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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from _________ to __________
COMMISSION FILE NUMBER: 0-16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MN 55439
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 820-6696
Securities registered pursuant to section 12(b) of the act: none
Securities registered pursuant to section 12(g) of the act:
Title of each class
Common stock, par value of $.01 per share
Preferred stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES_X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 3, 1997, assuming as market value the price of $12.375 per share,
the closing sale price of the Company's Common Stock on the Nasdaq National
Market, the aggregate market value of shares held by non-affiliates was
$212,554,819.
As of March 3, 1997, the Company had outstanding 19,256,243 shares of Common
Stock of $.01 par value per share.
Documents Incorporated by Reference: The Company's (i) Annual Report to
Stockholders for the year ended December 31, 1996 and (ii) Proxy Statement for
its Annual Meeting of Stockholders to be held in April 1997, a definitive copy
of which will be filed with the Commission within 120 days of December 31, 1996,
are incorporated by reference into Parts II and III of this Form 10-K.
TABLE OF CONTENTS
Page
PART I ----
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 14
Item 3. Legal Proceedings.......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 16
Item 6. Selected Financial Data.................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 16
Item 8. Financial Statements and Supplementary Data................................ 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 17
Item 11. Executive Compensation..................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 17
Item 13. Certain Relationships and Related Transactions............................. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................................... 17
SIGNATURES ........................................................................... 18
Forward-Looking Statements
This Annual Report contains forward-looking statements under the
Private Securities Litigation Reform Act of 1995 that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those presently anticipated or projected. Such forward-looking statements
can be identified by the use of terminology such as "may," "will," "expect,"
"plan," "intend," "anticipate," "estimate," or "continue" or comparable
terminology. Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to the
following factors: (i) the Company's revenue and profitability is currently
reliant on sales of a single product; (ii) the Company's success will depend, to
a large extent, on the enforceability and comprehensiveness of the patents on
the Breathe Right(R) nasal strip technology, and the Company has been sued for
patent infringement (see Item 3, Legal Proceedings); (iii) the markets in which
the Company competes are highly competitive; and (iv) the risk factors included
in the Company's Prospectus dated March 29, 1996, included in its Registration
Statement on Form S-3 (File No. 333-01589) filed with the Securities and
Exchange Commission.
PART I
ITEM 1. BUSINESS
GENERAL
CNS, Inc. (the "Company") designs, manufactures and markets consumer
products, including the Breathe Right nasal strip which improves breathing by
reducing nasal airflow resistance. It can be effective in eliminating or
reducing snoring, for the temporary relief of nasal congestion, and for the
temporary relief of breathing difficulties due to a deviated nasal septum. The
Company also has entered into several agreements to market or license certain
new medical consumer products that are in various stages of marketing,
evaluation and testing.
BREATHE RIGHT NASAL STRIPS
The Breathe Right nasal strip is a nonprescription single-use
disposable device that improves breathing by reducing nasal airflow resistance.
The Company has received 510(k) clearances from the FDA to market the Breathe
Right nasal strip for improvement of nasal breathing (October 1993), reduction
or elimination of snoring (November 1995), temporary relief of nasal congestion
(February 1996) and temporary relief of breathing difficulties due to deviated
nasal septum (May 1996).
The Breathe Right nasal strip includes two embedded plastic strips.
When folded down onto the sides of the nose, the Breathe Right nasal strip lifts
the side walls of the nose outward to open the nasal passages. The product
improves nasal breathing upon application and does not include any medication,
thereby avoiding any medicinal side effects. The Breathe Right nasal strip is
offered in three sizes (junior/small, small/medium and medium/large) to
accommodate the range of nose sizes from a child's nose to an adult's nose. The
Breathe Right nasal strip is packaged for the over-the-counter ("OTC") market in
quantities of 10 or 30 strips per box and for sporting goods retailers in
quantities of eight strips per box. The Company believes that the Breathe Right
nasal strip is priced comparably to medicinal decongestants on a daily or
nightly dosage basis at suggested retail prices of $4.99 for a box of ten,
$11.99 for a box of 30 and $4.99 for an eight count sports pack.
MARKETS
The Breathe Right nasal strip is sold in the consumer OTC market, the
professional medical market and the athletic market. Because a substantial
number of people may be included in more than one market, the number of
potential customers for the Breathe Right nasal strip does not equal the
aggregate population of these markets.
CONSUMER OTC MARKET. Air impedence in the nose accounts for half of the
total airway resistance involved in the respiratory system (i.e., half of the
energy required for breathing). If the effort to breathe through the nose during
sleep is excessive, the person will resort to mouth breathing, promoting
snoring, dry mouth, sore throat and mini-awakenings which disrupt sleep. In
addition, nasal breathing difficulties during sleep are often caused by nasal
congestion found in people with allergies, sinusitis and the common cold and by
nasal obstruction due to a deviated nasal septum. The Company believes that
people with deviated septa or other structural problems or chronic conditions
such as snoring may be more predisposed to use the Breathe Right nasal strip on
a regular or daily basis while seasonal sufferers are likely to use the Breathe
Right nasal strip as needed. People with these medical conditions are currently
the primary users of the product and are the primary targets of the Company's
advertising.
SNORING. Market research commissioned by the Company indicates that, in
the U.S., approximately 78% of all households have at least one snorer,
approximately 37 million people snore regularly (every night) and 50
million people snore occasionally. In a clinical study conducted at the
Sleep Disorders Center in Cincinnati, Ohio, Breathe Right nasal strips
were effective in reducing snoring loudness or eliminating snoring in
75% of the participants in the study. Additional clinical studies show
that Breathe Right nasal strips may improve the quality of sleep. The
Company believes that the Breathe Right nasal strip is the only
non-prescription product in wide retail distribution that the FDA has
cleared to market for the reduction or elimination of snoring.
NASAL CONGESTION/OBSTRUCTION. The Company believes the Breathe Right
nasal strip can in many cases benefit those people who suffer from
nasal congestion, stuffy nose and nasal obstruction resulting from the
following conditions: (i) the common cold; (ii) allergies and sinus
disease -- approximately 35 million people in the U.S.; and (iii)
deviated nasal septum and other nasal structural deficiencies --
approximately 12 million people in the U.S. Clinical studies at the
Oklahoma Allergy Clinic in Oklahoma City, Oklahoma and at Park Nicollet
Clinic in Minneapolis, Minnesota have shown that the product relieves
some of the symptoms associated with nasal congestion caused by
allergies, and a clinical study at Mount Sinai Hospital, Toronto,
Ontario has shown that the product relieves some of the symptoms of
nasal obstruction due to septal deviation. For nasal congestion
applications, the Company believes that the Breathe Right nasal strip
is often used as either an alternative or adjunct to decongestant drugs
(including nasal sprays and oral decongestants).
PROFESSIONAL MEDICAL MARKET. In October 1996, the Company entered into
a Distributorship Agreement with Healthdyne Technologies, Inc. ("Healthdyne")
pursuant to which Healthdyne will market the Breathe Right nasal strip to the
professional medical market. The Company believes that patients receiving
various treatments for sleep apnea and chronic lung disease may become regular
users of the product if it is recommended to them by their physicians. The
Company believes that there are over one million sleep apnea and chronic lung
disease patients receiving treatments and an additional 15 million chronic lung
disease sufferers that may benefit from use of the Breathe Right nasal strip.
The Company also believes that awareness of the product by physicians will
increase their recommendations of the product for other applications.
ATHLETIC MARKET. The Company believes that the product may make nasal
breathing more comfortable and may improve endurance during athletic activity,
particularly when a mouth guard is used. Clinical studies are being conducted to
establish the benefit of use during athletic activity. The Breathe Right nasal
strip has been used by professional and collegiate athletes in sports such as
football and hockey, by race car drivers and horse racing jockeys and by
recreational athletes, including runners and bikers. The Company uses athletes
to endorse the Breathe Right nasal strip to increase the visibility of the
product, which thereby leads to awareness of the product for not only its
athletic applications, but also for snoring, nasal congestion and other
applications.
BUSINESS STRATEGY
The Company's strategy for increasing sales of its Breathe Right nasal
strip and expanding its product line consists of:
INCREASING NEW CONSUMER PRODUCT TRIAL. The Company uses a combination
of advertising, promotions and celebrity endorsements to increase consumer
awareness of the Breathe Right nasal strip and its benefits and to encourage
initial consumer trial of the product. The Company's advertising campaign
utilizes widely distributed magazines, nationally syndicated radio programs and
network and cable television to try to establish the Breathe Right nasal strip
as a leading OTC branded product for the relief of snoring and nasal congestion.
A research study commissioned by the Company indicates that, of the persons
surveyed in January 1996 and January 1997, total consumer awareness of an
unidentified device used over the nose to improve nasal breathing and reduce
snoring increased from 53% to 74% and household trial of the Breathe Right nasal
strip increased from 5% to 9%.
INCREASING REPEAT USAGE. According to research data collected by an
independent, nationally recognized consumer market research firm, approximately
32% in the U.S. of those who have purchased Breathe Right nasal strips have
purchased additional product. To encourage repeat usage, in 1995 the Company
introduced a 30 count box, which carries a suggested retail price 20% less per
strip than the 10 count box. Although the 30 count box is in fewer stores than
the 10 count box, the 30 count box accounted for approximately 48% of the
Company's domestic sales in 1996. The Company intends to try to increase the
retail distribution of the 30 count box.
EXPANDING PRESENCE IN INTERNATIONAL MARKETS. In August 1995, the
Company signed an exclusive international distribution agreement with 3M to
market the Breathe Right nasal strip outside the U.S. and Canada. 3M introduced
the product in over 30 countries in 1996 and expects the product to be available
at retail in additional international markets by the end of 1997.
EXPANDING PRESENCE IN THE PROFESSIONAL MEDICAL MARKET. In October 1996,
the Company entered into a Distributorship Agreement with Healthdyne pursuant to
which Healthdyne will market the Breathe Right nasal strip to the professional
medical market. The Company seeks to increase its presence in the professional
medical market, which includes patients receiving various treatments for sleep
apnea and chronic lung disease. The Company believes that educating the
professional medical market will lead to both recommendations for use of the
product in that market and for other applications, such as for snoring and nasal
congestion.
MARKETING NEW PRODUCTS THAT LEVERAGE DISTRIBUTION CHANNELS. The Company
has established a strong brand identity for the Breathe Right name and strong
distribution channels. The Company plans to leverage its marketing and
distribution strengths by acquiring or licensing the rights to those products
that it believes have merit and attempt to bring them to market. In 1996, the
Company began marketing the TheraPatch(TM), which is an external analgesic
manufactured by LecTec Corporation. There can be no assurance that the Company
will ever market any of the Company's other new products.
MARKETING STRATEGY
The Company began broad consumer marketing of the Breathe Right nasal
strip in September 1994. According to data collected by Information Resources,
Inc. ("IRI"), the Breathe Right nasal strip became a leading sales volume
producer during 1995 in the cough, cold and allergy section of drug, grocery and
mass merchant stores nationwide. In September 1995, the Company received two REX
(retail excellence) awards from Drug Stores News magazine. The first award named
the Breathe Right nasal strip as the best new product in the cough, cold and
allergy section in U.S. drug stores. The second award named the product the
"market maker of the year," the single most important product which
disproportionately increased traffic and profits in U.S. drug stores.
The Company's marketing efforts are primarily directed to the OTC
market. The Company's advertising focuses on the snoring and nasal congestion
applications for the product. The Company primarily uses a mix of consumer and
trade promotions and magazine, radio and television advertising to market the
Breathe Right nasal strip. Marketing communications are generally designed to
promote trial of the Breathe Right nasal strip by increasing consumer awareness
of the product's benefits.
The Company's paid advertising programs have been enhanced by media
coverage of use of Breathe Right nasal strips by professional athletes. In
addition, a number of radio and television personalties have provided
unsolicited endorsements of the product on national radio and television
programs. The Company has also entered into endorsement agreements pursuant to
which athletes will provide the Company with endorsement services. The Company
believes that use by professional athletes increases the visibility of the
product, which thereby leads to greater awareness of the product for not only
its athletic applications but also for snoring, nasal congestion and other
applications, and also makes it more acceptable for consumers to wear the highly
visible product.
The Company also uses product promotion programs, such as coupons, and
public relations activities to encourage product trial and repeat purchases.
Typically, coupons for the Breathe Right nasal strip appear three to four times
each year in free standing inserts (FSIs) that are included in Sunday newspapers
and are often tied to a holiday or special event theme such as Super Bowl,
Fathers Day, or the Christmas holidays (stocking stuffer). The Company has
developed a joint promotion with Johnson & Johnson for April 1997 in which
samples of Tylenol PM will be included in Breathe Right nasal strip packages and
samples of Breathe Right nasal strips will be included in Tylenol PM packages.
The Company intends to seek additional joint promotion opportunities in the
future. To increase consumer product awareness, the Company also uses public
relations programs associated with "special events," such as sponsoring
marathons, providing product to certain professional athletic teams and
sponsoring radio station contests in conjunction with certain holidays.
Because the Breathe Right nasal strip is sold as an OTC product, sales
of the product will depend in part upon the degree to which the consumer is
aware of the product and is satisfied with its use, which also influences repeat
usage and word of mouth referrals. Research data collected by a nationally
recognized consumer market research firm indicates that approximately 32% of
those in the U.S. who have purchased Breathe Right nasal strips have purchased
additional product.
The Company has conducted periodic consumer awareness surveys in which
1,000 consumers over the age of 18 were surveyed by telephone. The table set
forth below shows the percent of the respondents who had (i) total product
awareness, where respondents identified or, if asked, were aware of, a nasal
strip as a product designed to help people breathe more easily or provide relief
from snoring, (ii) unaided brand name awareness, where the respondents were
asked to identify a product worn across the nose to help people breathe and
reduce snoring and the respondents identified the Breathe Right brand name, and
(iii) purchased product, those who have purchased Breathe Right nasal strips.
Mar. Sept. Jan. April July Oct. Jan.
1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
Total Product Awareness................. 32% 41% 53% 74% 72% 70% 74%
Unaided Brand Name Awareness............ 2% 3% 7% 12% 12% 12% 14%
Purchased Product....................... 1% 2% 5% 8% 8% 8% 9%
DOMESTIC DISTRIBUTION
OTC MARKET. The Breathe Right nasal strip is sold as an OTC product in
drug stores, grocery stores, mass merchant chain stores, warehouse clubs,
military base stores and convenience stores in the U.S. The Company sells
product to retailers through a network of independent sales representatives
referred to in the industry as non-food general merchandise brokers. The Company
uses broker groups who call on the chain drug, grocery, mass merchant and
warehouse club accounts and the wholesalers who serve primarily the independent
drug stores and many of the grocery stores in the U.S.
Although the Company's advertising focuses on both the snoring and
nasal congestion applications, the Breathe Right nasal strip is typically
positioned in the cough, cold and allergy section of the store because Breathe
Right nasal strips provide benefits similar to those obtained with decongestant
products and there is typically no section in stores for snoring relief
products. Many store managers have also placed the product in secondary
locations, such as on the pharmacy counter or in special sections located at the
end of an aisle reserved for better selling products.
The Company's OTC customers for the Breathe Right nasal strip include
national chains of drug stores, grocery stores and mass merchants such as
Walgreens, RiteAid, REVCO, Kroger, Safeway, Wal-Mart and Kmart and warehouse
clubs such as Sam's Club, as well as regional and independent stores in the same
store categories. In 1996, one retailer accounted for approximately 14% of
Breathe Right nasal strip sales. Although this retailer accounted for less than
4% of the retail stores that carried the product, the loss of this customer or
any other large retailer would require the Company to replace the lost sales
through other retail outlets and could temporarily disrupt distribution of the
Breathe Right nasal strip.
PROFESSIONAL MEDICAL MARKET. The Company believes that establishing a
strong presence in the professional medical market will not only increase sales
to this market, but will also result in physicians recommending the product for
other applications. The Company has entered into an agreement with Healthdyne, a
national manufacturer and distributor of pulmonary products, pursuant to which
Healthdyne will distribute the product to hospitals, clinics and other providers
of in-home medical equipment and health care services.
ATHLETIC MARKET. Largely as a result of the exposure that the Breathe
Right nasal strips received when NFL football players began wearing them, many
sporting goods retailers expressed an interest in carrying the product. A
special package has been developed for this market. The Breathe Right nasal
strips sports package is distributed to mass merchant sports departments and
sporting goods stores. In addition, many drug stores carry the sports package in
their sports medicine section.
INTERNATIONAL DISTRIBUTION
The Company executed an international distributor agreement with 3M in
August 1995 pursuant to which 3M has the exclusive right to distribute the
Breathe Right nasal strip outside of the U.S. and Canada. 3M has operations in
over 60 foreign countries. The product is marketed internationally under the
co-brand of "3M Breathe Right nasal strips" in order to benefit from both 3M's
brand name and the publicity that the Breathe Right brand name has received.
Under the terms of the agreement, 3M buys product from the Company either in
finished form in 3M boxes or in bulk quantities to be packaged by 3M's
international subsidiaries. All sales to 3M are denominated in U.S. dollars. 3M
is responsible for obtaining all necessary regulatory approvals outside of the
U.S. and for all marketing and selling expenses. The agreement contains certain
minimum performance objectives and breakup provisions. The product was on retail
shelves in over 30 countries by the end of 1996.
In 1995, the Company arranged with LOCIN Industries, a Canadian dental
floss company, to establish distribution in the Canadian market. LOCIN
distributes the product to drug stores in Canada. During 1996, LOCIN purchased
product in bulk and packaged it at its facility and assumed responsibility for
cooperative advertising programs.
THERAPATCH(TM) EXTERNAL ANALGESIC PATCH
The Company began national distribution of the TheraPatch at the end of
1996. The Company has the right to market the TheraPatch pursuant to a Marketing
and Distribution Agreement with Natus Corporation and LecTec Corporation, the
manufacturers of the TheraPatch.
The TheraPatch is a 2" by 3" external analgesic patch designed for
temporary relief of pain from arthritis, simple backaches and muscular aches and
strains. The patch is coated with a proprietary hydrogel formulation which, when
placed on the skin, creates a cutaneous sensation that interferes with the
sensation of pain. The Company believes that the TheraPatch design allows it to
provide longer lasting relief (four to six hours) than similar patches or
external analgesic creams (60 to 90 minutes) currently on the market. The
Company, however, will not be able to make any claims as to duration without FDA
approval.
The FDA has issued a deferment letter to the product's manufacturer
which allows the product to be marketed and defers the product's regulatory
status until the FDA publishes a Final Monograph on External Analgesics. After
the Final Monograph is published, if the product does not comply with the FDA's
requirements listed in the Final Monograph, the product's manufacturer will have
one year to bring it into compliance.
POTENTIAL LINE EXTENSIONS AND NEW PRODUCTS
BREATHE RIGHT NASAL STRIP ENHANCEMENTS AND LINE EXTENSIONS. The Company
is currently evaluating a number of enhancements to the existing Breathe Right
nasal strip product line. These enhancements include a modification that would
increase the dilating force of the strip without diminishing the strip's ability
to stay in place, an enhancement that would reduce the potential for irritation
over the top of the nose and production of nasal strips that are different in
appearance from the current product.
NEW PRODUCTS. As a result of the Company's established distribution
channels and highly visible success with the Breathe Right nasal strip, the
Company has frequently been approached by individuals and smaller companies to
explore the possibility of partnering with the Company to manufacture and market
new product ideas. The Company routinely evaluates the merit of these products,
and from time to time may acquire or license the rights to products which it
believes could successfully be sold through the Company's established
distribution channels. The Company has entered into contractual arrangements for
several products which are in various stages of evaluation and testing prior to
potential market launch. The Company plans to incur costs of approximately $1.0
million relating to evaluation and test marketing of these products in 1997.
Most, if not all, of these products are regulated to varying degrees by the FDA
and some will require extensive clinical studies and regulatory approvals prior
to marketing. There can be no assurance that any required regulatory approvals
will be obtained or that the Company will market any of these products.
The Company has an exclusive, worldwide license agreement covering the
Pollen-Guard(TM) Gel, which is an ionized gel product that is applied around the
nostrils, dries clear, colorless and odorless and creates a local electrostatic
field. The Company believes that this product reduces the inhalation of airborne
contaminants such as pollen, mold spores and dust, which will thereby reduce
allergic symptoms.
The Company plans to perform clinical tests on two products that
utilize a chemical compound that is used as a common food additive. The Company
believes that the compound, when inhaled, may be effective as an adjunct to
assist in stopping smoking or as a smoking substitute product, and may also be
useful in suppressing appetite, resulting in weight loss, but the Company has
not completed any clinical studies on these products to date.
The Company is also testing a laryngoscope dental warning system. A
laryngoscope is a medical device used in the process of intubation, which
involves insertion of a breathing tube into a patient's trachea by passing it
through the mouth and throat. During the process of intubation, the
laryngoscope's blade has a tendency to be pressed against the patient's top
teeth, at times causing damage to those teeth or to adjacent bridge work. The
laryngoscope dental warning system uses a disposable warning circuit embedded
into a thin plastic strip placed on the bottom of the laryngoscope's blade to
warn the user when the blade makes contact with the teeth, allowing the
physician to avoid damaging the patient's teeth.
MANUFACTURING AND OPERATIONS
The Company currently sub-contracts with multiple manufacturers, known
as converters, to produce the Breathe Right nasal strip and does no in-house
product production itself. The converters are capable of providing full turnkey
service and shipping product to the Company that is completely packaged ready to
be sold to retailers or providing semi-finished goods to the Company that
require final packaging. To complete these products, the Company has the ability
to wrap individual strips in the paper sleeve in-house and subcontracts the
final packaging out to qualified packaging subcontractors.
Each of these converters builds the product to the Company's
specifications using materials specified by the Company and, for the major
materials, places orders against a supply agreement negotiated by the Company
with the material manufacturer. The converters have all entered into
confidentiality agreements with the Company to protect the Company's
intellectual property rights. Company quality control and operations personnel
periodically visit the converters to observe processes and procedures. Finished
goods are inspected at the Company to insure that they meet quality
requirements. The Company inspects its converters on a regular basis and is not
aware of any material violation of FDA Good Manufacturing Practice Standards.
The Company works closely with its material vendors and converters to reduce
scrap and waste, improve efficiency, and improve yields to reduce the
manufacturing costs of the product.
To ensure consistent quality and favorable pricing, the Company has
entered into a multi-year material supply agreement with 3M for the major
components of the Breathe Right nasal strip. Although similar materials are
currently available from other suppliers, the Company believes that 3M's
materials are of superior quality. Although the Company believes that this
relationship will not be disrupted or terminated, the inability to obtain
sufficient quantities of these components or the need to develop alternative
sources in a timely and cost effective manner, if and as required in the future,
could adversely affect the Company's operations until new sources of these
components become available, if at all. In addition, while the Company does not
expect 3M to do so, 3M has the right to discontinue its production or sale of
these products at any time with 90 days notice to the Company.
COMPETITION
The Company believes that the market for decongestant products is
highly competitive while there is currently little or no competition in the
market for products for the reduction or elimination of snoring. In the U.S.,
the Company's competition in the OTC market for (i) decongestant products and
other cold, allergy and sinus relief products consist primarily of
pharmaceutical products and (ii) snoring remedies consist primarily of internal
nasal dilators. The Company believes that the patents on the Breather Right
nasal strip will limit the ability of others to introduce competitive external
nasal dilator products in the United States. However, external nasal dilator
products compete in the OTC markets for decongestant and sinus relief products
and snoring remedies in international markets where the Company does not have
patent protection on the Breathe Right nasal strip. See "Patents, Trademarks and
Proprietary Rights" below. Many of the manufacturers of the pharmaceutical
products that compete with the Breathe Right nasal strip have significantly
greater financial and operating resources than the Company. In addition,
competitors may develop products which are able to circumvent the Company's
patents.
GOVERNMENT REGULATION
As a manufacturer and marketer of medical devices, the Company is
subject to regulation by, among other governmental entities, the FDA and the
corresponding agencies of the states and foreign countries in which the Company
sells its products. The Company must comply with a variety of regulations,
including the FDA's Good Manufacturing Practice regulations, and is subject to
periodic inspections by the FDA and applicable state and foreign agencies. If
the FDA believes that its regulations have not been fulfilled, it may implement
extensive enforcement powers, including the ability to ban products from the
market, prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations. The Company believes that it is currently in
compliance with applicable FDA regulations.
FDA regulations classify medical devices into three classes that
determine the degree of regulatory control to which the manufacturer of the
device is subject. In general, Class I devices involve compliance with labeling
and record keeping requirements and are subject to other general controls. Class
II devices are subject to performance standards in addition to general controls.
Class III devices are those devices, usually invasive, for which pre-market
approval (as distinct from pre-market notification) is required before
commercial marketing to assure the products' safety and effectiveness. The
Breathe Right nasal strip has not yet been classified.
Before a new medical device can be introduced into the market, the
manufacturer generally must obtain FDA clearance through either a 510(k)
pre-market notification or a pre-market approval application ("PMA"). A 510(k)
clearance will be granted if the submitted data establish that the proposed
device is "substantially equivalent" to a legally marketed Class I or II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The PMA process can be expensive, uncertain and lengthy, frequently
requiring from one to several years from the date the PMA is accepted. In
addition to requiring clearance for new products, FDA rules may require a filing
and waiting period prior to marketing modifications of existing products. The
Company has received 510(k) approvals to market the Breathe Right nasal strip as
a device that can (i) reduce or eliminate snoring, (ii) temporarily relieve the
symptoms of nasal congestion and stuffy nose, (iii) improve nasal breathing by
reducing nasal airflow resistance and (iv) temporarily relieve breathing
difficulties due to deviated nasal septum.
In addition to the Company's medical device products, the Company has
entered into an agreement to manufacture and market a smoking substitute and
appetite suppressant product that the FDA may classify as a "New Drug." The FDA
must approve safety and effectiveness for each labeled use before a New Drug can
be sold. As part of the requirements for obtaining approval of a New Drug, the
Company will be required to conduct extensive preclinical studies to determine
the safety and efficacy of the drug. Upon completion of these studies, the
Company will submit an Investigational New Drug application ("IND") to the FDA,
which permits the Company to begin clinical trials.
These clinical trials of the products must be conducted and the results
submitted to the FDA as part of a New Drug Application ("NDA"). The FDA must
approve the NDA before pharmaceutical products may be sold in the U.S. The grant
of regulatory approvals often takes a number of years and may involve the
expenditure of substantial resources. There is no assurance that NDAs will be
approved for the Company's products if any are required. Even after initial FDA
approval has been granted, further studies may be conducted to provide
additional data on safety or efficacy or to obtain approval for marketing the
drug as a treatment for disease indications in addition to those originally
approved. In addition, the FDA can revoke its approval even after it has
initially been given.
Sales of the Company's products outside the U.S. are subject to
regulatory requirements governing human clinical trials and marketing approval
for drugs, and such requirements vary widely from country to country. Under its
agreement with the Company, 3M is responsible for obtaining all necessary
regulatory approvals outside the U.S. The Company believes it has provided 3M
with the necessary documentation to enable 3M to obtain the "CE" mark, an
international symbol of quality and compliance with applicable European medical
device directives, and 3M is affixing the CE mark on the Company's products in
Europe.
No assurance can be given that the FDA or state or foreign regulatory
agencies will give on a timely basis, if at all, the requisite approvals or
clearances for additional applications for the Breathe Right nasal strip or for
any of the Company's products which are under development. Moreover, after
clearance is given, the Company is required to advise the FDA and these other
regulatory agencies of modifications to its products. These agencies have the
power to withdraw the clearance or require the Company to change the device or
its manufacturing process or labeling, to supply additional proof of its safety
and effectiveness or to recall, repair, replace or refund the cost of the
medical device if it is shown to be hazardous or defective. The process of
obtaining clearance to market products is costly and time-consuming and can
delay the marketing and sale of the Company's products. Furthermore, federal,
state and foreign regulations regarding the manufacture and sale of medical
devices are subject to future change. The Company cannot predict what impact, if
any, such changes might have on its business.
The Company is also subject to substantial federal, state and local
regulation regarding occupational health and safety, environmental protection,
hazardous substance control and waste management and disposal, among others.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company entered into a license agreement in 1992 (the "License
Agreement") pursuant to which the Company acquired from the licensor (the
"Licensor") the exclusive rights to manufacture and sell the Breathe Right nasal
strip. Pursuant to the License Agreement, the Company has the exclusive right to
manufacture, sell and otherwise practice any invention, including the Breathe
Right nasal strip, claimed in the Licensor's patent applications related thereto
and all patents issued in any country which correspond to those applications.
The Company must pay royalties to the Licensor based on sales of the Breathe
Right nasal strip including certain minimum royalty amounts to maintain its
exclusivity. The Company is also responsible for all costs and expenses incurred
in obtaining and maintaining patents related to the Breathe Right nasal strip.
The Licensor has filed patent applications with the U.S. Patent and
Trademark Office seeking patent protection for different aspects of the Breathe
Right nasal strip technology. Four of these patent applications have issued as
patents, including one with claims that cover the single-body construction of
the Breathe Right nasal strip. The Licensor has received notice of allowance in
two additional patent applications and one application remains pending. The
Licensor has also obtained patent protection on the Breathe Right nasal strip in
two foreign countries and has applications pending which seek patent protection
in 39 additional countries.
There can be no assurance that the Licensor's patents on the Breathe
Right nasal strip, or any additional patents issued, if any, will effectively
foreclose the development of competitive products or that the Company will have
sufficient resources to pursue enforcement of any patents issued. See Item 3,
Legal Proceedings. The Company intends to aggressively enforce the patents
covering the Breathe Right nasal strip. In order to enforce any patents issued
covering the Breathe Right nasal strip, the Company may have to engage in
litigation, which may result in substantial cost to the Company and
counterclaims against the Company. Any adverse outcome of such litigation could
have a negative impact on the Company's business. The Company has sued two
companies for patent infringement in the United States. The Company settled with
one company based on its representation that it had not made, used, sold or
offered for sale nasal dilators after the issuance of the patents, as described
in Item 3, Legal Proceedings. The second company agreed to discontinue making,
using, selling or offering for sale external nasal dilator strips. The Company
has also initiated suits against two companies for patent infringement in
Australia. One has settled and agreed to cease infringing activity and the other
company is in administration proceedings.
The Company believes its trademarks are important as protection for the
Company's names and advertising. The Company has successfully opposed two
competitors, and has initiated opposition proceedings against three additional
competitors, in the U.S. Patent and Trademark Office for attempting to register
trademarks that are substantially similar to "Breathe Right," and has a
trademark infringement suit pending against one competitor.
There can be no assurance that the Company's technology will not be
challenged on the grounds that the Company's products infringe on patents,
copyrights or other proprietary information owned or claimed by others or that
others will not successfully utilize part or all of the Company's technology
without compensation to the Company. The Company will attempt to protect its
technologies and proprietary information as trade secrets.
EMPLOYEES
At March 3, 1997, the Company had 40 full-time and two part-time
employees, of whom 15 were engaged in operations, 15 in general administration,
10 in marketing and sales and two in new products and product development. There
are no unions representing Company employees. Relations with its employees are
believed to be good and there are no pending or threatened labor employment
disputes or work interruptions.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's
Executive Officers together with all positions and offices held with the Company
by such Executive Officers. Officers are appointed to serve until the meeting of
the Board of Directors following the next Annual Meeting of Shareholders and
until their successors have been elected and have qualified.
Name and Age Office
------------ ------
Daniel E. Cohen, M.D. (44) Chairman of the Board, Chief Executive Officer,
Treasurer and Director
Richard E. Jahnke (48) President, Chief Operating Officer and Director
M. W. Anderson, Ph.D. (46) Vice President of Clinical and Regulatory Affairs
David J. Byrd (43) Vice President of Finance and Chief Financial Officer
William Doubek (41) Vice President of Operations
Rihab FitzGerald (45) Vice President of Consumer Sales
Kirk P. Hodgdon (37) Vice President of Consumer Marketing
Gerhard Tschautscher (40) Vice President of International and Professional Medical
Marketing
DANIEL E. COHEN, M.D. has served as the Company's Chairman of the Board
since 1993, its Chief Executive Officer since 1989 and a director and the
Treasurer since 1982. Dr. Cohen was a founder of the Company and is a
board-certified neurologist.
RICHARD E. JAHNKE has served as the Company's President and Chief
Operating Officer and as a director since 1993. From 1991 to 1993, he was
Executive Vice President and Chief Operating Officer of Lemna Corporation, which
manufactures and sells waste water treatment systems. From 1986 to 1991, Mr.
Jahnke was general manager of the government operations division of ADC
Telecommunications, an electronic communications systems manufacturer. From 1982
to 1986, he was Director of Marketing and Business and Technical Development at
BMC Industries, Inc. From 1972 to 1982, he held various positions of increasing
responsibility in engineering, sales and marketing management at 3M Company. He
is also a director of Rehabilicore Inc., a manufacturer of medical devices.
M. W. ANDERSON, PH.D. has served as the Company's Vice President of
Clinical and Regulatory Affairs and Vice President of Research and Development
since 1990. He has served in various capacities since joining the Company in
1984, including Director of Applications Research and Director of Research and
Development. Prior to joining the Company in 1984, Dr. Anderson was an Assistant
Professor at the University of Minnesota's College of Pharmacy.
DAVID J. BYRD has served as the Company's Vice President of Finance and
Chief Financial Officer since February 1996. Prior to joining the Company, Mr.
Byrd was Chief Financial Officer and Treasurer of Medisys, Inc., a health care
services company, since 1991. From 1975 to 1991, Mr. Byrd was employed by
Coopers & Lybrand, where he was a partner from 1986 to 1991. Mr. Byrd is a
certified public accountant.
WILLIAM DOUBEK has served as the Company's Vice President of Operations
since 1990, Director of Operations from 1986 to 1990 and was the Company's
Senior Engineer from 1982 to 1986. Prior to joining the Company in 1982, Mr.
Doubek served as Senior Project Engineer at Medtronic, Inc., a manufacturer of
medical devices, Senior Engineer at Micro Control Company, a manufacturer of
computer testing equipment, and Electrical Engineer at Palico Instrument
Company, a manufacturer of computer testing equipment.
RIHAB FITZGERALD has served as the Company's Vice President of Consumer
Sales since August 1993, Vice President of Sales and Marketing from 1990 to
August 1993 and Director of Marketing from 1985 to 1990. Prior to joining the
Company in 1984, Ms. Fitzgerald was employed in sales and marketing with Nicolet
Instrument Corporation, a medical devices manufacturer.
KIRK P. HODGDON has been the Company's Vice President of Marketing
since February 1994. Prior to joining the Company, Mr. Hodgdon served as: Vice
President-Management Supervisor at Gage Marketing Communications, a marketing
services company, from 1993 to February 1994; Vice President - Account
Supervisor at U.S. Communications, a marketing agency, from 1989 to 1993; and
Marketing Manager at Land O'Lakes, Inc., a consumer foods cooperative, from 1988
to 1989.
GERHARD TSCHAUTSCHER has served as the Company's Vice President of
International and Professional Medical Marketing since January 1994 and as a
Company Product Director and as the International Sales Marketing and Sales
Director between 1988 and December 1993.
ITEM 2. PROPERTIES
The Company leases approximately 80,000 square feet of office,
manufacturing and warehouse space in Bloomington, Minnesota. The lease expires
in December 2000.
ITEM 3. LEGAL PROCEEDINGS
Except as otherwise disclosed in this Form 10-K, no material legal
proceedings are pending or known to be contemplated to which the Company is a
party or to which any of its property is subject, and the Company knows of no
material legal proceedings pending or threatened, or judgments against any
director or officer of the Company in his or her capacity as such.
In January 1997, the Company was sued for patent infringement in
California District Court by Acutek Adhesive Specialties, Inc. ("Acutek").
Acutek claims to be an exclusive licensee in the United States Reissue Patent
RE. 35,408. The plaintiff seeks compensatory damages, interests, costs and fees.
The Company has counterclaimed for a declaration of invalidity of the patents
asserted by Acutek and for a declaration that the Company does not infringe the
Reissue Patent. The Company has also filed a claim against Acutek for false
advertising and related offenses by Acutek related to claims Acutek has made
about its products and patent rights. Earlier, the Company sued Acutek and
Mabco, Inc., a related corporation, for patent infringement. Upon the Company
receiving representations that those companies had not made, used, or sold
products infringing the patents that protect the Company's Breathe Right device,
the suit was settled. The Company will defend the current suit brought against
it by Acutek and pursue its counterclaims vigorously. The Company believes that
it does not infringe any valid patent claims.
In October 1995, an individual commenced a lawsuit against the Company
in U.S. District Court for the Northern District of Ohio claiming that the
Breathe Right nasal strip infringes the plaintiff's patents relating to a facial
cleanser. In May 1996, the suit was dismissed by the District Court and in June
1996 the plaintiff filed an appeal to the United States Court of Appeals for the
Sixth Circuit. The appeal was transferred to court of appeals for the Federal
Circuit, where it is currently pending. The plaintiff is seeking an undefined
amount of monetary damages from the Company and an order enjoining the Company
from infringing on his patents. The plaintiff claims his patent covers a facial
cleanser for a person's nose. The Company believes that the suit is completely
without merit and is vigorously defending itself based upon what it considers
meritorious defenses and which were recognized as such by the District Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information as to the principal market on which the Company's common
stock is traded and market price information for the common stock of the Company
is incorporated herein by reference from page 19 of the 1996 Annual Report to
Shareholders (the "1996 Annual Report").
On March 3, 1997, the last sale price of the Common Stock as reported
on the Nasdaq National Market was $12.375. As of March 3, 1997, there were
approximately 1,000 owners of record of Common Stock.
The Company has never paid any dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its operations and
does not anticipate paying any cash dividends in the foreseeable future. The
payment of dividends, if any, in the future will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, restrictions in future financing agreements, the general
financial condition of the Company and general business considerations.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial information is presented on page 1 of the Company's
1996 Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears on pages 8 through 11 of the Company's 1996 Annual
Report and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Balance Sheets of the Company as of December 31, 1995 and 1996,
and the related Statements of Operations, Stockholders' Equity and Cash Flows
for each of the years in the three-year period ended December 31, 1996, the
Notes to the Financial Statements and the Report of KPMG Peat Marwick LLP,
independent auditors, is contained in the Company's 1996 Annual Report on pages
12 through 19 and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required under this Item with respect to
directors is contained in the Section "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held in April 1997 (the "1997 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.
Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the section
entitled "Executive Compensation" in the 1997 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section
entitled "Security Ownership of Principal Shareholders and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Documents filed as part of this Report:
1. Financial Statements. See Item 8, Financial Statements.
2. Financial Statement Schedules. Not Applicable.
3. Exhibits. See "Exhibit Index" on the page following the
Signature Page.
b. Reports on Form 8-K. The Company did not file a report on Form 8-K
during the fourth quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNS, INC.
("Registrant")
Dated: March 14, 1997 By/s/ Daniel E. Cohen
-----------------------------------------------
Daniel E. Cohen, M.D.
Chairman of the Board, Chief Executive Officer,
Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on March 14, 1997 on behalf
of the Registrant in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
DANIEL E. COHEN, M.D. and PATRICK DELANEY as his true and lawful
attorneys-in-fact and agents, each acting alone, with the full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ Daniel E. Cohen
- -----------------------------------------
Daniel E. Cohen, M.D.
Chairman of the Board and Chief
Executive Officer, Treasurer and Director
(Principal Executive Officer)
/s/ Richard E. Jahnke
- -----------------------------------------
Richard E. Jahnke
Director, President and
Chief Operating Officer
/s/ David J. Byrd
- -----------------------------------------
David J. Byrd
Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
/s/ Patrick Delaney
- -----------------------------------------
Patrick Delaney
Director
/s/ R. Hunt Greene
- -----------------------------------------
R. Hunt Greene
Director
/s/ Andrew J. Greenshields
- -----------------------------------------
Andrew J. Greenshields
Director
/s/ Richard W. Perkins
- -----------------------------------------
Richard W. Perkins
Director
CNS, INC.
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3.1 Company's Certificate of Incorporation as amended to date
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K").
3.1.1 Certificate of Retirement for the Preferred Stock of the
Company which was redeemed and converted to Common Stock on
April 16, 1992 (incorporated by reference to Exhibit 3.1.1 to
the Company's Registration Statement on Form S-2 filed with
the Commission on March 2, 1994 (the "1994 Form S-2")).
3.1.2 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (incorporated by
reference to Exhibit 1 to the Company's Form 8-A dated July
21, 1995).
3.2 Company's Amended By-Laws (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 (the "1991 Form 10-K")).
10.1 CNS, Inc. 1987 Employee Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-18, Commission File No.
33-14052C).
10.2 CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-8, Commission File No. 33-29454).
10.3 CNS, Inc. 1990 Stock Plan (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990).
10.4 Employment Agreement dated February 22, 1988 between the
Company and William Doubek (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form
S-2, Commission File No. 33-46120 (the "1992 Form S-2")).
10.5 License Agreement dated January 30, 1992 between the Company
and Creative Integration and Design, Inc. (incorporated by
reference to Exhibit 10.11 to the 1992 Form S-2).
10.6 CNS, Inc. 1994 Stock Plan (incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.7 Distribution Agreement dated August 2, 1995 between the
Company and Minnesota Mining and Manufacturing Company
(incorporated by reference to Exhibit 10.11 to the 1995 Form
10-K).
10.8 Supply Agreement dated May 17, 1995 between the Company and
Minnesota Mining and Manufacturing Company (incorporated by
reference to Exhibit 10.12 to the 1995 Form 10-K).
10.9 Asset Purchase Agreement dated May 8, 1995 between the Company
and Aequitron Medical, Inc. (incorporated by reference to
Exhibit 10.4 to the March 31, 1995 Form 10-Q).
10.10 Non-Exclusive Distributorship Agreement dated May 8, 1995
between the Company and Aequitron Medical, Inc. (incorporated
by reference to Exhibit 10.5 to the March 31, 1995 Form 10-Q).
10.11 License Agreement dated January 24, 1996 between the Company
and Ronald S. Nietupsky (incorporated by reference to Exhibit
10.15 to the 1995 Form 10-K).
10.12 License Agreement dated February 26, 1996 between the Company
and Scott Dahlbeck, M.D. (incorporated by reference to Exhibit
10.16 to the 1995 Form 10-K).
10.13 Option Agreement dated October 5, 1995 between the Company and
TruTek Corp. (incorporated by reference to Exhibit 10.17 to
the 1995 Form 10-K).
10.14 Marketing and Distribution Agreement dated as of January 11,
1996 between the Company, Natus Corporation and LecTec
Corporation (incorporated by reference to Exhibit 10.18 to the
1995 Form 10-K).
10.15 Employment Agreement between the Company and Dr. Daniel E.
Cohen dated April 15, 1996.
10.16 Employment Agreement dated April 15, 1996 between the Company
and Richard E. Jahnke.
10.17 Employment Agreement dated April 15, 1996 between the Company
and Kirk Hodgdon.
10.18 Employment Agreement dated April 15, 1996 between the Company
and David J. Byrd.
11.1 Computation of Net Earnings (Loss) Per Share of Common Stock.
13.1 Selected Information from 1996 Annual Report to Stockholders.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney (included on the signature page hereof).
27.1 Financial Data Schedule.