UNITED STATES
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 |
For the fiscal year ended March 31, 2005
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from _________ to __________
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.) |
7615 Smetana Lane
Eden Prairie, MN 55344
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (952) 229-1500
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. x
As of March 31, 2005, the aggregate market value of the Company’s Common Stock held by non-affiliates is $144,835,691 computed by reference to the closing sales price of the Company’s Common Stock of $11.00 on September 30, 2004, the last business day of the Company’s most recently completed second fiscal quarter.
Indicated by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes X No
As of June 3, 2005, the Company had outstanding 14,289,874 shares of Common Stock of $.01 par value per share.
Documents Incorporated by Reference: Portions of the Company’s Proxy Statement for its Annual Meeting of Stockholders to be held on August 30, 2005, are incorporated by reference into Part III of this Form 10-K.
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We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products that focus on better breathing, and FiberChoice® branded products that focus on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands and patented technologies, well-established distribution networks domestically and internationally, a flexible and low-cost operating model and an experienced management team.
Our principal product, the Breathe Right nasal strip, improves breathing by dilating the nasal passages. Nasal strips provide temporary relief from nasal congestion and stuffiness resulting from a variety of health conditions, and also reduce or eliminate snoring. Breathe Right nasal strips, and the entire Breathe Right product line, provide consumers “drug free” better breathing solutions. The Breathe Right brand has been further extended by the launch of new products such as Breathe Right Snore Relief throat spray in fiscal 2003 and the launch of Breathe Right Vapor Shot!™ personal vaporizer in fiscal 2004.
We entered the bulk fiber category in March 2000 with the launch of the FiberChoice® brand. The original FiberChoice product is an orange-flavored chewable fiber tablet that offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber. In March 2005, CNS extended the FiberChoice line to include sugar-free chewable fiber tablets in assorted fruit flavors and a low-sugar, hard candy fiber drop.
In addition to further organic development and expansion of the Breathe Right® and FiberChoice brands, we are exploring opportunities to acquire established consumer health care brands, product lines, and new technologies that complement our better breathing and digestive health platforms.
CNS was founded in 1982. From 1982 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. In 1992, CNS obtained the exclusive license to manufacture and sell nasal strips, and in 1993, received FDA clearance to market the nasal strip as a product that improves nasal breathing. In 1994, CNS launched the Breathe Right nasal strip in the United States and in 1995 divested itself of the assets related to its sleep disorders business in order to focus on further developing the Breathe Right® nasal strip product. In 1998, CNS strengthened its management team to add consumer healthcare products experience, and since that time continued to develop the Breathe Right brand both domestically and internationally. In 2000, CNS added its second branded product line with the launch of FiberChoice chewable fiber supplements.
| • | Development of Strong Brands within Attractive Niche Categories. Our core competency is sales and marketing of consumer healthcare products. We have strategically chosen to focus on niche product categories with unique and high margin product offerings that address recurring consumer needs, and support these products with ongoing advertising and promotion campaigns. Our goal is to develop strong consumer demand based on brand awareness and product loyalty, allowing us to achieve long term growth in sales and profitability. |
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| • | Proven Ability to Develop Technologies and Products. We focus our product development efforts on identifying underserved consumer needs and then designing products that directly address those unmet needs. The Breathe Right nasal strip and the FiberChoice chewable fiber tablet were both developed by licensing patented technologies from inventors and creating new consumer brands. Both Breathe Right and FiberChoice brands have been expanded through new product launches. |
| • | Efficient Operating Model. We focus our internal resources on marketing, sales and product development. We directly manage the production planning and quality control aspects of manufacturing, but outsource manufacturing to well-established, low-cost third-party suppliers. This approach allows us to benefit from manufacturing expertise and economies of scale, and maintain a highly flexible and variable cost structure, with low overhead and low capital investment. We internally manage all aspects of customer service and distribution of our products, delivering a high standard of service to our customers. |
| • | Experienced Management Team. We have an experienced management team, with a proven track record of developing branded consumer healthcare products and building shareholder value. Although we maintain a lean staff of approximately 60 employees, we believe we have the skill and experience of larger companies in our industry. We organize our management structure into five strategic teams focused on growth: the Breathe Right brand, both domestic and international markets, the FiberChoice brand and new product development for both the Breathe Right and FiberChoice brands. |
| Investing in Advertising and Promotion. |
| Breathe Right® Brand. Our marketing efforts for Breathe Right products are targeted against two key consumer healthcare conditions: nasal congestion and snoring. The majority of our advertising and promotion investment is spent on television advertising, which communicates the unique Breathe Right brand benefits of instant, drug-free relief from nasal congestion and snoring. We also use other product promotion programs, such as sampling, coupons, in-store advertising and public relations activities. Marketing communications promote trial, as well as repeat purchases of Breathe Right brand products by increasing consumer awareness and developing product loyalty. |
| FiberChoice® Brand. Our marketing efforts for FiberChoice products are targeted toward the growing awareness of the need for more consumption of dietary fiber, and the important health benefits associated with consuming higher levels of dietary fiber. The majority of advertising and promotion investment is spent on television advertising, which communicates the challenge that active people face in meeting the recommended daily levels of fiber consumption. It also highlights the unique benefits offered by FiberChoice including convenience, efficacy and good taste relative to competing products. Marketing communications are focused on building awareness, which is still at an early stage of development, and developing strong brand loyalty. |
| Developing New Products. The Breathe Right and FiberChoice brand names are two of our most valuable assets and we intend to continue leveraging these assets by future introduction of new products. Our goal is to continue to develop a pipeline of potential new products under both the Breathe Right and FiberChoice brands, linked to their respective brand equities of better breathing and digestive health. |
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| Developing Domestic Distribution. Breathe Right® and FiberChoice products are sold to mass merchandise stores, drug stores, grocery stores, warehouse clubs, military base stores and on-line retailers in the United States. We sell our products through a dedicated direct sales force that concentrates on serving key retail accounts as well as through a national brokerage organization which serves our smaller customers. |
| Our customers generally merchandise our products in the over-the-counter drug section of their stores. Breathe Right nasal strips are typically positioned in the cough, cold and allergy sections of stores because they provide benefits similar to those obtained from other decongestant products. FiberChoice products are positioned in the bulk fiber/laxative sections of stores. |
| Our retail customers include national chains of mass merchants, drug stores and grocery stores such as Wal-Mart, Target, Eckerd, Walgreen’s, RiteAid, CVS, Kroger and Albertson’s and warehouse clubs such as Sam’s Club and Costco, as well as regional and independent stores in these retail channels. In fiscal 2005, Wal-Mart accounted for approximately 31% of sales. |
| Expanding Company Presence in International Markets. The Company believes that there is significant market potential for its products outside the United States and is actively developing the Breathe Right brand in selected international markets, most significantly Japan, Europe, Canada and Mexico. We have established an international distribution system for Breathe Right nasal strips that consists of reselling distributors, sales representatives and suppliers that repackage bulk nasal strips into final consumer packaging. Distributors are appointed largely on an exclusive basis, with territories consisting of one or more countries, and it is expected that this pattern of operation will continue. We retain control over the brand, packaging and advertising in all international markets. |
| Development of a Third Brand Platform. We are exploring opportunities to acquire or develop a third branded consumer healthcare platform or acquire complementary products which would fit under the Breathe Right or FiberChoice brands. We expect that a potential acquisition would expand our product line within consumer healthcare product categories, leveraging our core competency in sales, marketing and product development, as well as increasing efficiency of our operations. |
| Breathe Right Nasal Strips. The Breathe Right nasal strip is a non-prescription, single-use disposable device that improves breathing by dilating the nasal passages. The Company has 510(k) clearance from the United States Food and Drug Administration (“FDA”) to market the Breathe Right nasal strip for improvement of nasal breathing, temporary relief of nasal congestion, elimination or reduction of snoring and temporary relief of breathing difficulties due to a deviated nasal septum. See Item 1. Business – Government Regulation. |
| The Breathe Right nasal strip includes two embedded flexible “spring-like” pieces which gently lift nasal passages open while a special adhesive holds the strip comfortably in place. The product improves nasal breathing during use and is drug-free, thereby avoiding the side effects associated with many competing products. The Breathe Right nasal strip is offered in two sizes (small/medium and large), and three varieties (tan, clear, and mentholated). Mentholated nasal strips contain a soothing mentholated aroma for additional relief from nasal congestion. Clear nasal strips have been positioned as an alternative for consumers who wish to use the product frequently, but suffer from dry or sensitive skin. |
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| Other Breathe Right Products. We currently market and sell three non-nasal strip products under the Breate Right brand. Breathe Right Snore Relief™ throat spray is a drug-free astringent and lubricating spray that addresses the snoring condition in a complementary way relative to nasal strips. Breathe Right VaporShot! is a “personal vaporizer” which works by dropping an effervescent tablet into a cup of warm tap water with a vapor concentrating lid. Breathe Right saline nasal spray is a nasal moisturizing spray that soothes dry, irritated nasal passages due to colds, allergies, dry air and overuse of nasal decongestants. |
| Breathe Right Markets & Competition. Our marketing efforts capitalize on the multiple benefits of Breathe Right® products, providing solutions to consumers within the following market segments: |
| • Nasal Congestion Market. Annually most Americans suffer some nasal congestion as a result of the common cold, while nasal congestion as a result of allergies affects approximately 35 million Americans. The Company believes that Breathe Right nasal strips are often used as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral decongestants). This broad cold/flu/allergy market represents significant potential for the Breathe Right brand. |
| • Snoring Market. Snoring is a large potential market given estimates that approximately 37 million Americans snore regularly, while another 50 million Americans snore occasionally. We believe that the percentage of international consumers that suffer from snoring is roughly equivalent to the United States. Based on results from clinical trials, Breathe Right products were effective in reducing snoring for approximately 85% of participants. |
| • Improved Breathing for Consumers with Deviated Septa. Approximately 12 million people in the United States suffer from a deviated septum, a bend in the cartilage or bone that divides the nostrils. Breathe Right nasal strips were cleared by the Food and Drug Administration in 1996 to provide temporary relief from breathing difficulties associated with a deviated septum. |
| • Athletic Market. We believe that Breathe Right nasal strips make nasal breathing more comfortable and may improve endurance during athletic activity, particularly when a mouth guard is used. An exercise physiology study published in peer-reviewed medical literature in 1997 concluded that Breathe Right nasal strips provided physiologic advantages in ventilation and heart rate during mid-level exercise. |
| Competition in Breathe Right Markets. The market for decongestant products is highly competitive, and many of the competitors have significantly greater financial and operating resources than CNS. Our competition in the consumer market for decongestant products and other cold, allergy and sinus relief products consists primarily of pharmaceutical products sold over the counter, other nasal sprays and external nasal dilators. Competition in the snoring remedies market consists primarily of nasal dilators, throat sprays, herbs, including supplements and homeopathic remedies. |
| Although we have historically achieved approximately 90% share of the external nasal dilator market, Schering Plough Corp. entered the market in September 1998 with an external nasal dilation device. In May 2003, Aso Corporation announced it was acquiring the brand, sales and distribution of Schering Plough’s nasal strip device effective June 3, 2003. Other companies have also entered the nasal dilation market with private label products. |
| We believe the patents owned and licensed by the Company on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States and most major international markets. We intend to aggressively enforce our patent rights covering the Breathe Right nasal strip and have engaged in litigation to protect its patent rights. However, there can be no assurance that potential competitors will not be able to develop nasal dilation products which circumvent our patents. |
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| FiberChoice® Daily Fiber Supplement. FiberChoice is a line of daily fiber supplements that offer consumers an effective, convenient, good-tasting way to supplement their daily intake of dietary fiber. Two tablets or drops contain four grams of fiber and provide more than twice the amount of fiber per dose compared to other convenient fiber supplements. The active ingredient in FiberChoice tablets is inulin, a natural fiber source, which is a prebiotic that helps promote the growth of healthy bacteria in the intestinal tract. FiberChoice products can be taken without water and have been clinically proven to be as effective as powder alternatives. |
| Approximately 10 million U.S. households annually purchase bulk fiber products, primarily to promote regularity and improve digestive health. The bulk fiber category represents approximately $340 million in U.S. retail sales. We believe this is an attractive product category due to the demographics associated with the aging population. |
| Competition in FiberChoice® Markets. The market for dietary fiber supplements is highly competitive and dominated by large companies with better established brands and greater resources than CNS. Competitors include Metamucil® manufactured by Procter and Gamble, Citrucel® manufactured by GlaxoSmithKline, Benefiber manufactured by Novartis and FiberCon® manufactured by Wyeth. The technology of the FiberChoice chewable fiber tablet is currently protected by one issued U.S. patent with other U.S. and international patents pending. |
We outsource all manufacturing to outside suppliers. Each supplier manufactures a portion of our product line to our detailed specifications using raw materials specified by CNS. All suppliers have entered into confidentiality agreements with CNS to protect our intellectual property rights. Our quality control and operations personnel regularly inspect these manufacturers to observe processes and procedures to ensure compliance with FDA Good Manufacturing Practice Standards. Finished goods are also inspected to ensure that they meet quality requirements. We work closely with raw material vendors and our manufacturers to reduce scrap and waste, improve efficiency and improve yields to reduce the manufacturing costs of the product. We have received certification that CNS has established and maintains a quality system which meets the requirements of ISO 9001:2000/EN 46001.
All of our manufacturing supply agreements are documented by contracts, with terms ranging from 2 to 5 years. Prices under these agreements are generally established annually and subject to periodic adjustments for changes in actual raw material costs. All of our products are ordered as-needed on a purchase order basis. We are not obligated to buy any particular quantity of product or use any manufacturer exclusively.
To ensure consistent quality and supply, we have multi-year contracts with the suppliers that provide most of the major components for nasal strips. In 2001, we entered into a multi-year contract with 3M that provides for consistent supply, adherence to specifications and pricing. Although similar materials are currently available from other suppliers, we have historically utilized 3M components for manufacturing nasal strips. Although we believe that this relationship will not be disrupted, the inability to obtain sufficient quantities of these components or the need to develop alternative sources in a timely and cost-effective manner could adversely affect our operations until new sources of these components become available.
We consolidate all finished goods inventories into our leased warehouse adjacent to our offices in Eden Prairie, MN. We retain control of all aspects of customer service, including arranging logistics for shipment of our product to domestic customers and to international distributors.
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As a manufacturer and marketer of medical devices, we are subject to regulation by governmental agencies including the FDA and the corresponding agencies of the states and foreign countries in which we sell our products. We must comply with a variety of regulations, relating to the manufacture, marketing and sale of our products as well as our recordkeeping and other general business practices, including the FDA’s Good Manufacturing Practice regulations. We are subject to periodic inspections by the FDA and applicable state and foreign agencies. If the FDA believes that there is a violation of its regulations, 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. We believe that CNS is currently in compliance with applicable FDA regulations.
FDA regulations classify medical devices into three categories that determine the degree of regulatory control to which the manufacturer of the device is subject. In general, Class I devices involve compliance with labeling and record keeping requirements and are subject to other general controls. Class II devices are subject to performance standards in addition to general controls. Class III devices are those devices, usually invasive, for which pre-market approval (as distinct from pre-market notification) is required before commercial marketing to assure product safety and effectiveness. Nasal dilators, such as our Breathe Right strips, have been classified by the FDA as Class I devices.
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 for approval 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. We have received 510(k) pre-market notification approvals to market the Breathe Right nasal strip as a device that can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing difficulties due to a deviated nasal septum.
Our FiberChoice product is considered to be a dietary supplement and is regulated under the Federal Food, Drug, and Cosmetic Act as amended by the Dietary Supplement Health and Education Act of 1994 (DSHEA), and under the Fair Packaging and Labeling Act. There is generally no requirement that a company obtain a license or approval from FDA before marketing dietary supplements in the United States. The FDA is currently developing regulations for certain provisions of the DSHEA that may affect the regulation of our FiberChoice product line. However, at this time, the impact of any proposed regulation on our product lines is not certain.
Sales of our products outside the United States are subject to regulatory requirements that vary widely from country to country. We have selected a third party to act as an “authorized representative” in the European Union. We believe that we have the necessary documentation to support affixing the “CE” mark, an international symbol of quality and compliance with applicable European medical device directives, to our Breathe Right® nasal strips in Europe. We will pursue additional approvals in other jurisdictions as needed.
No assurance can be given that the FDA or state or foreign regulatory agencies will give approvals or clearances for additional applications for the Breathe Right nasal strip or for any of our other products. Moreover, after clearance is given, we are required to advise the FDA and these other regulatory agencies of modifications to our products. These agencies have the power to withdraw the clearance or require us 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 our products. Furthermore, federal, state and foreign regulations regarding the manufacture and sale of medical devices and other products are subject to future change. We cannot predict what impact, if any, such changes might have on our business.
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We are also subject to substantial federal, state and local regulation regarding occupational health and safety, environmental protection, hazardous substance control, waste management and disposal, among others.
We have registered trademarks, own several patents and pending patent applications, and have a number of patents through licenses which are used in connection with our business. Some of these patents and licenses cover significant product formulations, methods and designs for our current and possible future products. We believe our trademarks are important as protection for CNS’ image in the marketplace. Our success is and will continue to be dependent upon the existence of and ability to protect our patents, trademarks and those under our licenses and we intend to take such steps as are necessary to protect our intellectual property rights.
There can be no assurance that our technology and proprietary rights will not be challenged on the grounds that our 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 our technology without compensation to CNS. Nor can there be any assurance that others will not attempt to challenge the validity or enforceability of our patents and licensed patents on the basis of prior art or introduce competitive products. In addition to seeking patent protection for our products, we also intend to protect our proprietary technologies and proprietary information as trade secrets.
Through license agreements CNS has acquired the exclusive worldwide rights to manufacture and sell nasal strips and chewable inulin based fiber tablets. Specifically, we have the exclusive right pursuant to those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensors’ patents issued in any country, including those that issue on pending applications. We are obligated to pay royalties to the licensors based on sales of the products typically including certain minimum royalty amounts in order to maintain our exclusive rights.
The original licensor of nasal strip technology has filed patent applications with the U.S. Patent and Trademark Office seeking patent protection for different aspects of the nasal strip technology. Seven of these patent applications have resulted in issued patents in the United States, including one with claims that cover the single-body construction of the nasal strip. The licensor of nasal strip technology also has one patent application which is currently pending. In addition, that licensor has obtained patent protection on the nasal strip in several foreign countries and has various applications pending which seek further patent protection in these and a number of additional countries. The licensor of the mentholated vapor strip technology has filed several patent applications with the U.S. Patent and Trademark Office as well as international patent offices resulting in both issued and pending applications. In addition to the patents and patent applications pending in the U.S. mentioned above, we have filed corresponding patent applications seeking protection in several foreign countries to protect certain rights to nasal dilation technology that have been acquired.
The licensor of the chewable fiber tablet has one issued U.S. Patent and other issued and pending international patents seeking patent protection for different aspects of this product.
Although we believe that our owned and licensed patents will limit the ability of others to introduce competitive products in the United States, there can be no assurance that the patents on the Breathe Right nasal strip and FiberChoice chewable fiber tablets will effectively foreclose the development of competitive products or that we will have sufficient resources to pursue enforcement of any patents issued. We do, however, intend to aggressively enforce our patents. In order to enforce any patents issued, we may have to engage in litigation which may result in substantial expense and counterclaims against CNS. Any adverse outcome of such litigation could have a negative impact on our business.
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We have engaged in litigation to enforce our patent rights relating to the Breathe Right nasal strip. In 1999, CNS brought a suit in federal district court to enforce one of the licensed nasal strip patents containing the broadest claims and providing the most comprehensive protection, U.S. Patent No. 5,533,499 (“ ‘499 Patent”). In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of the ‘499 Patent. On September 29, 2000, the Patent Office issued an Office Action in Reexamination and rejected certain of the claims. Other claims that were not subject to reexamination remain in effect. We have joined the licensor, Creative Integration & Design, Inc., in the exercise of our rights to contest the action of the Patent Office and have provided reasons that we believe establish that the claims should not have been rejected. CNS and its licensor are also seeking to amend certain claims to provide us with additional protection under the patent. On January 21, 2005, we received a determination from the Patent Office that the ‘499 Patent has significant allowable claims. With some formal amendments, we expect the Patent Office will confirm these claims as allowable. As the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received final notice from the Patent Office of the claims of the ‘499 Patent it has confirmed as allowable.
On February 18, 2004, CNS, together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to CNS. The two patents at issue are U.S. Patent No. 6,318,362 (the “ ‘362 Patent”) and U.S. Patent No. 3,533,503 (the “ ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and not infringed and asks for its attorneys’ fees and costs.
On November 24, 2004, we announced that the Patent Office will reexamine the ‘362 Patent and the ‘503 Patent. In response to this action by the Patent Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. We believe that when the ‘362 and ‘503 Patents emerge from reexamination, we will maintain significant patent protection under those patents and will recommence enforcement of those patents in the litigation described above. As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received information that the Patent Office has acted on the reexamination of the ‘362 and ‘503 Patents.
The final outcome of the reexamination of the ‘499, ‘362 and ‘503 Patents by the Patent Office is therefore uncertain. Although an adverse ruling from the Patent Office would narrow the protection available for nasal dilators and limit the breadth of the our patent protection, we believe that our current portfolio of both pending patent applications and newly issued patents will enable CNS to maintain significant patent protection for our nasal strip products. See Item 3. Legal Proceedings.
CNS has registered its Breathe Right and FiberChoice trademarks in the United States and in several foreign countries and is seeking further registration of those trademarks and other trademarks.
At May 31, 2005, we had 56 full-time employees and 7 part-time employees, of whom 16 were engaged in operations, 22 in general administration, and 25 in marketing and sales. There are no unions representing CNS’ employees. Relations with our employees are believed to be positive and there are no pending or threatened labor employment disputes or work interruptions.
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The following table sets forth the names and ages of the Company’s current Executive Officers together with all positions and offices held with the Company by such executive officers. Officers are appointed to serve until their successors have been elected and have qualified.
| Name and Age |
Office | ||
|---|---|---|---|
| Daniel E. Cohen (53) | Chairman of the Board and Director | ||
| Marti Morfitt (47) | President, Chief Executive Officer and Director | ||
| Samuel Reinkensmeyer (44) | Vice President of Finance and Chief Financial Officer | ||
| John J. Keppeler (43) | Vice President of Worldwide Sales | ||
| Linda Kollofski (52) | Vice President of Marketing | ||
| Larry R. Muma (54) | Vice President of Operations | ||
| Susan Horvath (46) | Vice President of International | ||
| Nicole Strait (34) | Vice President of Human Resources | ||
Daniel E. Cohen has served as the Company’s Chairman of the Board since 1993 and has served as a director of the Company since its formation in 1982. Mr. Cohen also served as the Company’s Chief Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.
Marti Morfitt has served as the Company’s President and Chief Executive Officer since June 2001 and its President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has served as a director of the Company since 1998. From September 1982 to February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems, and as a director of Intrawest Corporation, a Vancouver-based developer and operator of ski and golf resorts.
Samuel Reinkensmeyer has served as the Company’s Chief Financial Officer since October 2003. From March 2000 until joining the Company, Mr. Reinkensmeyer was employed by ValueVision Media Inc., a television and Internet retailer which owns and operates ShopNBC and ShopNBC.com serving most recently as its Senior Vice President of Finance and Investor Relations. From August 1988 to February 2000, he served in various financial positions at The Pillsbury Company, most recently as Finance Director, Pillsbury North America. Previously, Mr. Reinkensmeyer worked for Citicorp and PriceWaterhouse.
John J. Keppeler has served as the Company’s Vice President of Worldwide Sales since August of 1999 and has served as the Company’s Vice President of Sales from 1998 to 1999. From November of 1986 to June of 1998, Mr. Keppeler served in a series of sales and customer marketing positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Director of Category & Customer Development for the Green Giant and Progresso businesses.
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Linda Kollofski has served as the Company’s Vice President of Domestic Marketing since February of 2004 and as Vice President of New Business Development from November of 2002 to January of 2004. Prior to joining the Company in 2002, Ms. Kollofski was principal of Linda K. Consulting, Inc. from October of 1994 to October of 2002. Ms. Kollofski provided marketing expertise to various businesses including Haagen-Daz, Totino’s and Green Giant as well as to Telex Communications, Hazeldon Foundation publishing business and the Company’s FiberChoice brand. Previously, Ms. Kollofski served in senior marketing and new business development positions with the Hazelden Foundation, Dow Brands, Pillsbury and Munsingwear.
Larry R. Muma has served as the Company’s Vice President of Operations since January of 2001. From May of 2000 to December of 2000, Mr. Muma served as Director of Supply Chain for Novartis, Inc., a worldwide manufacturer and distributor of health care and pharmaceutical products. From February of 1992 to April of 2000, Mr. Muma served in various operations positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, serving from February 1994 to April of 1999 as Vice President of Operations for Pillsbury North America and most recently from April of 1999 to April of 2000 as Vice President of Operations Frozen Division. Mr. Muma worked for PepsiCo from 1976 to 1992, serving most recently as its Vice President of International Technical Services.
Susan Horvath has served as the Company’s Vice President of International since April of 2005. From September 1999 to April 2005, Ms. Horvath has served in a variety of roles with the Company, including Director of Financial Planning and Analysis from September 2002 to April 2005. Prior to joining CNS in 1999, Ms. Horvath was the senior finance manager for the advertising and sales promotion department of The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products. Previously Ms. Horvath worked for Coopers and Lybrand.
Nicole Strait has served as the Company’s Vice President of Human Resources since March of 2005. Prior to joining the Company, from November 2002 to March 2005, Ms. Strait was with The J.M Smucker Company/International Multifoods Corporation, a Minneapolis-based manufacture and distributor of food products, most recently employed as its Director, Human Resources. From May 2000 to October 2002, Ms. Strait held various human resources positions with SimonDelivers.com, Inc., a Minneapolis-based online grocery shopping and grocery delivery company.
The Company leases approximately 73,000 square feet of office and warehouse space in Eden Prairie, Minnesota. The lease expires in November of 2010 and contains a renewal option. Monthly payments on the lease are $61,766.
On February 18, 2004, CNS, Inc., together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to CNS. The two patents at issue are U.S. Patent No. 6,318,362 (the ” ‘362 Patent”) and U.S. Patent No. 3,533,503 (the ” ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and therefore not infringed and asks for its attorneys’ fees and costs.
On November 24, 2004, we announced that the U.S. Patent and Trademark Office will reexamine the ‘362 Patent and the ‘503 Patent. In response to this action by the U.S. Patent and Trademark Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. We believe that when the ‘362 and ‘503 Patents emerge from reexamination, we will maintain significant patent protection under those patents and will recommence enforcement of those patents in the litigation described above. We maintain patent protection for our nasal dilator products under other United States and foreign patents and will continue to vigorously enforce all of our intellectual property.
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As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received information that the U.S. Patent and Trademark Office has acted on the reexamination of the ‘362 and ‘503 Patents.
Another of our patents covering our nasal strip technology, U.S. Patent No. 5,533,499 (the “ ‘499 Patent”), is also subject to reexamination by the U.S. Patent and Trademark Office. On January 21, 2005, we received a determination from the U.S. Patent and Trademark Office that the ‘499 Patent has significant allowable claims. With some formal amendments, we expect the U.S. Patent and Trademark Office will confirm these claims as allowable. As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2005, we have not received final notice from the U.S. Patent and Trademark Office of the claims of the ‘499 Patent it has confirmed as allowable.
None.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock has been traded on The Nasdaq Stock Market under the symbol “CNXS” since April 8, 1994. The following table sets forth the high and low last sale prices of our common stock for the period indicated which cover our fiscal years ending March 31, 2005 and 2004.
| Fiscal Year Ended March 31, 2005 | High | Low | |||
|---|---|---|---|---|---|
| Quarter Ended March 31, 2005 | 18.08 | 12.43 | |||
| Quarter Ended December 31, 2004 | 13.25 | 10.95 | |||
| Quarter Ended September 30, 2004 | 11.30 | 9.86 | |||
| Quarter Ended June 30, 2004 | 11.04 | 9.31 | |||
| Fiscal Year Ended March 31, 2004 | High | Low | |||
| Quarter Ended March 31, 2004 | 14.49 | 9.91 | |||
| Quarter Ended December 31, 2003 | 13.70 | 11.02 | |||
| Quarter Ended September 30, 2003 | 11.72 | 8.52 | |||
| Quarter Ended June 30, 2003 | 8.92 | 6.25 | |||
On June 3, 2005, the last sale price of the common stock was $20.76 per share.
As of June 3, 2005, there were approximately 600 owners of record of our common stock.
We paid four quarterly dividends of $.05 per share of common stock during fiscal 2005. We paid three quarterly dividends of $.04 per share of common stock during fiscal 2004. The payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, our general financial condition and general business considerations.
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The following table provides certain information regarding purchases made by us of our common stock in the quarter ended March 31, 2005:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||
|---|---|---|---|---|---|---|---|---|---|
| January 1 – January 31, 2005 | — | — | — | 470,400 | |||||
| February 1 – February 28, 2005 | 12,000 | $ 15.83 | 12,000 | 458,400 | |||||
| March 1 – March 31, 2005 | 32,895 | $ 15.37 | 32,895 | 425,505 | |||||
| Total | 44,895 | $ 15.49 | 44,895 | 425,505 | |||||
| (1) | On February 11, 2002, we announced that our board of directors had approved a stock repurchase program authorizing us to repurchase up to 1,000,000 shares of our common stock from time to time in open market transactions or in privately negotiated transactions. |
The following table sets forth information regarding our equity compensation plans in effect as of March 31, 2005. Each of our equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.
| Plan Category | Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares of common stock remaining available for future issuance under equity compensation plans | ||||
|---|---|---|---|---|---|---|---|
| Equity compensation plans approved | 1,476,668 | $ 6.91 | 265,145 | ||||
| by stockholders: | |||||||
| Equity compensation plans not | -0- | -0- | -0- | ||||
| approved by shareholders: | |||||||
| Totals | 1,476,668 | $ 6.91 | 265,145 | ||||
The equity compensation plans approved by our shareholders are the 2000 Amended Stock Option Plan, the 1994 Amended Stock Plan, the 1990 Stock Plan and the 1987 Employee Incentive Stock Option Plan. No shares remain available for future awards under the 1994, 1990 or 1987 Plans.
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We also maintain a 1989 Employee Stock Purchase Plan, participation in which is available to substantially all of our employees. Participating employees may purchase our common stock at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the stock at the beginning or end of the participation period. The six-month participation period runs from January 1 to June 30 and from July 1 to December 31 each year. Employees may contribute up to 10% of their base compensation to the plan subject to certain IRS limits on stock purchases through the plan. This plan has been approved by our shareholders.
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and Notes thereto together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this Report. The Consolidated Statements of Operations and Balance Sheet data presented below as of and for the years ended December 31, 2000 through March 31, 2005 have been derived from our Consolidated Financial Statements included elsewhere in this Annual Report or previously filed with the Securities and Exchange Commission on Form 10-K, which have been audited by KPMG LLP, independent certified public accountants.
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
| Years ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2005 | March 31, 2004 | March 31, 2003 | Dec. 31, 2001 | Dec. 31, 2000 | |||||||||||||
| Net sales | $ | 93,732 | $ | 86,980 | $ | 79,075 | $ | 76,242 | $ | 38,409 | |||||||
| Operating income (loss) | 20,051 | 12,748 | 9,639 | (1,225 | ) | (18,696 | ) | ||||||||||
| Net income (loss) | 13,702 | 8,547 | 6,516 | 81 | (13,756 | ) | |||||||||||
| Diluted net income (loss) per share | $ | 0.93 | $ | 0.59 | $ | 0.46 | $ | 0.01 | $ | (0.89 | ) | ||||||
| Working capital | $ | 67,650 | $ | 54,900 | $ | 45,266 | $ | 32,712 | $ | 50,183 | |||||||
| Total assets | 87,215 | 73,534 | 65,375 | 50,618 | 65,337 | ||||||||||||
| Stockholders’ equity | 71,151 | 58,644 | 49,054 | 36,612 | 53,584 | ||||||||||||
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The following discussion of the financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. In this discussion, our three fiscal years ended March 31, 2005, 2004 and 2003 are referred to as fiscal years 2005, 2004 and 2003, respectively.
We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products that focus on better breathing, and FiberChoice® branded products that focus on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands, patented technologies, established domestic and international distribution networks, a flexible and low-cost operating model and an experienced management team.
Our financial goals are to achieve sustainable long-term growth in consumer demand for our products, which should leverage our efficient operating model to generate further growth in operating profit and operating cash flow: