7769than as an unsecured general creditor of CNS, to any7770amounts held in trust and all trust assets shall be7771general assets of CNS and subject to the claims of7772creditors of CNS. Failure of CNS to establish or7773fully fund such trust shall not be deemed a7774revocation or termination of this Agreement by CNS.77757776x. As a condition of receiving the Severance Payment and7777other benefits provided in this subparagraph 8.f and7778in subparagraph 8.g, Employee shall be required to7779sign a standard release agreement with CNS in which7780he agrees to release any and all claims and causes of7781action which he might have against CNS and in which7782he affirms and acknowledges his obligations under7783paragraphs 9, 10, 11 and 12 of this Agreement.77847785g. Stock Options. Employee shall, immediately upon a Change in7786Control, vest in all stock options which have been granted to7787him and he shall be entitled to exercise all rights and to7788receive all benefits accruing to him under any and all CNS7789stock purchase and stock option plans or programs, including7790the CNS, Inc. 1994 Amended Stock Plan, or any successor to any7791such plan or program, which shall be in addition to and not7792reduced by any other amounts payable to Employee under this7793paragraph 8.77947795<PAGE>779677977798Executive Employment Agreement7799Page 117800780178029. Confidential Information. All knowledge and information not already7803available to the public which Employee may acquire or has acquired with7804respect to product development, improvements, modifications,7805discoveries, designs, methods, systems, computer software, programs,7806codes and documentation, research, designs, formulas, instructions,7807methods, inventions, trade secrets, services or other private or7808confidential matters of CNS (such as those concerning sales, costs,7809profits, organizations, customer lists, pricing methods, etc.), or of7810any third party which CNS is obligated to keep confidential, shall be7811regarded by Employee as strictly confidential and shall not be used by7812Employee directly or indirectly or disclosed to any persons,7813corporations or firms. All of the foregoing knowledge and information7814are collectively termed "Confidential Information" herein. Employee's7815obligations under this paragraph will not apply to any information7816which (a) is or becomes known to the general public under circumstances7817involving no breach by Employee of the terms of this paragraph, (b) is7818generally disclosed to third parties by CNS as a continuing practice7819without restriction on such third parties, (c) is approved for release7820by written authorization of CNS's Board, or (d) Employee is obligated7821by law to disclose.7822782310. Disclosure and Transfer of Product Developments, etc.78247825a. Employee will make full and prompt disclosure to CNS or all7826product developments, improvements, modifications,7827discoveries, computer software, programs, codes and7828documentation, research, designs, formulas, configurations,7829instructions, methods and inventions (all of which are7830collectively termed "Developments" herein), whether patentable7831or not, made, discovered, conceived or first reduced to7832practice by Employee or under his direction during his7833employment, alone or with others, whether or not made or7834conceived during normal working hours or on the premises of7835CNS which relate in any material way to the business or to7836research or development work of CNS. Employee confirms by his7837acceptance of this Agreement that CNS owns and shall own all7838of the Developments.78397840b. Employee also agrees on behalf of himself and his heirs and7841legal representatives that he will promptly communicate,7842disclose and transfer to CNS, free of encumbrances and7843restrictions, all of his right, title and interest in the7844Developments covered by subparagraph 10.a. and any patents or7845patent applications covering such Developments and to execute7846and deliver such assignments, patents and applications, and7847any other documents as CNS may direct, and to cooperate fully7848with CNS to enable it to secure any patents or otherwise7849protect such Developments in any and all countries. Employee7850shall assign to CNS any and all copyrights and reproduction7851rights to all material prepared by Employee in connection with7852his employment.78537854<PAGE>785578567857Executive Employment Agreement7858Page 12785978607861c. Notwithstanding subparagraphs 10.a. and b., however, this7862paragraph 10 shall not apply to Developments for which no7863equipment, supplies, facility or trade secret information of7864CNS was used and which was developed entirely on the7865Employee's own time, and (1) which do not relate (a) directly7866to the business of CNS or (b) to CNS's actual or demonstrably7867anticipated research or development, or (2) which does not7868result from any work performed by Employee for CNS.78697870This will confirm that Employee's obligations to CNS under paragraphs78719, 10 and 11 will continue after the termination of Employee's7872employment.7873787411. Non-Competition. During the term of Employee's employment by CNS and7875for twelve (12) months thereafter, Employee shall not directly or7876indirectly engage in, enter into or participate in the business of CNS7877or in any business or commercial activity which does or is reasonably7878likely to compete with or adversely affect the Business or products of7879CNS, either as an individual for Employee's own account, as a partner7880or a joint venturer, or as an officer, director, consultant or holder7881of more than five percent (5%) of the entity interest in, any other7882person, firm, partnership or corporation, or an employee, agent or7883salesman for any person. In addition, during such period Employee shall7884not: avail himself of any advantages or acquaintances he has made with7885any person who has, within the twelve (12) month period ended on the7886date of termination of his employment, been a customer of CNS or its7887affiliates, and which would, directly or indirectly, materially divert7888business from or materially and adversely affect the Business of CNS;7889interfere with the contractual relations between CNS and any of its7890employees; or employ or cause to be employed in any capacity or retain7891or cause to be retained as a consultant any person who was employed in7892any capacity by CNS during the twelve (12) month period ended on the7893date of termination of Employee's employment.78947895For purposes of this Agreement, the "Business of CNS" or "Business"7896means and includes the business of the manufacture, production, sale,7897marketing and distribution of the Breathe Right strip and any other7898products currently offered or currently under development by CNS or7899offered or currently under development by CNS during one (1) year prior7900to the date of termination of Employee's employment.79017902Inasmuch as the activities of CNS are conducted on an international7903basis, the restrictions of this paragraph 11 shall apply throughout the7904United States, Canada, Japan and Europe.7905790612. Non-Solicitation. During the term of Employee's employment by CNS and7907for twelve (12) months thereafter, Employee shall not directly or7908indirectly solicit any current or prospective CNS customer, broker,7909vendor or distributor for the purpose of providing products or services7910for or on behalf of said customer, broker, vendor or distributor which7911are competitive with the products or services being provided by CNS,7912which are in the development stages of being competitive with the7913products or services being provided by79147915<PAGE>791679177918Executive Employment Agreement7919Page 13792079217922CNS, or which would in any way cause said customer, broker, vendor or7923distributor to discontinue or reduce its business relationship with7924CNS. Current CNS customers, brokers, vendors or distributors include7925those customer, brokers, vendors or distributors with whom CNS has had7926a business relationship at any time within one year immediately7927preceding Employee's termination date. Prospective CNS customers,7928brokers, vendors and distributors include those with whom (a) a CNS7929representative has been in direct personal contact and (b) CNS has a7930reasonable opportunity of entering into a business relationship within7931six months following Employee's termination date. Employee also agrees7932that during his employment in the one year period following his7933employment, he will not directly or indirectly solicit any CNS7934employees to terminate his or her employment with CNS. This Employee7935non-solicitation obligation applies to Employees of CNS during7936Employee's employment and as of his termination date.7937793813. Remedies. Employee acknowledges that the restrictions set forth in7939paragraphs 9, 10,11 and 12 hereof are reasonably necessary to protect7940legitimate business interests of CNS. It is understood that if Employee7941violates his obligations under any of these paragraphs, CNS would7942suffer irreparable harm for which a recovery of money damages would be7943an incomplete and inadequate remedy. It is therefore agreed that CNS,7944in addition to any remedies at law, shall be entitled, as a matter of7945right, in any court of competent jurisdiction, to a mandatory7946injunction restraining Employee pending litigation, as well as upon7947final determination thereof, from violating this Agreement. In7948addition, CNS will discontinue payment to Employee of any Severance or7949Salary Continuation Payments, benefits or bonus which he may be7950entitled to receive or is receiving under paragraphs 6, 7 or 87951hereunder or otherwise, in the event of his violation of any of his7952obligations under this Agreement. In the event of cessation of payments7953and benefits, Employee's release of his claims against CNS shall remain7954valid and fully enforceable in consideration of the benefits which7955Employee received prior to set breach.7956795714. Severability. The parties intend that the covenants and agreements7958contained herein shall be deemed to be a series of separate covenants7959and agreements, one for each and every state of the United States and7960political subdivision outside the United States where the business7961described is conducted. If, in any judicial proceeding, a court shall7962refuse to enforce any of the separate covenants deemed included in such7963action, then such unenforceable covenants shall be deemed eliminated7964from the provisions of this Agreement for the purpose of such7965proceeding to the extent necessary to permit the remaining covenants to7966be enforced in such proceeding. Further, in the event that any7967provision is held to be overbroad as written, such provision shall be7968deemed amended to narrow its application to the extent necessary to7969make the provision enforceable according to applicable law and enforced7970as amended79717972<PAGE>797379747975Executive Employment Agreement7976Page 1479777978797915. Binding Effect.79807981a. CNS will require any successor (whether direct or indirect, by7982purchase, merger, consolidation or otherwise) to all or7983substantially all of the business and/or assets as defined in7984subparagraph 8.a of CNS to expressly assume and agree to7985perform this Agreement in the same manner and to the same7986extent that CNS would be required to perform it if no such7987succession had taken place, in which case, the term "CNS" as7988used in this Agreement shall instead refer to CNS' successor.7989Failure of CNS to obtain such assumption and agreement prior7990to the effectiveness of any such succession shall be a breach7991of this Agreement and shall entitle Employee to compensation7992from CNS in the same amount and on the same terms as he would7993be entitled hereunder if he terminated his employment for Good7994Reason following a Change in Control, except that for purposes7995of implementing the foregoing, the date on which any such7996succession becomes effective shall be deemed the Date of7997Termination.79987999b. This Agreement shall inure to the benefit of and be8000enforceable by Employee's personal or legal representatives,8001successors, heirs, and designated beneficiaries. If Employee8002should die while any amount would still be payable to Employee8003hereunder if Employee had continued to live, all such amounts,8004unless otherwise provided herein, shall be paid in accordance8005with the terms of this Agreement to Employee's designated8006beneficiaries, or, if there is no such designated beneficiary,8007to Employee's estate.8008800916. Entire Agreement. From and after the date of this Agreement the terms8010and provisions of this Agreement constitute the entire agreement8011between the parties and this Agreement supersedes any previous oral or8012written communications, representations, or agreements with respect to8013any subject, including the subject matter of compensation, bonus,8014participation and profit sharing and termination compensation.8015801617. Waiver and Interpretation. The waiver by either party of a breach of8017any provision of this Agreement by the other party shall not operate or8018be construed as a waiver of any subsequent breach by the breaching8019party. No waiver shall be valid unless in writing and signed by the8020party providing such waiver. If any provision of this Agreement is held8021by any court to be unenforceable, then such provision shall be deemed8022to be eliminated from the Agreement to permit enforceability of the8023remaining provisions. If any provision is held to be overbroad, such8024provision shall be amended to narrow its application to the extent8025necessary for enforceability. For purposes of the release agreement8026which Employee shall be required to execute as a condition of receiving8027any payments and benefits hereunder, "CNS", as referred to in this8028Agreement, shall include CNS and all its80298030<PAGE>803180328033Executive Employment Agreement8034Page 15803580368037affiliates, shareholders, officers, directors, employees, agents,8038attorneys, insurers and indemnitors.8039804018. Applicable Law. All questions pertaining to the validity, construction,8041execution and performance of this Agreement shall be construed and8042governed in accordance with the laws of the State of Minnesota. The8043parties consent to the personal jurisdiction of the State of Minnesota,8044waive any argument that such a forum is not convenient, and agree that8045any litigation relating to this Agreement shall be venued in8046Minneapolis, Minnesota.8047804819. Tax Withholding. CNS may withhold from any payment of benefits under8049this Agreement (and forward to the appropriate taxing authority) any8050taxes required to be withheld under applicable law.8051805220. Notice. Any notice required or desired to be given under this Agreement8053shall be deemed given if in writing sent by certified mail to his8054residence in the case of Employee, or to its principal office in the8055case of CNS.80568057IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and8058year first set forth above.80598060CNS, INC.806180628063By /s/ Daniel E. Cohen8064-------------------------------------80658066Its CEO8067---------------------------------8068806980708071EMPLOYEE807280738074/s/ Larry R. Muma8075----------------------------------------8076Larry R. Muma8077<PAGE>807880798080EXECUTIVE EMPLOYMENT AGREEMENT80818082EXHIBIT A80838084NAME: Larry R. Muma80858086DATE: January 2, 200180878088POSITION: VP, Operations80898090DEPARTMENT: Operations80918092BASE SALARY: $182,00080938094MANAGEMENT INCENTIVE PLAN LEVEL: 15 at Threshold809530 at Plan809660 at Maximum8097</TEXT>8098</DOCUMENT>8099<DOCUMENT>8100<TYPE>EX-23.18101<SEQUENCE>68102<FILENAME>cns010440_ex23-1.txt8103<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT8104<TEXT>8105810681078108Exhibit 23.1810981108111INDEPENDENT AUDITORS' CONSENT81128113The Board of Directors8114CNS, Inc.:81158116We consent to incorporation by reference in the registration8117statements Nos. 333-60017, 33-29454, 33- 42971 and 33-59719 on Form S-8 of CNS,8118Inc. of our report dated January 18, 2001, relating to the consolidated balance8119sheets of CNS, Inc. and subsidiaries as of December 31, 2000, and 1999, and the8120related consolidated statements of operations, stockholders' equity and8121comprehensive income (loss), and cash flows for each of the years in the8122three-year period ended December 31, 2000, which report is included in the8123December 31, 2000, annual report on Form 10-K of CNS, Inc.81248125/s/ KPMG LLP8126812781288129Minneapolis, Minnesota8130March 26, 20018131</TEXT>8132</DOCUMENT>8133</SEC-DOCUMENT>8134-----END PRIVACY-ENHANCED MESSAGE-----813581368137