Prepared by American Financial Printing, Inc. www.afpi.com

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPSVqoJ0Ia5Vw/yGt+oOudnFhvYAMrp1f+vOQnvrcIB2X8TJvwKkpfUoTZsV1ydp 4LsOsAcTKUIjY+F4s1iu3w== 0000897101-00-000300.txt : 20000411 0000897101-00-000300.hdr.sgml : 20000411 ACCESSION NUMBER: 0000897101-00-000300 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNS INC /DE/ CENTRAL INDEX KEY: 0000814258 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411580270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16612 FILM NUMBER: 583875 BUSINESS ADDRESS: STREET 1: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128206696 MAIL ADDRESS: STREET 1: PO BOX 39802 STREET 2: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-K 1 Prepared by American Financial Printing, Inc. www.afpi.com 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 December 31, 1999

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from _________ to __________

COMMISSION FILE NUMBER: 0-16612

CNS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)

41-1580270
(I.R.S. Employer
Identification No.)

P.O. Box 39802
Minneapolis, 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 15, 2000, assuming as market value the price of $5.125 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 approximately $55,000,000.

As of March 15, 2000, the Company had outstanding 14,436,561 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 May 3, 2000, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I

Item 1.	Business	3
Item 2.	Properties	16
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17

PART II

Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	18
Item 6.	Selected Financial Data	19
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26

PART III

Item 10.	Directors and Executive Officers of the Registrant	27
Item 11.	Executive Compensation	27
Item 12.	Security Ownership of Certain Beneficial Owners and Management	27
Item 13.	Certain Relationships and Related Transactions	27

PART IV

Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	28

SIGNATURES		29
EXHIBIT INDEX		31
FINANCIAL STATEMENTS		F-1

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts but provide current expectations or forecasts of future events. As such, they are considered "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and 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 similar words or expressions. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements and investors therefore should not consider any list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. 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 reliant on sales of Breathe Right® nasal strips; (ii) the Company's success and future growth will depend significantly on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets for additional products; (iii) the Company's competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of its patents on the Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation (see Item 1, "Patents, Trademarks and Proprietary Rights" and Item 3, "Litigation"); (iv) the Company operates in competitive markets where recent and potential entrants into the nasal dilator segment pose greater competitive challenges than those faced by the Company in the past (see Item 1, "Competition"); (v) the Company has faced and will continue to face challenges in successfully developing and introducing new products and anticipates that there will be substantial costs, expenses and risks associated with the introduction of new products during 2000, including those associated with the introduction of the Company's FiberChoice^TM chewable fiber tablets (see Item 1, "Business"); (vii) the Company is currently establishing its own channels of distribution for its nasal strip products in international markets (see Item 1, "International Distribution"), and there can be no assurance that the Company's efforts to develop its international distribution will be successful; and (viii) the Company is dependent upon contract manufacturers for the production of substantially all of its products.

PART I

Item 1. BUSINESS

General

CNS, Inc. (the "Company") develops and markets consumer health care products, including the Breathe Right® nasal strip. The Breathe Right nasal strip improves breathing by reducing nasal airflow resistence. It can be effective in providing temporary relief for nasal congestion, reducing snoring and reducing breathing difficulties due to a deviated nasal septum. The Company has recently announced its expansion of the Breathe Right product line to include nasal strips for colds with Vicks® mentholated vapors that are sized for the entire family, and nasal strips for children that will be available in multiple colors and designs. Both are expected to be on retail shelves during the fall 2000 cough/cold season.

In the third quarter of 1999, the Company introduced a product for race horses called the FLAIR^TM equine nasal strip. Invented by two veterinarians, the FLAIR equine nasal strip is a patented, drug-free product that enables horses to breathe more easily during strenuous exercise. The Company plans to introduce its new FiberChoice^TM chewable fiber tablets in 2000. The FiberChoice product is a flavored, chewable fiber tablet that offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber.

In addition to expanding the Breathe Right brand and introducing other new products, the Company is exploring possibilities for acquiring new consumer health care products or companies that have established consumer brands. The Company is also considering opportunities for licensing new products and technologies.

Management

During 1998, the Company added to its management team several executive officers with a diverse body of consumer packaged goods experience. See Item 1, "Executive Officers of the Company." The Company also reorganized its management structure into strategic business teams in order to expand the platform for building the Breathe Right brand and develop and launch new products: Breathe Right Brand Team; FiberChoice Team; FLAIR Team; International Team; and Business Development Team. The Company believes that its team focus enables the Company to more effectively implement its business strategies and position itself to become a large, multi-product consumer products company with a significant international presence.

Breathe Right Brand Team. The Company's Breathe Right Brand Team is responsible for the strategic development and management of the Breathe Right nasal strip business and other non-nasal strip products that seek to leverage the Breathe Right brand name. Breathe Right nasal strip products currently represent the cornerstone of the Company's business. The Company intends to exploit new markets and opportunities that it believes exist for its current nasal strip products and plans to commercialize potential new Breathe Right brand products. The Company has developed two new products, nasal strips for colds with Vicks® mentholated vapors for the entire family and nasal strips for children. Both products are expected to be introduced during the fall of 2000 to coincide with the cough/cold season.

FiberChoice Team. The Company has recently completed an evaluation and testing of its FiberChoice chewable fiber tablets and plans to introduce the product during the second quarter of 2000. The FiberChoice Product Team is responsible for the strategic development and management of the FiberChoice chewable fiber supplement business and will lead the Company's launch of the product.

FLAIR Team. The Company introduced the FLAIR equine nasal strip on a limited basis during the fourth quarter of 1999 and plans an official launch of the product in the spring of 2000. The Company's FLAIR Product Team is responsible for the strategic development and management of the FLAIR equine nasal strip business.

International Team. The Company intends to develop international markets for all of its products and is negotiating with distributors and representatives for distribution of Breathe Right nasal strips in a number of countries in order to further expand the Company's presence in international markets. See Item 1, "International Distribution." The International Team is responsible for developing and managing the Company's overseas business and its relationships with distributors and representatives in international markets.

Business Development Team. The Business Development Team is committed to the expansion of the Company's product base through the acquisition or licensing of promising consumer health care products that have significant market potential. The Business Development Team is responsible for identifying and evaluating potential new products, inventions and other business prospects that will enable the Company to achieve its long-term growth and profit objectives, including opportunities for the acquisition of companies that have established product lines.

Products

Breathe Right Nasal Strips. The Breathe Right nasal strip is a nonprescription, single-use disposable device that improves breathing by opening 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, "Government Regulation." The Breathe Right nasal strip comes both in tan and clear.

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 two sizes (small/medium and medium/large) to accommodate the range of nose sizes. The Breathe Right nasal strip is packaged for the consumer market in various quantities ranging between 12 to 38 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 ranging between $3.99 and $11.99 per box. The Company expanded the Breathe Right nasal strip line with the reintroduction of the Breathe Right clear nasal strip in the second half of 1999. Research has suggested that the clear nasal strip product could increase the Company's customer base for nasal strip products by addressing vanity issues that may be associated with the use of the tan Breathe Right nasal strip product.

The Company is currently planning to introduce two new nasal strip products in the fall of 2000. The first product is a Vicks mentholated strip that uses traditional Breathe Right strip technology but contains a soothing mentholated aroma for additional relief. The mentholated vapors are released when the strip surface is rubbed. The second is a nasal strip product that is specifically sized and styled for children. The Kid's Strips will be sized specifically to fit children and include a brightly colored version and a mentholated version.

Breathe Right Brand Products. During the third quarter of 1998, the Company began the national introduction of a saline nasal spray that leverages the Breathe Right brand name. The Breathe Right saline nasal spray is a non-habit forming, drug-free product that restores moisture to comfort and soothe dry, irritated nasal passages due to colds, allergies, dry air (low humidity), air pollution and the overuse of nasal decongestants. The Company intends to introduce additional non-nasal strip products in the future that carry the Breathe Right brand name and to extend the product line.

FiberChoice Chewable Fiber Tablets. The Company has recently completed evaluation and testing of its FiberChoice chewable fiber tablets. FiberChoice is a flavored, chewable tablet that offers consumers an effective, convenient good-tasting way to supplement their daily intake of dietary fiber. The Company plans to introduce its FiberChoice product during the second quarter of 2000. The FiberChoice tablets will be available in both regular and sugar-free varieties. The product will be packaged in both 90-count bottles and 10-count rolls.

FLAIR Equine Nasal Strips. The FLAIR equine nasal strip is a product for horses that capitalizes on the Company's current nasal strip technology. Invented by two veterinarians, the FLAIR equine nasal strip is a patented, drug-free product that enables horses to breathe more easily during strenuous exercise. Results from a limited clinical trial indicate that the equine nasal strip product also reduces a bleeding condition in horses called exercise-induced pulmonary hemorrhaging ("EIPH") that often occurs during and after races, high performance events and strenuous workouts. The FLAIR equine nasal strip holds open the nasal passages of the horses, which can breathe only through their noses, and reduces the effort required to breathe.

The FLAIR equine nasal strip was introduced for the first time during the Breeder's Cup in November of 1999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR is being sold in tack shops, through equine catalogs and in equine supply stores. The Company expects to officially launch FLAIR in the spring of 2000.

Markets

Breathe Right Brand Product Line. The Breathe Right brand of products includes the Breathe Right nasal strips and the Breathe Right saline nasal spray.

Air impedance in the nose accounts for approximately one-half of the total airway resistance involved in the respiratory system (i.e., one-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 who have a common cold, allergies and sinusitis and by those who experience nasal obstruction due to a deviated nasal septum. The Company believes that people with chronic conditions such as snoring or allergies or with structural problems such as deviated septa may be more predisposed to use Breathe Right products on a regular or daily basis while seasonal sufferers are likely to use Breathe Right products as needed. These conditions are aggravated when people have nasal congestion, thus increasing the opportunity for consumer trial during the cough/cold season. People suffering from these conditions are currently the primary users of the Company's Breathe Right products and are the main targets of its advertising.

In 1999, the Company began to emphasize the Breathe Right nasal strip position as a product that provides instant, drug-free relief for those suffering from nasal congestion and other symptoms due to the common cold, allergies and sinusitis. The Company's new advertising emphasizes the ability of Breathe Right nasal strips to provide immediate relief from nasal congestion due to colds and allergies.

The Company's marketing efforts capitalize on the benefits of Breathe Right products to consumers in various, and often overlapping, consumer market segments:

	·	Nasal Congestion Relief. Virtually all Americans suffer some nasal congestion annually as a result of the common cold, while nasal congestion as a result of allergies affects approximately 35 million Americans. The Company believes that the Breathe Right nasal strip is often used as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral decongestants). This broad cough/cold market represents a significant potential for the Breathe Right nasal strip. Prior to 1999, the product had not been marketed directly to the cough/cold consumer in any significant respect. In 1999, the Company commenced marketing efforts aimed at repositioning the Breathe Right nasal strip as a product that provides relief for the common cold. The Company believes that its recent efforts to reposition this product will increase a significant segment of its business. In the fall of 2000, the Company plans to introduce two new products that could also increase the Breathe Right business for colds. These products include nasal strips for colds with soothing Vicks mentholated vapors and nasal strips for children.

	·	Snoring Relief. Breathe Right nasal strips were effective in eliminating snoring or reducing snoring loudness in approximately 75% of the participants in a clinical study. Snoring relief was one of the Company's key advertising messages prior to 1999. This market remains very important to the Company since approximately 37 million people snore regularly, while another 50 million people snore occasionally. The Company believes that snorers can be targeted effectively and directly through relationship marketing efforts as well as through broad-based advertising.

	·	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. The Company plans to approach this market more directly through targeted marketing efforts.

Athletic Market. The Company believes that the Breathe Right nasal strip may 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 the Breathe Right nasal strip provided physiologic advantages in ventilation and heart rate during mid-level exercise. Other exercise physiology studies have been conducted and add to the substantiation of the positive effects of the Breathe Right nasal strip during exercise. The Company continues to use athletes to endorse the Breathe Right nasal strip to increase the visibility of the product, which thereby leads to greater awareness of the product.

FiberChoice Chewable Fiber Tablets. 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 $300 million in U.S. retail sales. The Company believes there is a significant opportunity to expand this category due to both the aging of the baby-boomer generation and the marketing of a better consumer solution to existing dietary fiber products–FiberChoice chewable fiber tablets. As people age, they frequently develop digestive problems. People over 55 years old are three times more likely to purchase a bulk fiber supplement than those younger than 55. The first year the baby-boom generation will turn 55 is in 2001. This generation is generally more active and demanding than their parents. These consumers will be searching for solutions that do not hamper their active lifestyles. The Company believes that its FiberChoice chewable fiber tablet represents such a solution in that it provides an effective, convenient and good-tasting alternative for supplementing dietary fiber intake. The tablets can be taken anytime and anywhere, with or without water.

FLAIR Equine Nasal Strips. The FLAIR equine nasal strip is similar in concept to the human Breathe Right nasal strip adjusted to the unique anatomy and size of a horse. A horse breathes only through its nose, not through its mouth. During strenuous exercise, large amounts of air are inhaled creating a vacuum inside the lungs which can cause soft tissue on the side of the nose to collapse. The equine nasal strip supports those soft tissues so they do not collapse, which allows a horse to breathe more easily with less vacuum developing in the lungs. Results from a limited clinical trial indicate that horses wearing the FLAIR equine nasal strip use less energy to breath and that the product reduces a bleeding condition in horses called exercise-induced pulmonary hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts. Additional studies are underway to more completely delineate the benefits of the FLAIR equine nasal strip product.

The FLAIR equine nasal strip could be used any time a horse is engaged in strenuous exercise. The Company estimates that in the U.S. there are approximately 1.3 million individual horse starts in racing competitions and over 1 million individual horse starts in non-racing competitions. Horses can benefit from the use of the FLAIR equine nasal strip in training as well as competition.

Business Strategy

The Company's business strategy includes increasing sales of its Breathe Right nasal strip and other Breathe Right brand products through advertising, expanding its Breathe Right product line with value added line extensions like Breathe Right nasal strips for colds with Vicks mentholated vapors and children's nasal strips, and successfully introducing new products, including the FLAIR equine nasal strip and the FiberChoice chewable fiber tablet.

Increasing New Consumer Product Trial and Increasing Product Usage. The Company uses a combination of advertising, sampling, promotions, public relations and celebrity endorsements to increase consumer awareness and to encourage consumer trial of the Breathe Right nasal strip. In 1998, the Company began to emphasize the position of the Breathe Right nasal strip as a product that provides instant, drug-free relief for those suffering from nasal congestion and other symptoms due to the common cold, allergies and sinusitis. The Company's new advertising emphasizes the ability of Breathe right nasal strips to provide instant, drug-free relief from nasal congestion due to colds and allergies.

Marketing New Breathe Right Brand Products. The Company believes that the Breathe Right brand name is one of its most valuable assets. In 1998, the Company introduced the Breathe Right saline nasal spray. The Company has also expanded the Breathe Right product line to include nasal strips for colds with Vicks mentholated vapors and nasal strips for children, both of which are expected to be introduced during the fall of 2000 in order to coincide with the cough/cold season.

Acquiring and Marketing New Products. The Company plans to take advantage of its marketing and distribution strengths by acquiring or licensing the rights to new products that it believes have merit and bring them to market. The FLAIR equine nasal strip was introduced in the fourth quarter of 1999 and the FiberChoice chewable fiber tablet is being prepared for a 2000 launch. In addition, the Company is evaluating opportunities for licensing new products and acquiring companies or product lines that have an established base of consumer acceptance.

Expanding Company Presence in International Markets. The Company believes that there is a significant market potential for its products outside the United States. The 3M Company ("3M") has been the Company's sole distributor of its nasal strip products outside the United States and Canada since August of 1995. The Company's relationship with 3M produced less than anticipated results. On September 30, 1999, the Company negotiated the termination of its distribution agreement with 3M to allow the Company to assume the role of selling, marketing and distributing its nasal strip products in international markets during 2000. See Item 1, "International Distribution." The Company is devoting significant resources to the development of its international business and is in the process of entering into agreements with distributors and representatives for the distribution of the Company's nasal strip products in foreign countries. The Company believes that the network that it is attempting to establish for the international distribution of Breathe Right nasal strips will also enable the Company to build its international marketing and distribution capacity for other products. See Item 1, "International Distribution."

Marketing Strategy

The Company's marketing efforts for Breathe Right products are primarily directed to the consumer market. The Company's advertising focuses on the Breathe Right brand benefit of providing instant, drug-free relief from nasal congestion. The Company has primarily used television, magazine and radio advertising to market its products. The Company also uses product promotion programs, such as sampling, coupons and public relations activities to encourage product trial and repeat purchases. Introduction of the new Breathe Right nasal strips for colds with Vicks mentholated vapors will include joint promotional programs with Vicks products. Marketing communications are generally designed to promote trial of Breathe Right brand products by increasing consumer awareness of the benefits of each product.

Because the Breathe Right nasal strip is sold as a consumer 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. The most recent research data collected by a nationally recognized consumer market research firm indicated that approximately 32% of those in the United States who had purchased Breathe Right nasal strips have purchased additional product in the same year.

The Company's marketing efforts for FiberChoice chewable fiber tablets will concentrate on advertising through television and magazines to consumers who are 55 or more years old. In addition, the Company plans to distribute samples of the product and coupons to current users of bulk fiber products. Marketing communications are designed to promote awareness and trial of this new product among current category users.

The Company's marketing communications for FLAIR equine nasal strips focus on the benefits of using the product in training as well as competition. Marketing efforts will include advertising in influential equine magazines and public relations activities surrounding high profile races and events in order to create awareness in the racing and non-racing segments of the market. The Company will also use sampling and direct mail to generate trial among top horse trainers and competitors.

New Products Strategy

The Company is committed to the expansion of its product base through the acquisition and development of unique consumer health care products and technologies that have good market potential. The Business Development Team is responsible for identifying for acquisition or license new products and potential acquisition of companies that have established products in the Company's focus areas of better breathing, digestive health and aging well. The Company has licensed the Vicks trademark from The Proctor & Gamble Company for use with the new product, Breathe Right nasal strips for colds with Vicks mentholated vapors. The Company routinely evaluates the merit of product concepts and acquisition opportunities 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.

Most, if not all, of the Company's current products are regulated to varying degrees by the FDA and other regulatory bodies. See Item 1, "Government Regulation." Products that the Company may acquire or develop in the future could also be subject to a variety of regulatory requirements. Some products will require extensive clinical studies and regulatory approvals prior to marketing and sale. There can be no assurance that any required regulatory approvals will be obtained or that the Company will market or sell any of these products.

Domestic Distribution

The Breathe Right nasal strip and the Breathe Right saline nasal spray are sold primarily as consumer products in mass merchant chain stores, drug stores, grocery stores, warehouse clubs and military base stores in the United States. The Company expects that the FiberChoice chewable fiber tablet will be sold in most of the same retail outlets. The Company sells its products through a direct sales force that concentrates on serving certain key retail accounts as well as through a network of independent sales representatives referred to in the industry as non-food general merchandise brokers. The Company uses direct sales people and broker groups who call on the mass merchant, chain drug, and grocery accounts and the wholesalers who serve primarily the independent drug stores and many of the grocery stores in the United States.

The Breathe Right nasal strip is typically positioned in the cough, cold and allergy section of stores because it provides benefits similar to those obtained with other decongestant products. The Breathe Right saline nasal spray is also usually positioned in the same section of the store as the Breathe Right nasal strip since the products are typically used by those suffering from congestion, allergies and colds. Dietary fiber products typically occupy a small section of a particular store and the Company anticipates that its FiberChoice chewable fiber tablets will be positioned near well-established brands.

The Company's retail customers include national chains of mass merchants, drug stores and grocery stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens, RiteAid, CVS, and Albertson's and warehouse clubs such as Sam's Club and Price Costco, as well as regional and independent stores in the same store categories. In 1999, one retailer accounted for approximately 24% of sales. The loss of this customer or any other large retailer would require the Company to replace the lost sales through other retail outlets and could disrupt distribution of the Breathe Right nasal strip.

The FLAIR equine nasal strip will, at least initially, be sold primarily to trainers and owners in the horse racing industry through tack shops, equine catalogs and equine supply stores. The product was introduced on a limited basis during the fourth quarter of 1999. The Company intends to officially launch the FLAIR equine nasal strip in the spring of 2000.

International Distribution

In August of 1995, the Company executed an international distribution agreement with 3M pursuant to which 3M was given the exclusive right to distribute the Breathe Right nasal strip outside of the United States and Canada. Under the terms of the agreement, 3M was obligated to buy product from the Company and was responsible for obtaining all necessary regulatory approvals outside of the United States and for all marketing and selling expenses. The agreement contained certain minimum performance objectives and breakup provisions. The contractual relationship with 3M produced less than anticipated results in international markets. International sales for the Company were approximately $1 million for 1999, down from its high of approximately $26 million for 1996. The decrease in international sales during that period were attributable in substantial part to the high inventory levels of nasal strips maintained by 3M and disappointing marketing efforts in the international sector.

The Company is optimistic about the prospects for generating increased sales of nasal strips outside the United States and believes that international markets require an increased level of focus, advertising and promotion to reach their potential. On September 30, 1999, the Company and 3M agreed to terminate the existing distribution agreement in a manner that enables the Company to take a direct and immediate role in the sale, marketing and distribution of its nasal strip products in international markets. The amended distribution agreement provides for an orderly transition of the international business from 3M to the Company. Under the amended distribution agreement, 3M has the nonexclusive right to distribute Breathe Right nasal strips outside the United States and Canada until June 30, 2000. The right of 3M to distribute the Company's nasal strip products terminates on June 30, 2000 and, for a period of two years thereafter, 3M has agreed not to sell any nasal dilator devices. The Company paid 3M a one-time termination fee of approximately $6.3 million. The Company is not obligated to repurchase any unsold inventory of nasal strips after 3M exits the market.

The Company is currently involved in establishing a broad-ranging international distribution system for the Breathe Right nasal strip business that will consist of both sales representatives and reselling distributors. The markets that the Company plans to address first will be western Europe as well as Japan and Australia. Sales will be supervised by the Company from its Minnesota headquarters and by CNS International, Inc., a wholly-owned domestic subsidiary which has hired one business manager in Europe. The business manager will supervise and coordinate the activities of the distributors and sales representatives. It is expected that the distributors will be appointed largely on an exclusive basis, with territories consisting of one or more countries. The Company will retain control over packaging and advertising in all territories. Most shipments are expected to be made in bulk, either to reselling distributors who will package for the local market, or to Company-controlled warehouse facilities, where final packaging may be arranged by the Company directly before shipment to retailers.

In 1995, the Company executed a distribution agreement with LOCIN Industries, a Canadian dental floss company, to establish distribution of the Breathe Right nasal strip in the Canadian market. LOCIN purchases nasal strips from the Company in bulk, does its own packaging and distributes the product in Canada.

Manufacturing and Operations

The Company currently subcontracts with multiple manufacturers to produce the Breathe Right nasal strip, Breathe Right saline nasal spray, the FiberChoice chewable fiber tablet and the FLAIR equine nasal strip. The Company does no in-house product production itself. These contract manufacturers 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. With respect to the Breathe Right nasal strip, 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 the manufacturers builds the product to the Company's specifications using materials specified by the Company and, for the major nasal strip materials, places orders against a supply agreement negotiated by the Company with the material manufacturer. The contract manufacturers 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 contract manufacturers in order to observe processes and procedures. Finished goods are inspected at the Company to ensure that they meet quality requirements. The Company inspects its contract manufacturers 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 contract manufacturers to reduce scrap and waste, improve efficiency and improve yields to reduce the manufacturing costs of the product. The Company has received certification that it has established and maintains a quality system which meets the requirements of ISO 9002/EN 46002.

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. Similar materials are, however, currently available from other suppliers. 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 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 upon 90 days' notice to the Company.

Competition

Breathe Right Nasal Strips

The Company believes that the market for decongestant products is highly competitive. The Company's competition in the consumer market for decongestant products and other cold, allergy and sinus relief products consists primarily of pharmaceutical products, other nasal sprays and external nasal dilators while competition in the snoring remedies market also consists primarily of nasal dilators, throat sprays and herbs. Although the Company is currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in the fourth quarter of 1998 with an external nasal dilation device. Other companies have also recently entered the nasal dilation market with private label products. Many of the companies that compete with the Breathe Right nasal strip and other Breathe Right products, including Schering Plough, have significantly greater financial and operating resources than the Company. The Company has developed and implemented marketing strategies aimed at minimizing the impact of competitive products. As a result, the Breathe Right nasal strip has maintained more than 85% of the nasal dilator market despite the entry of Schering Plough and other competitors into the market place.

The patents 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. The Company intends to aggressively enforce the patents it has licensed covering the Breathe Right nasal strip and has engaged in significant litigation to protect its patent rights. See Item 3, "Legal Proceedings."

There can be no assurance that potential competitors will not be able to develop nasal dilation products which circumvent the Company's patents. In addition, external nasal dilator products compete in the consumer markets with decongestant and sinus relief products and snoring remedies in many international markets where the Company does not yet have patent protection on the Breathe Right nasal strip.

FiberChoice Chewable Fiber Tablet

Although the market for dietary fiber supplements is highly competitive and dominated by large companies with resources greater than the Company's and established brands, such as Metamucil, Citrucel and FiberCon, the Company believes that its FiberChoice chewable fiber tablet is a unique product that will present a significant opportunity for the Company. The Company believes that its product will offer consumers an effective, convenient and good tasting alternative to existing products.

FLAIR Equine Nasal Strip

As an alternative to controversial drug therapies, the FLAIR equine nasal strip is a unique product which currently has no direct competition. The only competitive product currently available is the drug Lasix. Lasix is intended to alleviate a bleeding condition in the lungs of horses called exercise-induced pulmonary hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts.

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 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.

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) 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. In March of 1998, nasal dilators were classified by the FDA as Class I devices and exempt from pre-market notification.

The Company's 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 "DSHEA" of 1994, 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 developing implementing regulations for certain provisions of the DSHEA which will be published as final rules in the Federal Register.

There is no national regulatory body for horse racing. Consequently, approval from state horse racing commissions must be obtained on a state-by-state basis before the Company's FLAIR equine nasal strip can be used during horse racing events. The Company has been working with state racing commissions to gain approval for the use of the FLAIR equine nasal strip in competition. To date, the FLAIR equine nasal strip can be used in horse races in approximately 25 states, including the leading racing states of Kentucky, California and Florida, and 3 provinces in Canada.

Sales of the Company's products outside the United States are subject to regulatory requirements that vary widely from country to country. Under its international distribution agreement with the Company which will terminate on June 30, 2000, 3M was responsible for obtaining all necessary approvals outside the United States for Breathe Right nasal strips. As part of the renegotiations of the 3M distribution agreement (see Item 1, "International Distribution"), the Company will transfer the product registrations from the 3M subsidiary in each country to a new distributor or third party. The Company has selected a third party to act as an "Authorized Representative" in the European Union. The Company believes that it has the necessary documentation to support affixing the "CE" mark, an international symbol of quality and compliance with applicable European medical device directives, to 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 other Company's products. 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 and other products 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 has registered trademarks, and has a number of patents under licenses which are used in connection with its business. Some of these patents and licenses cover significant product formulations, processing and designs for the Company's products. The Company believes its trademarks are important as protection for the Company's image in the marketplace and advertising. The Company's success is and will continue to be dependent upon the existence of and ability to protect its patents, trademarks and licenses and the Company intends to take such steps as are necessary to protect its intellectual property rights.

There can be no assurance that the Company's technology and proprietary rights will not be challenged on the grounds that its 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. Nor can there be any assurance that others will not attempt to challenge the validity or enforceability of the Company's licensed patents on the basis of prior art or introduce products different from that of the Company. In addition to seeking patent protection for its products, the Company also intends to protect its proprietary technologies and proprietary information as trade secrets.

The Company entered into license agreements pursuant to which the Company acquired from the licensors the exclusive rights to manufacture and sell the Breathe Right nasal strip, the FiberChoice chewable fiber tablet and the FLAIR equine nasal strip. Specifically, the Company has the exclusive right pursuant to those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensor's

patent applications related thereto and all patents issued in any country which correspond to those applications. The Company is obligated to pay royalties to the licensors based on sales of the products including certain minimum royalty amounts in order to maintain its exclusivity.

The licensor of the Breathe Right nasal strip 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. Six 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 Breathe Right nasal strip. The licensor of the Breathe Right nasal strip also has one patent application which is currently pending. In addition, that licensor has obtained patent protection on the Breathe Right 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 Company has two patent applications both pending in the U.S. and has filed a corresponding patent application seeking protection in several foreign countries to protect certain rights to nasal dilation technology that it acquired.

The licensor of the FiberChoice chewable fiber tablet has filed at least two patent applications with the U.S. Patent and Trademark Office seeking patent protection for different aspects of this product which remain pending. The licensor of the Breathe Right aromatic nasal strip has filed at least three patent applications with the U.S. Patent and Trademark Office resulting in one issued patent so far. At least two patent applications for the FLAIR equine nasal strip have also been filed by the licensor thereof in the U.S. Patent and Trademark Office which have resulted in an issued U.S. patent. Each of these licensors has filed corresponding patent applications for acquiring patent protection in several foreign countries on the licensed products.

Although the Company believes that its licensed patents on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products in the United States, there can be no assurance that the patents on the Breathe Right nasal strip, or any additional patents on this or other products 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. The Company does, however, intend to aggressively enforce the patents covering the Breathe Right nasal strip and its other products. In order to enforce any patents issued covering the Breathe Right nasal strip or any of its other products, 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 in the past and is currently engaged in litigation to enforce its patent rights relating to the Breathe Right nasal strip. The Company has recently brought a suit in federal district court to enforce one of the licensed nasal strip patents. In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office of the patent involved which request was granted thus leaving the licensor to await further action on the part of the Office. (See Item 3, "Legal Proceedings").

The Company has registered its Breathe Right trademark in the United States and in several foreign countries and is seeking further registration of that trademark and other trademarks. The Company has also licensed the right to a U.S. trademark registration for the FLAIR equine nasal strip product as well as the pending trademark application for the FiberChoice chewable fiber tablet.

Employees

At March 15, 2000, the Company had 73 full-time and 3 part-time employees, of whom 18 were engaged in operations, 23 in general administration, 31 in marketing and sales and 4 in product development. There are no unions representing Company employees. Relations with its employees are believed to be positive 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 Stockholders and until their successors have been elected and have qualified.

Name and Age		Office

Daniel E. Cohen (47)		Chairman of the Board, Chief Executive Officer and Director

Marti Morfitt (42)		President, Chief Operating Officer and Director

M. W. Anderson, Ph.D (49)		Vice President of Product Development and Regulatory Affairs

Douglas G. Austin (45)		Vice President of Operations

David J. Byrd (46)		Vice President of Finance, Chief Financial Officer and Treasurer

Kirk P. Hodgdon (40)		Vice President of Business Development

John J. Keppeler (38)		Vice President of Worldwide Sales

Teri P. Osgood (36)		Vice President of U.S. Marketing

Carol J. Watzke (52)		Vice President of Consumer Strategy

Daniel E. Cohen has served as the Company's Chairman of the Board since 1993, its Chief Executive Officer since 1989 and a director since 1982. He also served as the Company's Treasurer from 1982 to March of 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 Operating Officer and a director since March 1998. From September of 1982 through February of 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 of 1997 to February of 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.

M. W. Anderson, Ph.D has served as the Company's Vice President of Product Development and Regulatory Affairs since 1998,Vice President of Clinical and Regulatory Affairs from 1994 to 1998, and Vice President of Research and Development from 1990 to 1994. He has served in various other 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.

Douglas G. Austin has served as the Company's Vice President of Operations since December of 1998. Prior to joining the Company, Mr. Austin served as: Executive Vice President and Vice President of Operations for Ergotron, Inc., a manufacturer of computer mounting solutions, from February 1996 to December of 1998; Director of Logistics and Purchasing for Wilsons - The Leather Experts, a specialty retailer of leather garments and accessories, from March of 1993 to February of 1996; and Director of System Stores and General Purchasing of Northwest Airlines, Inc. from June of 1976 to October of 1992.

David J. Byrd has served as the Company's Vice President of Finance and Chief Financial Officer since February of 1996 and its Treasurer since March of 1999. 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.

Kirk P. Hodgdon has served as the Company's Vice President of Business Development since April of 1999, and has served as the Company's Vice President of Breathe Right Brand from 1998 to 1999 and as Vice President of Marketing from 1994 to 1998. Prior to joining the Company, Mr. Hodgdon served as: Vice President-Management Supervisor at Gage Marketing Communications, a marketing services company, from 1993 to 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.

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 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 Business.

Teri P. Osgood has served as the Company's Vice President of U.S. Marketing since December of 1999, of the Breathe Right Brand from April to December of 1999, and has served as the Company's Vice President of New Business Commercialization from 1998 to April of 1999. From August of 1990 to July of 1998, Ms. Osgood 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 of 1997 to July of 1998 as Business Team Leader for Old El Paso, and from October of 1995 to May of 1997 as Business Team Leader for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood was employed in marketing by the Kimberly Clark Corp., from 1988 to 1990.

Carol J. Watzke has served as the Company's Vice President of Consumer Strategy since July of 1998. Prior to joining the Company, Ms. Watzke served in a series of positions of increasing responsibility since 1974 with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Consumer Insights Director from May of 1997 to July of 1998 and as Market Research Director, Green Giant Brands, from 1994 to 1997.

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 of 2000. Upon the expiration of that lease, the Company will be moving into a different facility that consists of approximately 73,000 square feet of office, manufacturing and warehouse space located in Eden Prairie, Minnesota. The new lease expires in December of 2011 and contains a renewal option.

Item 3. LEGAL PROCEEDINGS

On July 20, 1999, the Company commenced a civil action in the United States District Court for the District of Minnesota, Case No. 99-CV-111 JMR/JGL, against JMS Labs Limited (USA), LLC, a/k/a/ JMS Labs Limited, asserting claims of patent infringement and Lanham Act violations. The Company contends that nasals strips manufactured, sold and/or offered for sale by JMS infringe United States Patent No. 5,533,499 (the "499 Patent"), and that JMS has made false and/or misleading statements concerning the characteristics and qualities of its own products and the Company's products. JMS filed an answer and counterclaim, denying the Company's claims and asserting a counterclaim for declaratory judgment that the 499 Patent is invalid, unenforceable and not infringed, and that the complained of statements are not false and misleading. The Company intends to vigorously defend against JMS's counterclaim. No discovery has been conducted in this action. JMS has also moved before the United States Patent and Trademark Office for re-examination of the 499 Patent.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company's 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 the Company's Common Stock for the period indicated.

          Fiscal Year Ended December 31, 1999                                  High                  Low
                                                                               ----                  ----
          First Quarter........................................................4.06                  3.00
          Second Quarter.......................................................3.47                  2.81
          Third Quarter........................................................4.19                  3.47
          Fourth Quarter.......................................................7.19                  3.63

          Fiscal Year Ended December 31, 1998                                  High                  Low
                                                                               ----                  ----
          First Quarter........................................................7.75                  5.44
          Second Quarter.......................................................5.56                  3.91
          Third Quarter........................................................4.81                  3.38
          Fourth Quarter.......................................................5.06                  3.41

On March 15, 2000, the last sale price of the Common Stock was $5.125 per share.

Shareholders

As of March 15, 2000, there were approximately 800 owners of record of Common Stock and an estimated 9,000 beneficial holders whose shares were registered in the names of nominees.

Dividends

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 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.

Recent Sales of Unregistered Securities

On March 12, 1999, the Company issued two ten-year warrants to two individuals in connection with the Company's acquisition of certain intellectual property rights relating to the FLAIR equine nasal strip under a license agreement on that same date (the "Holders") between the Company and a business in which the Holders are principals. The warrants vest over a three-year period and entitle each of the Holders to purchase up to 25,000 shares of Common Stock of the Company at a purchase price of $3.4375 per share, the fair market value of the Common Stock of the Company on the date the warrants were issued. The Company also granted the Holders certain "piggyback" or "incidental" registration rights in connection with the shares of Common Stock acquired by the Holders upon exercise of the warrants. The Company believes that the issuance of the warrants was exempt under Section 4(2) of the Securities Act of 1933. The Company did not issue any unregistered securities during the quarter ended December 31, 1999.

Item 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Company's 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, 1997 through December 31, 1999 inclusive have been derived from the Company's Consolidated Financial Statements included elsewhere in this Report, which have been audited by KPMG LLP, independent certified public accountants.

FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)

                                                              Years ended December 31,
                                               1999         1998        1997        1996        1995
                                            ---------------------------------------------------------
Net sales                                   $ 46,050     $ 53,623    $ 66,957    $ 85,866    $ 48,631
Operating income (loss)                      (18,696)         701       9,644      21,743      12,398
Income (loss) from continuing operations     (13,757)       2,982       8,770      15,522      13,311
Net income (loss)                            (13,757)       2,982       8,770      15,522      14,076
Diluted net income (loss) per share
    from continuing operations                 (0.89)        0.16        0.44        0.78        0.72
Diluted net income (loss) per share            (0.89)        0.16        0.44        0.78        0.72

Working capital                             $ 50,183     $ 72,025    $ 76,919    $ 78,403    $ 25,855
Total assets                                  65,337       84,963      88,495      89,409      32,341
Stockholders' equity                          53,584       75,866      80,645      79,775      26,885

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. In the opinion of the Company's management, the quarterly unaudited information set forth below has been prepared on the same basis as the audited financial information, and includes all adjustments (consisting only of normal, recurring adjustments) necessary to present this information fairly when read in conjunction with the Company's consolidated financial statements and notes thereto.

Overview

The Company was founded in 1982. From 1987 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. Since 1995, the Company has focused primarily on the Breathe Right® nasal strip and divested itself of the assets related to its sleep disorders business. The Company's revenues are derived primarily from the manufacture and sale of the Breathe Right nasal strip. Revenue from sales is recognized when earned, at the time products are shipped.

The Company obtained the exclusive license to manufacture and sell the Breathe Right nasal strip in 1992 and received FDA clearance in October 1993 to market the Breathe Right nasal strip as a product that improves nasal breathing. In September 1994, the Company launched its consumer marketing program which was enhanced by broad media coverage of the use of Breathe Right nasal strips by professional football players. At the same time, a number of radio and television personalities provided unsolicited endorsements of the product on national radio and television.

In August 1995, the Company signed an exclusive international distribution agreement with the 3M Company ("3M") to market Breathe Right nasal strips outside the U.S. and Canada. On September 30, 1999, the Company and 3M amended the distribution agreement in a manner that allows the Company to regain control of its international business on a phased schedule. In exchange for the one-time contract termination fee noted below, 3M is authorized to continue to distribute primarily on a non-exclusive basis until June 30, 2000. The international distribution agreement with 3M will terminate on June 30, 2000. The Company is currently adding distributors who will reintroduce nasal strips to Europe, Japan and Australia.

In November 1995, the Company received FDA clearance to market the Breathe Right nasal strip for the reduction or elimination of snoring and began marketing programs emphasizing the related snoring benefits of the product. At the end of 1995, Breathe Right nasal strips were available in most domestic drug stores, mass merchants and warehouse clubs and a majority of grocery stores.

In February 1996, the Company received FDA clearance to market the Breathe Right nasal strip for the temporary relief of nasal congestion and thereafter launched a media program to increase consumer awareness of the benefits of the product for this application. In June 1996, the Company received FDA clearance to market the Breathe Right nasal strip for the temporary relief of breathing difficulties due to a deviated nasal septum. In July 1996, U.S. Utility Patents were issued covering the basic invention of the Breathe Right nasal strip and additional elements incorporated in the product. During 1997, the Company became aware of a foreign reference to a nasal dilator, not commercially available, that the Company believed would result in narrower protection in the future from the patents licensed for Breathe Right nasal strips.

During 1998, the Company strengthened its management team to add consumer packaged goods and new products experience and organized into focused business teams. The Company completed positioning research work to expand the Breathe Right brand and developed a road map for new product development. During 1999, the Company invested aggressively in marketing, selling and product development expenses to build the Breathe Right brand and position additional products for launch in 2000.

Operating Results

The tables below set forth certain selected financial information of the Company and the percentage of net sales represented by certain items included in the Company's statements of income for the periods indicated.

                                           Three Months Ended                     Year               Three Months Ended              Year
                                     ------------------------------------------   Ended     -------------------------------------    Ended
                                        Mar 31,   Jun 30,   Sep 30,   Dec 31,     Dec 31,   Mar 31,  Jun 30,    Sep 30,   Dec 31,    Dec 31,
                                         1999      1999      1999       1999      1999      1999      1999       1999      1999      1999
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
                                                         (In thousands)
Domestic net sales                   $   11,811 $   7,994 $  10,151 $   15,106 $  45,062
International net sales                     123       191       312        362       988
                                       ---------  --------  --------  ---------  --------
    Net sales                            11,934     8,185    10,463     15,468    46,050     100.0 %   100.0 %    100.0 %   100.0 %   100.0 %
Cost of goods sold                        4,688     3,629     3,992      6,049    18,358      39.3      44.3       38.2      39.1      39.9
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Gross profit                       7,246     4,556     6,471      9,419    27,692      60.7      55.7       61.8      60.9      60.1
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
Operating expenses:
    Marketing and selling                11,430     4,361     4,644     12,918    33,353      95.8      53.3       44.4      83.5      72.4
    General and administrative              803       824       941        815     3,383       6.7      10.1        9.0       5.3       7.3
    Product development                     979       843       782        702     3,306       8.2      10.3        7.5       4.5       7.2
    Contract termination fee                  0         0     6,345          0     6,345       0.0       0.0       60.6       0.0      13.8
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Total operating expenses          13,212     6,028    12,712     14,435    46,387     110.7      73.6      121.5      93.3     100.7
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Operating loss                    (5,966)   (1,472)   (6,241)    (5,016)  (18,695)    (50.0)    (18.0)     (59.6)    (32.4)    (40.6)
Investment income                           899       698       643        598     2,838       7.5       8.5        6.1       3.9       6.2
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Loss before income taxes      $   (5,067)$    (774)$  (5,598)$   (4,418)$ (15,857)    (42.5)%    (9.5)%    (53.5)%   (28.6)%   (34.4)%
                                       =========  ========  ========  =========  ========  ========  ========   ========  ========  ========


                                               Three Months Ended                     Year               Three Months Ended              Year
                                         ------------------------------------------   Ended     -------------------------------------    Ended
                                            Mar 31,   Jun 30,   Sep 30,   Dec 31,     Dec 31,   Mar 31,  Jun 30,    Sep 30,   Dec 31,    Dec 31,
                                             1998      1998      1998       1998      1998      1998      1998       1998      1998      1998
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
                                                             (In thousands)
Domestic net sales                       $   13,354 $  11,789 $  12,581 $   14,130 $  51,854
International net sales                       1,127       168       168        305     1,768
                                           ---------  --------  --------  ---------  --------
    Net sales                                14,481    11,957    12,749     14,435    53,622     100.0 %   100.0 %    100.0 %   100.0 %   100.0 %
Cost of goods sold                            4,470     4,454     4,242      5,320    18,486      30.9      37.3       33.3      36.9      34.5
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Gross profit                          10,011     7,503     8,507      9,115    35,136      69.1      62.7       66.7      63.1      65.5
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
Operating expenses:
    Marketing and selling                     9,694     5,581     7,032      6,470    28,777      66.9      46.7       55.2      44.8      53.7
    General and administrative                1,047     1,167       810        596     3,620       7.2       9.8        6.4       4.1       6.8
    Product development                         395       589       540        515     2,039       2.7       4.9        4.2       3.6       3.8
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Total operating expenses              11,136     7,337     8,382      7,581    34,436      76.9      61.4       65.7      52.5      64.2
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Operating income (loss)               (1,125)      166       125      1,534       700      (7.8)      1.4        1.0      10.6       1.3
Investment income                               690       730       712        660     2,792       4.8       6.1        5.6       4.6       5.2
                                           ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Income (loss) before income taxes $     (435)$     896 $     837 $    2,194 $   3,492      (3.0)%     7.5 %      6.6 %    15.2 %     6.5 %
                                           =========  ========  ========  =========  ========  ========  ========   ========  ========  ========

                                           Three Months Ended                     Year               Three Months Ended              Year
                                     ------------------------------------------   Ended     -------------------------------------    Ended
                                        Mar 31,   Jun 30,   Sep 30,   Dec 31,     Dec 31,   Mar 31,  Jun 30,    Sep 30,   Dec 31,    Dec 31,
                                         1997      1997      1997       1997      1997      1997      1997       1997      1997      1997
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
                                                         (In thousands)
Domestic net sales                   $   16,909 $  12,623 $  12,352 $   18,718 $  60,602
International net sales                   2,486       970       291      2,608     6,355
                                       ---------  --------  --------  ---------  --------
    Net sales                            19,395    13,593    12,643     21,326    66,957     100.0 %   100.0 %    100.0 %   100.0 %   100.0 %
Cost of goods sold                        6,245     4,456     3,897      6,695    21,293      32.2      32.8       30.8      31.4      31.8
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Gross profit                      13,150     9,137     8,746     14,631    45,664      67.8      67.2       69.2      68.6      68.2
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
Operating expenses:
    Marketing and selling                11,124     4,900     4,582     11,033    31,639      57.4      36.0       36.2      51.7      47.3
    General and administrative              762       812       933        768     3,275       3.9       6.0        7.4       3.6       4.9
    Product development                     202       289       246        369     1,106       1.0       2.1        1.9       1.7       1.7
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Total operating expenses          12,088     6,001     5,761     12,170    36,020      62.3      44.1       45.6      57.1      53.8
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Operating income                   1,062     3,136     2,985      2,461     9,644       5.5      23.1       23.6      11.5      14.4
Investment income                           710       777       773        716     2,976       3.7       5.7        6.1       3.4       4.4
                                       ---------  --------  --------  ---------  --------  --------  --------   --------  --------  --------
       Income before income taxes    $    1,772 $   3,913 $   3,758 $    3,177 $  12,620       9.1 %    28.8 %     29.7 %    14.9 %    18.8 %
                                       =========  ========  ========  =========  ========  ========  ========   ========  ========  ========

1999 Compared to 1998

Net Sales. Net sales were $46.1 million for 1999 compared to $53.6 million for 1998. While sales were down for the year, fourth quarter sales increased to $15.5 million for 1999 from $14.4 million for 1998 due to increased advertising expenditures. For the year 1999, domestic sales declined to $45.1 million from $51.9 for 1998. Slower sales for 1999 reflect both a lower level of advertising during the previous cough/cold season and the presence of competition. Retailer returns of product in conjunction with our introduction of new packaging also reduced sales.

The Company has experienced in the past, and expects that it will continue to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to advertising levels and seasonality of sales as described below, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers.

International sales decreased to $988,000 for 1999 from $1.8 million for 1998. The lower level of international sales for 1999 is attributable in large part to disappointing marketing results and continued high inventory levels at the Company's international distributor 3M. The distribution agreement with 3M has been terminated effective June 30, 2000. The Company is currently adding distributors who will reintroduce nasal strips to Europe, Japan and Australia. In addition the Company will take a more active role in international advertising and promotion.

Gross Profit. Gross profit was $27.7 million for 1999 compared to $35.1 million for 1998. Gross profit as a percentage of net sales was 60.1% for 1999 compared to 65.5% for 1998. The lower gross profit as a percentage of net sales was primarily due to costs of the transition to new product packaging, lower sales and product mix.

Marketing and Selling Expenses. Marketing and selling expenses were $33.4 million for 1999 compared to $28.8 million for 1998. This increase resulted primarily from a resumption in national television advertising during 1999 after no significant advertising in the fourth quarter of

1998. Marketing and selling expenses as a percentage of net sales increased to 72.4% in 1999 from 53.7% in 1998 reflecting the planned investment in advertising needed to return the Breathe Right brand to growth in the fourth quarter of 1999.

General and Administrative Expenses. General and administrative expenses were $3.4 million for 1999 comparable to $3.6 million for 1998. General and administrative expenses as a percentage of net sales increased to 7.3% in 1999 from 6.7% in 1998 primarily as a result of the lower level of sales in 1999.

Product Development Expenses. Product development expenses were $3.3 million for 1999 compared to $2.0 million for 1998. This increase resulted primarily from costs related to evaluation and testing of potential new products, including FLAIR equine nasal strips and FiberChoice chewable fiber tablets. Product development expenses as a percentage of net sales increased to 7.2% in 1999 from 3.8% in 1998.

Contract Termination Fee. Contract termination fee of $6.3 million represents a one-time payment to 3M, the Company's international distributor, to terminate the international distribution agreement. The amount paid was negotiated, and is less than the amount called for in the original contract. The agreement allows the Company to regain control of the international business on a phased schedule that will be completed by June 30, 2000.

Investment Income. Investment income was $2.8 million for 1999 and 1998.

Income Tax Benefit (Expense). Income tax provision for 1999 was a benefit of $2.1 million compared to an expense of $510,000 for 1998. Due to tax loss carryforwards the income tax benefit for 1999 represents the remaining tax benefit available from carrying back current year losses, offset by a reserve against net deferred income tax assets. A high level of tax-exempt interest income impacted the effective income tax rate in 1998.

1998 Compared to 1997

Net Sales. Net sales were $53.6 million for 1998 compared to $67.0 million for 1997. For the year 1998, domestic sales decreased to $51.9 million from $60.6 million for 1997. The decrease was primarily due to the failure of marketing efforts to generate the anticipated volume of new Breathe Right nasal strip users in the first quarter of 1998, a planned reduction in advertising expenditures during the fourth quarter of 1998 and the entry of a competitor at the end of 1998.

International sales decreased to $1.8 million for 1998 from $6.4 million for 1997. The lower level of international sales in 1998 reflects continued high inventory levels at 3M.

Gross Profit. Gross profit was $35.1 million for 1998 compared to $45.7 million for 1997. Gross profit as a percentage of net sales was 65.5% for 1998 compared to 68.2% for 1997. The lower gross profit as a percentage of net sales in 1998 was due primarily to a write off of inventory in anticipation of the introduction of new packaging, the inclusion of "20% More Free" Breathe Right nasal strips in packages for part of the year and the introduction of new products with lower gross profit margins.

Marketing and Selling Expenses. Marketing and selling expenses were $28.8 million for 1998 compared to $31.6 million for 1997. This decrease resulted primarily from a planned

reduction in national television advertising during the fourth quarter of 1998 and lower than expected coupon redemption. Marketing and selling expenses as a percentage of net sales increased to 53.7% in 1998 from 47.3% in 1997, reflecting the lower level of sales in 1998.

General and Administrative Expenses. General and administrative expenses were $3.6 million for 1998 compared to $3.3 million for 1997. This increase resulted primarily from personnel expenses, including costs associated with the change of the Company's President, offset by a decrease in expenses from patent litigation that was settled during 1998. General and administrative expenses as a percentage of net sales increased to 6.7% in 1998 from 4.9% in 1997 primarily as a result of the lower level of sales in 1998.

Product Development Expenses. Product development expenses were $2.0 million for 1998 compared to $1.1 million for 1997. This increase resulted primarily from costs related to evaluation and testing of potential new products. Product development expenses as a percentage of net sales increased to 3.8% in 1998 from 1.6% in 1997.

Investment Income. Investment income was $2.8 million for 1998 compared to $3.0 million for 1997. This decrease resulted primarily from a higher level of investment in tax exempt municipal bonds in 1998.

Income Tax Expense. Income tax expense for 1998 was $510,000 or 14.6% of income before income taxes compared to $3.9 million or 30.5% for 1997. The lower effective income tax rate was due primarily to the higher level of tax exempt interest income as a percentage of income before income taxes.

Seasonality

The Company believes that approximately 50% of Breathe Right nasal strip users currently use the product for the temporary relief of nasal congestion or congestion related to snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons because of increased use during the cold season.

Liquidity and Capital Resources

At December 31, 1999, the Company had cash, cash equivalents and marketable securities of $38.9 million and working capital of $50.2 million.

Operating Activities. The Company used cash in operations of approximately $12.1 million in 1999. The decreased cash flow in 1999 was primarily due to the net loss for the year. The Company generated cash from operations of $9.3 million in 1998 and $8.0 million in 1997. The increased cash flow in 1998 was primarily due to a change in operating assets and liabilities offset by a decrease in net income.

Investing Activities. Sales and maturities of marketable securities exceeded purchases by $21.1 million in 1999. Net proceeds were used to fund the cash used in operations and purchase treasury shares. The Company's purchases of marketable securities equaled sales and maturities of marketable securities in 1998. Marketable securities purchased consisted of cash equivalents, corporate bonds, U.S. Government obligations and municipal bonds.

The Company purchased $331,000 of property and equipment in 1999 and $1.1 million in 1998, primarily associated with the upgrade of management information systems.

Financing Activities. The Company purchased 2.3 million shares of its common stock for $8.6 million in 1999 and purchased 1.9 million shares for $8.3 million in 1998. These treasury shares are to be used to meet the Company's obligations under its employee stock ownership plan and stock option plans, and for possible future acquisitions. The Company received $446,000 in 1999 and $239,000 in 1998 from the exercise of stock options.

The Company believes that its existing funds will be sufficient to support its planned operations for the foreseeable future, including capital expenditures and possible future acquisitions of products that would complement existing operations.

Year 2000

The Company evaluated the potential impact of what is commonly referred to as the Year 2000 issue, concerning the inability of certain information systems to properly recognize and process dates containing the year 2000 and beyond. The Company identified and tested its systems, and the test results indicated that these systems were Year 2000 compliant. The Company has experienced no Year 2000 system issues in 2000.

The Company's direct costs for Year 2000 compliance were not significant and consisted primarily of costs related to the staff time devoted to Year 2000 compliance.

Recent Accounting Pronouncements

In 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company plans to adopt the new standard in 2001. The Company is in the process of evaluating SFAS No. 133 and its potential impact.

In 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and does not require additional disclosures. The Company adopted SOP 98-1 in 1999. Costs incurred prior to the initial application of the SOP were not adjusted to conform with SOP 98-1. The adoption did not have a material impact on the Company's financial position or results of operations.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risk exposure is primarily interest rate risk related to its cash and cash equivalents and investments in marketable securities. The Company has investment guidelines which limit the types of securities in which it may invest as well as the length of maturities. No investment may exceed 36 months in maturity and the weighted average life of the portfolio may not exceed 18 months.

The table below provides information about the Company's cash and cash equivalents and marketable securities as of December 31, 1999:

                                                          (In thousands)

                                              Cost                           Fair Value
                                              ----                           ----------

         Due within one year                $19,137                            $19,091
         Due after one year
            through two years                16,207                             15,990
         Due after two years
            through three years               2,973                              2,916
                                            -------                            -------
                                            $38,317                            $37,997
                                            =======                            =======

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Balance Sheets of the Company as of December 31, 1999 and 1998, and the related Consolidated Statements of Operations, Stockholders' Equity and Comprehensive Income (Loss), and Cash Flows for each of the years in the three-year period ended December 31, 1999, the Notes to the Consolidated Financial Statements and the Report of KPMG LLP, independent certified public accountants, are listed under Item 14 of this Report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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 Stockholders to be held on May 3, 2000 (the "2000 Proxy Statement"), a definitive copy of which will be filed with the Commission within 120 days of the close of the last 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 Company's 2000 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 Stockholders and Management" in the Company's 2000 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:

			Form 10-K Page Reference

	1.	Financial Statements.

		Independent Auditors' Report	F-1
		Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997	F-2
		Consolidated Balance Sheets as of December 31, 1999 and 1998	F-3
		Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 1999, 1998 and 1997	F-4
		Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997	F-5
		Notes to Consolidated Financial Statements	F-6

	2.	Financial Statement Schedules.

		None.

	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, 1999.

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 27, 2000	By /s/ Daniel E. Cohen
		Daniel E. Cohen Chairman of the Board, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on March 27, 2000 on behalf of the Registrant in the capacities indicated.

(POWER OF ATTORNEY)

Each person whose signature appears below constitutes and appoints DANIEL E. COHEN and PATRICK DELANEY as his or her true and lawful attorneys-in-fact and agents, each acting alone, with the full power of substitution and resubstitution, for him or her and in his or her 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
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)

/s/ Marti Morfitt
Marti Morfitt
President, Chief Operating Officer and Director

/s/ David J. Byrd
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

/s/ Patrick Delaney
Patrick Delaney
Director

/s/ H. Robert Hawthorne
H. Robert Hawthorne
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")).

3.2	Company's Amended and Restated By-Laws.

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*	CNS, Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K")).

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	Distribution Agreement dated August 2, 1995 between the Company and Minnesota Mining and Manufacturing ("3M") incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").

10.7	Amendment to August 2, 1995 Distribution Agreement between the Company and Minnesota Mining and Manufacturing company ("3M") dated effective September 30, 1999.

10.8	Supply Agreement dated May 17, 1995 between the Company and Minnesota Mining and Manufacturing Company ("3M") (incorporated by reference to Exhibit 10.12 to the 1995 Form 10-K).

10.9**	License Agreement dated November 10, 1997 between the Company and Onesta Nutrition, Inc.

10.10**	License Agreement dated March 12, 1999 between the Company and WinEase LLC.

10.11**	License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen Cronk.

10.12*	Employment Agreement between the Company and Daniel E. Cohen dated February 12, 1999 (incorporated by referenced to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K")).

10.13*	Employment Agreement between the Company and Marti Morfitt dated February 12, 1999 (incorporated by referenced to Exhibit 10.10 to the 1998 Form 10-K).

10.14*	Employment Agreement between the Company and Kirk P. Hodgdon dated February 12, 1999 (incorporated by referenced to Exhibit 10.11 to the 1998 Form 10-K).

10.15*	Employment Agreement between the Company and David J. Byrd dated February 12, 1999 (incorporated by referenced to Exhibit 10.12 to the 1998 Form 10-K).

10.16*	Employment Agreement between the Company and John J. Keppeler dated February 12, 1999 (incorporated by referenced to Exhibit 10.13 to the 1998 Form 10-K).

10.17*	Employment Agreement between the Company and Teri P. Osgood dated February 12, 1999 (incorporated by referenced to Exhibit 10.14 to the 1998 Form 10-K).

10.18*	Employment Agreement between the Company and Carol J. Watzke dated February 12, 1999 (incorporated by referenced to Exhibit 10.15 to the 1998 Form 10-K).

10.19*	Employment Agreement between the Company and Douglas G. Austin dated February 12, 1999 (incorporated by referenced to Exhibit 10.16 to the 1998 Form 10-K).

10.20*	Employment Agreement between the Company and M. W. Anderson dated February 12, 1999 (incorporated by referenced to Exhibit 10.17 to the 1998 Form 10-K).

21.1	Subsidiaries of the Company.

23.1	Consent of KPMG LLP.

24.1	Powers of Attorney (included on the signature page hereof).

27.1	Financial Data Schedule.

*Indicates Compensatory Agreement

**Certain portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are represented by brackets with asterisks.

Independent Auditors' Report

The Board of Directors and Stockholders
CNS, Inc.:

We have audited the accompanying consolidated balance sheets of CNS, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNS, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.

/s/ KPMG LLP

Minneapolis, Minnesota
January 19, 2000

F-1

CNS, INC.
Consolidated Statements of Operations
Years ended December 1999, 1998, and 1997

                                                                   1999             1998            1997
- -------------------------------------------------------------------------------------------------------------

Net sales                                                     $  46,050,208    $  53,622,803   $  66,957,134
Cost of goods sold                                               18,358,435       18,484,608      21,292,995
- -------------------------------------------------------------------------------------------------------------
                Gross profit                                     27,691,773       35,138,195      45,664,139
- -------------------------------------------------------------------------------------------------------------

Operating expenses:
     Marketing and selling                                       33,353,549       28,777,148      31,638,518
     General and administrative                                   3,382,897        3,620,752       3,275,636
     Product development                                          3,306,162        2,039,411       1,105,790
     Contract termination fee                                     6,345,000                0               0
- -------------------------------------------------------------------------------------------------------------
                Total operating expenses                         46,387,608       34,437,311      36,019,944
- -------------------------------------------------------------------------------------------------------------

                Operating income (loss)                         (18,695,835)         700,884       9,644,195

Interest income                                                   2,595,779        2,790,780       2,976,121
Gain on sales of marketable securities                              242,567                0               0
- -------------------------------------------------------------------------------------------------------------

                Income (loss) before income taxes               (15,857,489)       3,491,664      12,620,316

Income tax benefit (expense)                                      2,101,138         (510,000)     (3,850,000)
- -------------------------------------------------------------------------------------------------------------

                Net income (loss)                             $ (13,756,351)   $   2,981,664   $   8,770,316
=============================================================================================================


Basic net income (loss) per share                             $        (.89)   $         .16   $         .46
=============================================================================================================

Weighted average number of common shares outstanding             15,435,000       18,079,000      19,119,000
=============================================================================================================


Diluted net income (loss) per share                           $        (.89)   $         .16   $         .44
=============================================================================================================
Weighted average number of common
     and assumed conversion shares outstanding                   15,435,000       18,249,000      19,802,000
=============================================================================================================

The accompanying notes are an integral part of the consolidated financial statements.

F-2

CNS, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998

                                         Assets                                1999            1998
- -------------------------------------------------------------------------------------------------------

Current assets:
     Cash and cash equivalents                                            $    859,852    $    584,718
     Marketable securities                                                  37,997,409      59,796,952
     Accounts receivable, net of allowance for doubtful accounts
        of $280,000 in 1999 and $210,000 in 1998                            11,369,815       7,790,952
     Income taxes receivable                                                 3,177,771               0
     Inventories                                                             4,905,449       8,823,193
     Prepaid expenses and other current assets                               3,625,373       2,794,558
     Deferred income taxes                                                           0       1,332,000
- -------------------------------------------------------------------------------------------------------
                   Total current assets                                     61,935,669      81,122,373

Property and equipment, net                                                  2,010,059       2,406,488
Product rights, net                                                          1,391,107       1,434,566
- -------------------------------------------------------------------------------------------------------

                                                                          $ 65,336,835    $ 84,963,427
=======================================================================================================


                           Liabilities and Stockholders Equity
- -------------------------------------------------------------------------------------------------------

Current liabilities:
     Accounts payable                                                     $  5,422,031    $  4,993,462
     Accrued expenses                                                        6,330,730       3,419,187
     Accrued income taxes                                                            0         684,937
- -------------------------------------------------------------------------------------------------------
                   Total current liabilities                                11,752,761       9,097,586
- -------------------------------------------------------------------------------------------------------

Stockholders equity:
     Preferred stock - authorized 8,483,589 shares;
        none issued or outstanding                                                   0               0
     Common stock - $.01 par value; authorized 50,000,000 shares;
        issued and outstanding 19,294,570 shares in 1999 and 1998              192,946         192,946
     Additional paid-in capital                                             61,530,522      61,932,529
     Treasury shares -  at cost; 4,838,098 shares in 1999
        and 2,692,144 shares in 1998                                       (22,220,537)    (14,670,128)
     Retained earnings                                                      14,401,143      28,157,494
     Accumulated other comprehensive income (loss)                            (320,000)        253,000
- -------------------------------------------------------------------------------------------------------
                   Total stockholders equity                               53,584,074      75,865,841

Commitments (notes 9 and 10)
- -------------------------------------------------------------------------------------------------------

                                                                          $ 65,336,835    $ 84,963,427
=======================================================================================================

The accompanying notes are an integral part of the consolidated financial statements.

F-3

CNS, INC.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Years ended December 31, 1999, 1998, and 1997

                                                          Common stock                               Treasury shares                       Accumulated
                                                    --------------------------    Additional    --------------------------                     other          Total
                                                       Number         Par           paid-in      Number                        Retained    comprehensive   stockholders'
                                                     of shares       value          capital     of shares        Cost          earnings    income (loss)      equity
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1996                         19,145,445  $     191,454   $63,177,939              0   $          0   $16,405,514   $           0 $   79,774,907

    Stock issued in connection with
       Employee Stock Purchase Plan                         927             10         7,180         (1,489)         8,464              0              0         15,654
    Stock options exercised                              77,300            773       241,308        (37,000)        50,062              0              0        292,143
    Tax benefit from stock options
       exercised                                              0              0        70,000              0              0              0              0         70,000
    Warrants exercised                                   70,898            709          (709)             0              0              0              0              0
    Treasury shares purchased                                 0              0             0      1,000,000     (8,278,519)             0              0     (8,278,519)
    Comprehensive income:
       Net income for the year                                0              0             0              0              0      8,770,316              0      8,770,316
                                                                                                                                                             -----------
            Total comprehensive income                                                                                                                        8,770,316
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1997                         19,294,570        192,946    63,495,718        961,511     (8,219,993)    25,175,830              0     80,644,501

    Stock issued in connection with
       Employee Stock Purchase Plan                           0              0       (25,349)        (5,467)        43,141              0              0         17,792
    Stock options exercised                                   0              0    (1,537,840)      (171,500)     1,776,871              0              0        239,031
    Treasury shares purchased                                 0              0             0      1,907,600     (8,270,147)             0              0     (8,270,147)
    Comprehensive income:
       Net income for the year                                0              0             0              0              0      2,981,664              0      2,981,664
       Unrealized gains on marketable securities
         net of income tax effect of $154,000                 0              0             0              0              0              0        253,000        253,000
                                                                                                                                                             -----------
            Total comprehensive income                                                                                                                        3,234,664
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1998                         19,294,570        192,946    61,932,529      2,692,144    (14,670,128)    28,157,494        253,000     75,865,841

    Stock issued in connection with
       Employee Stock Purchase Plan                           0              0       (98,185)       (18,381)       151,404              0              0         53,219
    Stock options exercised                                   0              0      (413,822)      (108,065)       860,103              0              0        446,281
    Warrants issued                                           0              0       110,000              0              0              0              0        110,000
    Treasury shares purchased                                 0              0             0      2,272,400     (8,561,916)             0              0     (8,561,916)
    Comprehensive loss:
       Net loss for the year                                  0              0             0              0              0    (13,756,351)             0    (13,756,351)
       Unrealized losses on marketable securities
         net of income tax effect of $154,000                 0              0             0              0              0              0       (573,000)      (573,000)
                                                                                                                                                             -----------
            Total comprehensive loss                                                                                                                        (14,329,351)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1999                         19,294,570    $   192,946   $61,530,522      4,838,098   $(22,220,537)  $ 14,401,143   $   (320,000)   $53,584,074
========================================================================================================================================================================

The accompanying notes are an integral part of the consolidated financial statements.

F-4

CNS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997

                                                                                   1999              1998               1997
- ----------------------------------------------------------------------------------------------------------------------------------

Operating activities:
     Net income (loss)                                                     $     (13,756,351)   $     2,981,664   $     8,770,316
     Adjustments to reconcile net income (loss) to net cash
        provided by (used in) operating activities:
           Depreciation and amortization                                           1,029,148            854,702           460,044
           Warrants issued                                                           110,000                  0                 0
           Deferred income taxes                                                   1,486,000            284,000          (809,000)
           Changes in operating assets and liabilities:
              Accounts receivable                                                 (3,578,863)         3,601,049         3,273,730
              Inventories                                                          3,917,744           (198,530)         (309,837)
              Prepaid expenses and other current assets                           (4,008,586)           500,443        (1,647,946)
              Accounts payable and accrued expenses                                2,655,175          1,247,114        (1,783,688)
- ----------------------------------------------------------------------------------------------------------------------------------

                     Net cash provided by (used in) operating activities         (12,145,733)         9,270,442         7,953,619
- ----------------------------------------------------------------------------------------------------------------------------------

Investing activities:
     Purchases of marketable securities                                          (97,157,463)       (43,428,987)      (99,045,360)
     Sales and maturities of marketable securities                               118,230,006         43,497,271        89,926,317
     Payments for purchases of property and equipment                               (330,538)        (1,101,403)       (1,239,918)
     Payments for product rights                                                    (258,722)          (228,826)       (1,553,605)
     Redemption (purchase) of certificate of deposit, restricted                           0            359,898           (19,834)
- ----------------------------------------------------------------------------------------------------------------------------------

                     Net cash provided by (used in) investing activities          20,483,283           (902,047)      (11,932,400)
- ----------------------------------------------------------------------------------------------------------------------------------

Financing activities:
     Proceeds from the issuance of common stock
        under Employee Stock Purchase Plan                                            53,219             17,792            15,654
     Proceeds from the exercise of stock options                                     446,281            239,031           362,143
     Purchase of treasury shares                                                  (8,561,916)        (8,270,147)       (8,278,519)
- ----------------------------------------------------------------------------------------------------------------------------------

                     Net cash used in financing activities                        (8,062,416)        (8,013,324)       (7,900,722)
- ----------------------------------------------------------------------------------------------------------------------------------

                     Net increase (decrease) in cash and cash equivalents            275,134            355,071       (11,879,503)

Cash and cash equivalents:
     Beginning of year                                                               584,718            229,647        12,109,150
- ----------------------------------------------------------------------------------------------------------------------------------

     End of year                                                            $        859,852   $        584,718   $       229,647
==================================================================================================================================

Supplemental disclosure of cash flow information:
     Cash paid during the year for interest                                 $              0   $              0   $             0
     Cash paid during the year for income taxes                                      344,000            700,000         4,750,000
==================================================================================================================================

The accompanying notes are an integral part of the consolidated financial statements.

F-5

CNS, INC.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997

(1)	Summary of Significant Accounting Policies

	Principles of Consolidation The accompanying consolidated financial statements include the accounts of CNS, Inc. and its subsidiaries ("the Company"). All material intercompany accounts and transactions have been eliminated in consolidation.

	Business The Company designs, manufactures and markets consumer products, primarily the Breathe Right® nasal strip. The Breathe Right nasal strip is a nonprescription, single use, disposable device that can temporarily relieve nasal congestion and reduce or eliminate snoring by improving nasal breathing. The Breathe Right nasal strip is sold over-the-counter in retail outlets, including mass merchant, drug, grocery and club stores. The Company has an international distribution agreement with 3M Company ("3M") to market Breathe Right nasal strips outside the U.S. and Canada, which was amended in 1999 to allow the Company to regain control of its international business on a phased schedule. The Company's agreement with 3M will terminate on June 30, 2000.

	Revenue Recognition Revenue from sales is recognized at the time products are shipped.

	Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

	FairValue of Financial Instruments All financial instruments are carried at amounts that approximate fair value.

	Cash Equivalents Cash equivalents consist primarily of money market funds.

	Marketable Securities The Company classifies its marketable debt securities as available-for-sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Any unrealized gains and losses are reflected as a separate component of stockholders' equity. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary, results in a charge to operations resulting in the establishment of a new cost basis for the security.

	Inventories Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market.

	Property and Equipment Property and equipment are stated at cost. Equipment is depreciated using the straight-line method over five years. Leasehold improvements are amortized over the lesser of the estimated useful life of the improvement or the term of the lease.

	Product Rights Product rights, consisting of patents, trademarks and other product rights, are stated at cost and are amortized over three to seven years using the straight-line method.

F-6

	Stock Based Compensation The Company follows the disclosure requirements for employee stock based compensation plans and, accordingly, no compensation expense has been recognized.

	Foreign Sales Foreign sales are made in U.S. dollars only. There are no currency conversions.

	Advertising The Company expenses the production costs of advertising the first time the advertising runs.

	Income Taxes Deferred tax assets and liabilities and the resultant provision for income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

	Net Income Per Share Basic net income (loss) per share and diluted net (loss) per share have been computed based upon the weighted average number of common shares outstanding during the year. Assumed conversion shares were excluded from the net loss per share computation as their effect is antidilutive. Common stock options could potentially dilute basic earnings per share in future periods if the Company generates net income. Diluted net income per share has been computed based upon the weighted average number of common and assumed conversion shares outstanding during the year.

	Comprehensive Income (Loss) Comprehensive income (loss) consists of the Company's net income (loss) and unrealized gains (losses) on marketable securities and is presented in the consolidated statements of stockholders' equity and comprehensive income (loss). Comprehensive income (loss) is an additional disclosure in the consolidated financial statements; it does not affect the Company's financial position or results of operations.

	New Accounting Standards In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new standards for recognizing all derivatives as either assets or liabilities, and measuring those instruments at fair value. The Company plans to adopt the new standard in 2001. The Company is in the process of evaluating SFAS No. 133 and its potential impact.

(2)	Marketable Securities

	Marketable securities, including estimated fair value based on quoted market prices or valuation models, are summarized as follows (in thousands):

	December 31 ------------------------------------------------------------------------- 1999 1998 ------------------------------------------------------------------------- Cost Fair Value Cost Fair Value - ---------------------------------------------------------------------------------------------------------------- Cash equivalents $ 659 $ 659 $ 1,145 $ 1,145 Certificates of deposit 5,500 5,493 0 0 Corporate bonds 24,088 23,879 1,754 1,772 U.S. Government obligations 8,070 7,966 1,309 1,316 Municipal bonds 0 0 55,182 55,564 - ---------------------------------------------------------------------------------------------------------------- Total marketable securities $ 38,317 $ 37,997 $ 59,390 $ 59,797 ================================================================================================================

F-7

	Maturities of marketable securities at December 31, 1999 are as follows (in thousands):

	Cost Fair Value - ---------------------------------------------------------------- Due within one year $ 19,137 $ 19,091 Due after one year through three years 19,180 18,906 - ---------------------------------------------------------------- Total marketable securities $ 38,317 $ 37,997 ================================================================

	There were realized gains of $243,000 during 1999 and no realized gains or losses in 1998 or 1997.

(3)	Advertising

	At December 31, 1999 and 1998, $1,762,000 and $445,000, respectively, of advertising costs were reported as assets. Advertising expense was $17,669,000 in 1999, $15,783,000 in 1998, and $21,160,000 in 1997.

(4)	Details of Selected Balance Sheet Accounts

	Details of selected balance sheet accounts are as follows (in thousands):
	1999 1998 1997 - ------------------------------------------------------------------------------------- Allowance for doubtful accounts: Balance beginning of year $ 210 $ 210 $ 210 Plus provision for doubtful accounts 96 43 5 Less charge offs 26 43 5 - ------------------------------------------------------------------------------------- Balance end of year $ 280 $ 210 $ 210 ===================================================================================== December 31 --------------------- 1999 1998 - ------------------------------------------------------------------------------------- Inventories: Finished goods $ 2,935 $ 6,364 Work in process 21 183 Raw materials and component parts 1,949 2,276 - ------------------------------------------------------------------------------------- Total inventories $ 4,905 $ 8,823 ===================================================================================== Property and equipment: Production equipment $ 408 $ 410 Office equipment and information systems 3,330 3,096 - ------------------------------------------------------------------------------------- 3,738 3,506 Less accumulated depreciation 1,728 1,100 - ------------------------------------------------------------------------------------- Property and equipment, net $ 2,010 $ 2,406 ===================================================================================== Product rights: Product rights $ 2,407 $ 2,148 Less accumulated amortization 1,016 713 - ------------------------------------------------------------------------------------- Product rights, net $ 1,391 $ 1,435 =====================================================================================

F-8

	Accrued expenses: Promotions and allowances $ 3,106 $ 1,632 Royalties and commissions 678 665 Salaries, incentives and paid time off 991 1,016 Packaging transition 1,426 0 Other 130 106 - ------------------------------------------------------------------------------------- Total accrued expenses $ 6,331 $ 3,419 =====================================================================================

(5)	Stockholders' Equity

	Stock Options The Company's stock option plans allow for the grant of options to officers, directors, and employees to purchase up to 2,950,000 shares of common stock at exercise prices not less than 100% of fair market value on the dates of grant. The term of the options may not exceed ten years and vest in increments over 1 to 5 years from the grant date. The plans allow for the grant of shares of restricted common stock. No shares of restricted common stock have been granted under these plans as of December 31, 1999.

	Stock option activity under these plans is summarized as follows:

	Weighted-average Shares Exercise Price Shares Available Per Share Outstanding For Grant - ------------------------------------------------------------------------------- Balance at December 31, 1996 $ 5.65 1,451,600 67,052 Granted 7.13 110,000 (110,000) Exercised 2.56 (114,300) 0 Canceled 16.79 (90,000) 90,000 Unused 1987 expired - 0 (31,702) Amend 1994 Plan - 0 750,000 - ------------------------------------------------------------------------------- Balance at December 31, 1997 5.29 1,357,300 765,350 Granted 4.92 634,700 (634,700) Exercised 1.39 (171,500) 0 Canceled 10.71 (240,000) 240,000 - ------------------------------------------------------------------------------- Balance at December 31, 1998 4.74 1,580,500 370,650 Granted 3.05 353,000 (353,000) Exercised 4.16 (115,010) 0 Canceled 4.00 (47,100) 47,100 - ------------------------------------------------------------------------------- Balance at December 31, 1999 $ 4.47 1,771,390 64,750 ===============================================================================

F-9

	Information on outstanding and currently exercisable options by price range as of December 31, 1999, is summarized as follows:

	Weighted- Weighted- Weighted- Total average average Exercisable average Price Range Number of Remaining Exercise Number of Exercise Per Share Shares Life (Years) Price Shares Price - --------------------------------------------------------------------------------------- $ 1.69 - 2.31 37,100 1.8 $ 1.97 37,100 $ 1.97 2.81 - 3.94 719,000 7.0 3.12 369,400 3.20 4.13 - 5.00 309,590 8.5 4.70 102,456 4.69 5.44 - 7.25 697,700 5.6 5.81 574,200 5.80 11.38 8,000 .3 11.38 8,000 11.38 ------------- --------------- 1,771,390 1,091,156 ============= ===============

	At December 31, 1999, the weighted-average remaining contractual life of outstanding options was 6.6 years. At December 31, 1999, 1998 and 1997, currently exercisable options aggregated 1,091,156, 1,051,800 and 958,100 shares of common stock, respectively and the weighted-average exercise price of those options was $4.73, $4.62 and $3.87, respectively.

	The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 is estimated as $1.98, $3.20 and $2.38, respectively on the date of grant using the Black-Scholes option pricing model with the following assumptions: volatility of 65%; risk-free interest rate of 6.00% in 1999, 6.00% in 1998 and 6.25% in 1997; and an expected life of 6 years.

	The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock compensation plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and diluted earnings per share would have been reduced by approximately $950,000, or $.06 per share in 1999, $1,300,000, or $.07 per share in 1998 and $530,000, or $.03 per share in 1997.

	Pro forma net income reflects only options granted since 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered.

	Employee Stock Purchase Plan The Employee Stock Purchase Plan allows eligible employees to purchase shares of the Company's common stock through payroll deductions. The purchase price is the lower of 85% of the fair market value of the stock on the first or last day of each six-month period during which an employee participated in the plan. The Company has reserved 200,000 shares under the plan of which employees as of December 31, 1999 have purchased 162,650 shares.

	Warrants During 1997 and 1995, warrants to purchase a total of 100,000 shares at $2.75 were exercised. The warrants had been issued in connection with an agreement to license a product.

F-10

	In connection with agreements to license certain intellectual property rights to potential products, licensers were issued warrants. During 1999, warrants were issued to purchase 50,000 shares of the Company's common stock exercisable at a price of $3.44 per share exercisable evenly over the next three years and for a period of 10 years. The issuance of the warrants resulted in an expense of $110,000. Warrants were issued during 1997 to purchase 25,000 shares at a price of $8.00 per share exercisable when the potential products are marketed and for a period of five years. None of these warrants are currently exercisable.

	Preferred Stock At December 31, 1999, the Company is authorized to issue 1,000,000 shares of Series A Junior Participating Preferred Stock upon a triggering event under the Company's stockholders' rights plan and is authorized to issue up to an additional 7,483,589 shares of undesignated preferred stock.

(6)	Income Taxes

	Income tax expense (benefit) for the three years ended December 31, 1999, is as follows (in thousands):

	Current Deferred Total - ----------------------------------------------------------------------------- 1999: Federal $ (3,917) $ 1,816 $ (2,101) State 0 0 0 - ----------------------------------------------------------------------------- Income tax expense (benefit) $ (3,917) $ 1,816 $ (2,101) ============================================================================= 1998: Federal $ 128 $ 184 $ 312 State 98 100 198 - ----------------------------------------------------------------------------- Income tax expense $ 226 $ 284 $ 510 ============================================================================= 1997: Federal $ 4,154 $ (728) $ 3,426 State 505 (81) 424 - ----------------------------------------------------------------------------- Income tax expense (benefit) $ 4,659 $ (809) $ 3,850 =============================================================================

	Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following (in thousands):

	1999 1998 1997 - ----------------------------------------------------------------------------------- Computed tax expense (benefit) $ (5,550) $ 1,222 $ 4,417 State taxes, net of federal benefit (431) 64 331 Tax exempt interest (178) (789) (765) Benefit of foreign sales corporation 0 0 (127) Change in deferred tax valuation allowance 3,932 0 0 Other 126 13 (6) - ----------------------------------------------------------------------------------- Actual tax expense (benefit) $ (2,101) $ 510 $ 3,850 ===================================================================================

F-11

	The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for 1999 and 1998 are presented below (in thousands):

	December 31 ------------------------ 1999 1998 - -------------------------------------------------------------------------- Deferred tax assets: Inventory items $ 677 $ 659 Accounts receivable allowance 104 78 Product rights 181 113 Accrued expenses 1,835 710 Net operating loss and credit carryforwards 1,124 0 Unrealized loss on marketable securities 122 0 - -------------------------------------------------------------------------- 4,043 1,560 Less valuation allowance 3,932 0 - -------------------------------------------------------------------------- 111 1,560 - -------------------------------------------------------------------------- Deferred tax liabilities: Unrealized gains on marketable securities 0 (154) Property and equipment (111) (74) - -------------------------------------------------------------------------- (111) (228) - -------------------------------------------------------------------------- Net deferred tax assets $ 0 $ 1,332 ==========================================================================

	In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level on historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management does not believe that it is more likely than not the Company will realize the benefits of these deductible differences. Accordingly, the Company has provided a valuation allowance against the net deferred assets as of December 31, 1999.

	As of December 31, 1999, the Company has reported federal net operating loss carryforwards of approximately $1,700,000. The federal net operating loss carryforwards expire in 2009.

(7)	Sales

	The Company had one significant customer who accounted for approximately 24% of total sales in 1999 and 20% of total sales in 1998 and two significant customers, including 3M Company, who accounted for approximately 28% of total sales in 1997. Accounts receivable from this customer as of December 31, 1999 and 1998 were $4,330,000 and $1,013,000, respectively. Sales by geographic area are as follows (in thousands):

	1999 1998 1997 - ----------------------------------------------------------- Domestic $ 45,062 $ 51,855 $ 60,602 International 988 1,768 6,355 - ----------------------------------------------------------- Total sales $ 46,050 $ 53,623 $ 66,957 ===========================================================

F-12

(8)	Contract Termination Fee

	On September 30, 1999, the Company and 3M amended the international distribution agreement in a manner that allows the Company to regain control of its international business on a phased schedule. In exchange for the 1999 payment of a one-time contract termination fee of $6,345,000, the international distribution agreement with 3M will terminate on June 30, 2000.

(9)	License Agreements

	The Company has agreements to exclusively license intellectual property rights to certain products. Royalties due under these agreements are based on various percentages of net sales. To maintain the Company's licenses, it must make minimum royalty payments of $1,250,000 each year until patents for the products expire. Royalty expense was $1,477,000 in 1999, $1,509,000 in 1998 and $1,995,000 in 1997.

(10)	Operating Leases

	The Company leases equipment and office space under noncancelable operating leases that have initial or noncancelable lease terms in excess of one year. Future minimum lease payments due in accordance with these leases as of December 31, 1999 are as follows (in thousands):

	Year ending December 31, Amount - --------------------------------------------------------- 2000 $ 481 2001 697 2002 711 2003 725 2004 727 Later years 4,599 - --------------------------------------------------------- Future minimum lease payments $ 7,940 =========================================================

	Total rental expense for operating leases was $555,000 in 1999, $564,000 in 1998, and $471,000 in 1997.

(11)	Earnings Per Share

	A reconciliation of basic and diluted weighted average common shares outstanding is as follows (in thousands):

	1999 1998 1997 - ---------------------------------------------------------------------------------- Weighted average common shares outstanding 15,435 18,079 19,119 Assumed conversion of stock options 0 170 682 Assumed conversion of warrants 0 0 1 - ---------------------------------------------------------------------------------- Average common and assumed Conversion shares 15,435 18,249 19,802 ==================================================================================

	Options and warrants to purchase 1,846,390 shares of common stock with a range of exercise prices from $1.69 to $11.38 per share were outstanding during 1999 but were not included in the computation of 1999 diluted earnings per share because the effect would be anti-dilutive. The options expire from 2000 to 2009.

F-13

EX-3.2 2 AMENDED AND RESTATED BY-LAWS Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF CNS, INC. DATED MARCH 13, 2000 CONTENTS OF AMENDED AND RESTATED BY-LAWS OF CNS, INC. ARTICLE 1 - OFFICES............................................................1 1.1) Registered Offices.............................................1 1.2) Offices........................................................1 ARTICLE 2 - CORPORATE SEAL.....................................................1 ARTICLE 3 - SHAREHOLDERS.......................................................1 3.1) Regular Meeting................................................1 3.2) Special Meetings...............................................2 3.3) Quorum.........................................................2 3.4) Voting.........................................................2 3.5) Notice of Meeting..............................................3 3.6) Proxies........................................................3 3.7) Closing Transfer Books.........................................3 3.8) Record Date....................................................3 3.9) Presiding Officer..............................................3 3.10) Conduct of Meetings of Shareholders............................4 3.11) Order of Business..............................................4 3.12) Inspectors of Election.........................................5 3.13) Informal Action by Shareholders................................5 ARTICLE 4 - DIRECTORS..........................................................5 4.1) General Powers.................................................5 4.2) Number.........................................................5 4.3) Qualifications and Term of Office..............................5 4.4) Quorum.........................................................5 4.5) Regular Meetings...............................................6 4.6) Telephonic Meetings............................................6 4.7) Special Meetings...............................................6 4.8) Compensation...................................................6 4.9) Salaries.......................................................6 4.10) Committees.....................................................6 4.11) Committee of Disinterested Persons.............................7 4.12) Vacancies......................................................7 4.13) Order of Business..............................................7 4.14) Written Consent or Opposition in Advance of Meeting............7 4.15) Informal Action by Directors...................................8 4.16) Removal of Directors...........................................8 ARTICLE 5 - OFFICERS...........................................................8 5.1) Number.........................................................8 5.2) Election, Term of Office and Qualifications....................8 5.3) Chairman of the Board..........................................8 5.4) President and Chief Executive Officer..........................8 5.5) Chief Operating Officer........................................8 5.6) Vice President.................................................9 5.7) Secretary......................................................9 5.8) Treasurer and Chief Financial Officer..........................9 5.9) Assistant Officers.............................................9 5.10) Officers Shall Not Lend Corporate Credit.......................9 ARTICLE 6 - INDEMNIFICATION...................................................10 ARTICLE 7 - SHARES AND THEIR TRANSFER.........................................10 7.1) Certificates of Stock.........................................10 7.2) Facsimile Signature...........................................10 7.3) Issuance of Shares............................................10 7.4) Transfer of Shares............................................10 7.5) Lost Certificates.............................................11 7.6) Treasury Stock................................................11 7.7) Indebtedness of Shareholders..................................11 7.8) Transfer Agent and Registrar..................................11 ARTICLE 8 - BOOKS AND RECORDS.................................................11 8.1) Share Register; Dates of Issuance.............................11 8.2) Other Documents Required......................................11 8.3) Financial Records.............................................12 8.4) Right to Inspect..............................................12 8.5) Cost of Copies................................................12 8.6) Computerized Records..........................................12 8.7) Financial Statements..........................................12 ARTICLE 9 - DISTRIBUTIONS.....................................................13 9.1) Distributions.................................................13 9.2) Record Date...................................................13 9.3) Restrictions..................................................13 ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................13 10.1) Fiscal Year...................................................13 10.2) Audit of Books and Accounts...................................13 10.3) Contracts.....................................................14 10.4) Checks........................................................14 10.5) Deposits......................................................14 10.6) Voting Securities Held by Corporation.........................14 ARTICLE 11 - WAIVER OF NOTICE.................................................14 ARTICLE 12 - AMENDMENTS.......................................................14 AMENDED AND RESTATED BY-LAWS OF CNS, INC. ARTICLE 1 OFFICES 1.1) Registered Offices - The address of the registered office of the corporation shall be established and maintained at the office of the Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware and the Corporation Trust Company shall be the registered agent of the corporation. The Board of Directors shall have authority to change the registered office of the corporation from time to time, and any such change shall be registered by the secretary with the Secretary of State of Delaware. 1.2) Offices - The corporation may have such other offices, including its principal business office, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the corporation may require from time to time. ARTICLE 2 CORPORATE SEAL The corporate seal shall have thereon the name of the corporation, and the words "Corporate Seal" and when so directed by the Board of Directors a duplicate of the seal may be kept and used by the secretary or treasurer or by an assistant secretary or assistant treasurer. ARTICLE 3 SHAREHOLDERS 3.1) Regular Meeting - The regular meeting of the shareholders of the corporation shall be an annual meeting held at the principal business office of the corporation, or at such place as is designated by the Board of Directors or by written consent of all the shareholders entitled to vote thereat, at which time the shareholders, voting as provided in the Articles of Incorporation, shall elect a Board of Directors for the ensuing year, and shall transact such other business as shall properly come before them. In the event the regular meeting is not held for a period of thirteen (13) months or more, a shareholder or director may apply to the Court of Chancery to summarily order a meeting to be held. To be properly brought before the annual meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation, not less than 45 days nor more than 60 days prior to the date the proxy materials for the previous year's annual meeting were mailed to shareholders of the corporation. Each such notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (w) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (x) the name and address of record of the shareholders proposing such business, (y) the class or series (if any) and the number of shares of the corporation which are owned by the shareholder, and (z) any material interest of the shareholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these By-Laws. 3.2) Special Meetings - Special meetings of the shareholders shall be called by the Secretary at any time upon request of the President, a Vice-President acting in the capacity of the President, the Treasurer or two (2) or more members of the Board of Directors, or upon a written request of shareholders holding ten percent (10%) or more of the capital stock entitled to vote. Notice shall be given in accordance with the provisions of Article 3.5 hereof. 3.3) Quorum - The holders of fifty (50%) percent of the outstanding shares entitled to vote, represented either in person or by proxy, shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting, at which a quorum of the shareholders is present, may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. In case a quorum is not present at any meeting, those present shall have the power to adjourn the meeting from time to time, without notice or other announcement at the meeting, until the requisite number of voting shares shall be represented. Any business may be transacted at such reconvened meeting which might have been transacted at the meeting which was adjourned. 3.4) Voting - At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one (1) vote for each share having voting power standing in his name on the books of the corporation. Shares owned by two (2) or more shareholders may be voted by any one of them unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. A holder of voting shares may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all the shares in that way. Upon the demand of any shareholder, the vote for director, or the vote upon any question before the meeting shall be by ballot. All elections shall be had and all questions decided by a majority vote of the number of shares entitled to vote and represented at any meeting at which there is a quorum, except in such cases as shall otherwise be required or permitted by statute, the Certificate of Incorporation, these By-Laws or by agreement approved by a majority vote of the number of shares entitled to vote. 3.5) Notice of Meeting - There shall be mailed to each shareholder shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of the regular meeting or any special meeting, which notice shall be mailed at least ten (10) days and not more than sixty (60) days prior thereto. Every notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to purposes stated in the call. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, or whether given in writing, orally, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. 3.6) Proxies - At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. No appointment of a proxy is irrevocable unless the appointment is coupled with an interest in the shares of the corporation. 3.7) Closing Transfer Books - The Board of Directors may close the stock transfer books for a period of time not exceeding sixty (60) days preceding the date of any meeting of shareholders, payment of dividend, allotment of rights, change, conversion or exchange of capital stock or the date of obtaining consent of shareholders for any purpose. 3.8) Record Date - In lieu of closing the stock record books the Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any of the aforesaid events, as a record date for the determination of shareholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or allotment or rights, or to exercise the rights in respect to any change, conversion or exchange of capital stock or to give such consent, and in such case only such shareholders on the record date so fixed shall be entitled to notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date so fixed. If the stock transfer books are not closed and no record date is fixed for such determination of the shareholders of record, the date on which notice of the meeting is mailed, or the date of adoption of a resolution of the Board of Directors declaring a dividend, allotment of rights, change, conversion or exchange of capital stock or to give such consent, as the case may be, shall be the record date for such determination of shareholders. A determination of shareholders entitled to vote shall apply to any adjournment of such meeting except when the date of determination or the closing of the stock transfer book exceeds sixty (60) days preceding such adjourned meeting, in which event a new meeting must be called. 3.9) Presiding Officer - The appropriate officers of the corporation shall preside over all meetings of the shareholders; provided, however, that in the absence of an appropriate corporate officer at any meeting of the shareholders, the meeting shall choose any person present to act as presiding officer of the meeting. 3.10) Conduct of Meetings of Shareholders - Subject to the following, meetings of shareholders generally shall follow accepted rules of parliamentary procedure: 1. The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. If the chairman, in his absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of shareholders or part thereof the chairman shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. 2. If disorder should arise which prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is immediately adjourned. 3. The chairman may ask or require that anyone not a bona fide shareholder or proxy leave the meeting. 4. A resolution or motion shall be considered for vote only if proposed by a shareholder or duly authorized proxy, and seconded by an individual who is a shareholder or a duly authorized proxy, other than the individual who proposed the resolution or motion; provided, however, that the chairman shall have the discretion to rule out of order any resolution or motion which seeks shareholder vote on a proposal that has failed to comply with the requirements of Article 3.1. 3.11) Order of Business - The suggested order of business at the regular meeting of shareholders, and so far as possible at all other meetings of the shareholders, shall be: 1. Calling of roll. 2. Proof of due notice of meeting, or unanimous waiver. 3. Reading and disposal of any unapproved minutes. 4. Annual reports of all officers and committees. 5. Election of directors. 6. Unfinished business. 7. New business properly presented. 8. Adjournment. 3.12) Inspectors of Election - The Board of Directors in advance of any meeting of shareholders may appoint inspectors to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the officer or person acting as chairman of any such meeting may, and on the request of any shareholder or his proxy, shall make such appointment. In case any person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting, or at the meeting by the officer or person acting as chairman. The inspectors of election shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots, assents or consents, hear and determine all challenges and questions in any way arising and announce the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. No inspector whether appointed by the Board of Directors or by the officer or person acting as chairman need be a shareholder. 3.13) Informal Action by Shareholders - Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action. ARTICLE 4 DIRECTORS 4.1) General Powers - The property, affairs, and business of the corporation shall be managed by the Board of Directors. 4.2) Number - The Board of Directors shall consist of such number of directors, not less than five (5) nor more than eight (8), the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office. 4.3) Qualifications and Term of Office - Directors need not be shareholders or residents of the State of Delaware. Directors shall be elected by the shareholders at the regular meeting for a term of one (1) year or until their successors are elected and qualified. Each of the directors of the corporation shall hold office until the regular meeting next following or closely coinciding with the expiration of his term of office and until his successor shall have been elected and shall qualify or until he shall resign, or shall have been removed as provided by statute. 4.4) Quorum - A majority of the whole Board of Directors shall constitute a quorum for the transaction of business; provided, however, that if any vacancies exist by reason of death, resignation or otherwise, a majority of the remaining directors shall constitute a quorum for the conduct of business. If less than a quorum is present at any meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than a majority. 4.5) Regular Meetings - As soon as practical after each regular meeting of shareholders, the Board of Directors shall meet for the purposes of organization, choosing the officers of the corporation and for the transaction of other business at the place where the shareholders' meeting is held or at the place where regular meetings of the Board of Directors are held. No notice of such meeting need be given. Such first meeting may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings or in a consent and waiver of notice signed by all the directors. 4.6) Telephonic Meetings - Any member or members of the Board of Directors, or any committee designated by such Board, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this paragraph shall constitute presence in person at such meeting. 4.7) Special Meetings - Special meetings of the Board of Directors may be held at such time and place as may from time to time be designated in the notice or waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the president, or by any director. Unless notice shall be waived by all directors entitled to notice, notice of the special meeting shall be given by the secretary, who shall give at least twenty-four (24) hours notice thereof to each director by mail, telegraph, telephone, or in person; provided, however, that meetings may be held without waiver of notice from or giving notice to any director while he is in the Armed Forces of the United States. Each director, by his attendance and his participation in the action taken at any directors' meeting, shall be deemed to have waived notice of such meeting. 4.8) Compensation - Directors and any members of any committee of the corporation contemplated by these By-Laws or otherwise provided for by resolution of the Board of Directors, shall receive such compensation therefore as may be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving proper compensation therefor. 4.9) Salaries - Salaries and other compensation of all officers and employees of the corporation shall be fixed by the Board of Directors. Nothing herein contained shall be construed to preclude any officer from serving the corporation as a director, consultant or in any other capacity and receiving proper compensation therefor. In the event that any authority, such as the Internal Revenue Service, determines, and such determination is ultimately accepted, that any compensation paid to a director, officer or employee of the corporation is excessive and disallows the corporate deduction therefor, the recipient of the amounts so determined to be excessive shall repay the corporation said amount. 4.10) Committees - A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the corporation to the extent provided in the resolution. Committees are subject at all times to the direction and control of the Board of Directors except as provided in Article 4.11. A committee shall consist of one or more natural persons, who are directors, appointed by affirmative vote of a majority of the directors present. A majority of the members of the committee present at a meeting is a quorum for the transaction of business unless a larger or smaller proportion is provided in a resolution approved by the affirmative vote of a majority of the directors present. 4.11) Committee of Disinterested Persons - The Board of Directors may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the corporation. A director or other person is "disinterested" if he is not an owner of more than one percent of the outstanding shares of, or a present or former officer, employee or agent of the corporation or of a related corporation and has not been made or threatened to be made a party to the proceeding in question. The committee, once established, is not subject to the direction or control of, or termination by, the Board of Directors. A vacancy on the committee may be filled by a majority vote of the remaining members. The good faith determinations of the committee are binding upon the corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations. 4.12) Vacancies - Any vacancy in the Board of Directors shall be filled by an affirmative vote of a majority of the remaining directors of the Board, though less than a quorum, and each person so elected shall be a director until his successor is elected by the shareholders, who may make such election at their next annual meeting or any meeting duly called for that purpose. 4.13) Order of Business - The meetings shall be conducted in accordance with Roberts Rules of Order, Revised, and the suggested order of business at any meeting of the directors shall be: 1. Roll call. 2. Proof of due notice of meeting, or unanimous consent, or unanimous presence and declaration by president. 3. Reading and disposal of any unapproved minutes. 4. Reports of officers and committees. 5. Election of officers. 6. Unfinished business. 7. New business. 8. Adjournment. 4.14) Written Consent or Opposition in Advance of Meeting - Any member of the Board of Directors or a committee thereof, may give advance written consent or opposition to a proposal or resolution stating an action to be taken by the Board or committee. Such consent or opposition shall be a vote in favor of or against the proposal or resolution if the proposal or resolution acted upon at the meeting is substantially the same or has substantially the same effect as the proposal or resolution to which the member of the Board or committee has consented or objected. 4.15) Informal Action by Directors - Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter set forth. 4.16) Removal of Directors - The holders of a majority of the shares entitled to vote at an election of directors may remove at any time, for cause or without cause, any director of the corporation. ARTICLE 5 OFFICERS 5.1) Number - The officers of the corporation shall include a president or chief executive officer, a treasurer or chief financial officer and a secretary and may include such other officers as may from time to time be chosen by the Board of Directors. Any two offices except those of president and vice- president may be held by one person. 5.2) Election, Term of Office and Qualifications - At any regular meeting of the Board of Directors, the Board shall elect from their number a president or chief executive officer and shall, from within or without their number, elect a treasurer or chief financial officer and a secretary, and may, in addition, from within or without their number, elect one or more vice-presidents and such other officers and assistant officers as may be deemed advisable. Such officers shall hold office until the next regular meeting or until their successors are elected and qualified; provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the whole Board of Directors. 5.3) Chairman of the Board - The chairman of the board of directors shall preside at all meetings of shareholders and directors, and he shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. 5.4) President and Chief Executive Officer - The president shall have general and active management of the business under the supervision and direction of the Board of Directors, and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall be the chief executive officer of the corporation and shall perform all duties usually incident to the office of president and chief executive officer and such other duties as may be from time to time prescribed by the Board of Directors; except that if the Board of Directors elects a separate chief executive officer, then the president shall perform such duties usually incident to the office of president and the chief executive officer shall perform such duties usually incident to the office of the chief executive officer and each of them shall perform such duties as may be from time to time prescribed to each of them by the Board of Directors. 5.5) Chief Operating Officer - The chief operating officer of the corporation shall be responsible for directing and supervising the corporation's overall business activities. He shall be the officer primarily responsible for planning and carrying out the business policies of the corporation and shall report to the Board of Directors thereon at each meeting of the Board of Directors. He shall have such other responsibilities and shall exercise such additional authority as may from time to time be assigned to him by the Board. 5.6) Vice President - Each vice-president shall have such powers and shall perform such duties as may be specified in these By-Laws or prescribed by the Board of Directors. In the event of absence or disability of the president, a vice-president shall succeed to his powers and duties in the order in which they are elected or as otherwise prescribed by the Board of Directors. A vice-president who is not a director shall not succeed to the office of president. 5.7) Secretary - The secretary shall be secretary of and shall attend all meetings of the shareholders and Board of Directors. He shall act as clerk thereof and shall record all the proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall keep the seal of the corporation and shall affix the same to any instrument requiring it and shall attest the seal by his signature. He shall, with the president or any vice-president, acknowledge all certificates for shares of the corporation and shall perform such other duties as may be prescribed from time to time by the Board of Directors. 5.8) Treasurer and Chief Financial Officer - The treasurer shall keep accurate accounts of all moneys of the corporation received or disbursed. He shall deposit all moneys, drafts, and checks in the name and to the credit of the corporation in such banks and depositories as the Board of Directors shall designate from time to time. He shall endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor. He shall disburse the funds of the corporation as authorized by the Board of Directors. He shall render to the president and the Board of Directors, whenever required, an account of all of his transactions as treasurer and of the financial condition of the corporation and shall perform such other duties as may be prescribed by the Board of Directors from time to time. 5.9) Assistant Officers - In the event of absence or disability of any vice-president, secretary, or treasurer, such assistants to such officers shall succeed to the powers and duties of the absent officer in the order in which they are elected or as otherwise prescribed by the Board of Directors until such principal officer shall resume his duties or a replacement is elected by the Board of Directors. Such assistant officers shall exercise such other powers and duties as may be delegated to them from time to time by the Board of Directors, but they shall be subordinate to the principal officer they are designated to assist. 5.10) Officers Shall Not Lend Corporate Credit - Except for the proper use of the corporation, no officer of this corporation shall sign or endorse in the name or on behalf of this corporation, or in his official capacity, any obligations for the accommodation of any other party or parties, nor shall any check, note, bond, stock certificate or other security or thing of value belonging to this company be used by any officer or director as collateral for any obligation other than valid obligations of this corporation. ARTICLE 6 INDEMNIFICATION Any person who at any time shall serve or shall have served as a director, officer, employee or agent of the Corporation, and the heirs, executors and administrators of such person shall be indemnified by the Corporation in accordance with, and the fullest extent permitted by, the provisions of the Delaware General Corporation Law, as it may be amended from time to time. ARTICLE 7 SHARES AND THEIR TRANSFER 7.1) Certificates of Stock - Every owner of stock of the corporation shall be entitled to a certificate, to be in such form as the Board of Directors prescribe, certifying the number of shares of stock of the corporation owned by him. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the corporation by the president, and by the secretary, or by any other two (2) proper officers of the corporation authorized by the Board of Directors. A record shall be kept of the name of the person, firm or corporation owning the stock represented by each such certificate, and the respective issue date thereof, and in the case of cancellation, the respective dates of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be canceled and no other certificate or certificates shall be issued in exchange for any existing certificates until such existing certificate shall have been so canceled except in cases provided for in Article 7.5. 7.2) Facsimile Signature - Where any certificate is manually signed by a transfer agent, a transfer clerk or by a registrar appointed by the Board of Directors to perform such duties, a facsimile or engraved signature of the president and secretary or other proper officer of the corporation authorized by the Board of Directors may be inscribed on the certificate in lieu of the actual signature of such officer. The fact that a certificate bears the facsimile signature of an officer who has ceased to hold office shall not affect the validity of such certificate if otherwise validly issued. 7.3) Issuance of Shares - Subject to the provisions and limitations of Article 4 of the Certificate of Incorporation, the Board of Directors is authorized to cause to be issued shares of the corporation, to the full amount of such authorized shares, and at such times as may be determined by the Board of Directors and as may be permitted by law. 7.4) Transfer of Shares - Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or by the shareholder's legal representative, or duly authorized attorney-in-fact, and upon surrender for cancellation of the certificate or certificates for such shares. The shareholder in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of shares shall be made as collateral security, and not absolutely, such facts, if known to the secretary of the corporation, or to the transfer agent, shall be so expressed in the entry of transfer. 7.5) Lost Certificates - Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board, in an amount determined by the Board of Directors not exceeding double the value of the stock represented by such certificate to indemnify the corporation, against any claim that may be made against it on account of the alleged loss or destruction of such certificate; whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost. 7.6) Treasury Stock - Treasury stock shall be held by the corporation subject to disposal by the Board of Directors, in accordance with the Certificate of Incorporation and these By-Laws, and shall not have voting rights nor participate in dividends. 7.7) Indebtedness of Shareholders - The corporation shall have a first lien on all the shares of its capital stock and upon all dividends declared upon the same for any indebtedness of the respective holders thereof to the corporation. 7.8) Transfer Agent and Registrar - The Board of Directors may appoint one or more transfer agents or transfer clerks, and may require all certificates for shares to bear the signature or signatures of any of them. ARTICLE 8 BOOKS AND RECORDS 8.1) Share Register; Dates of Issuance - The corporation shall keep at its principal business office, or at another place or places within the United States determined by the Board of Directors, a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder. The corporation shall also keep, with the share register, a record of the dates on which certificates or transaction statements representing shares were issued. 8.2) Other Documents Required - A corporation shall keep at its principal business office, or, if its principal business office is outside of this state, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a person described in Article 8.4, originals or copies of: 1. Records of all proceedings of shareholders for the last three years; 2. Records of all proceedings of the board for the last three years; 3. Its articles and all amendments currently in effect; 4. Its by-laws and all amendments currently in effect; 5. Financial statements required by Article 8.7 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; 6. Reports made to shareholders generally within the last three years; 7. A statement of the names and usual business addresses of its directors and principal officers; 8. Voting trust agreements; and 9. Shareholder control agreements. 8.3) Financial Records - A corporation shall keep appropriate and complete financial records. 8.4) Right to Inspect - A shareholder, beneficial owner, or a holder of a voting trust certificate has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, during the usual hours for business, the share register and all documents referred to in Article 8.2. A shareholder, beneficial owner, or a holder of a voting trust certificate has a right, upon written demand, to examine and copy in person or by legal representative, other corporate records during the usual hours for business, only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination. A "proper purpose" is one reasonably related to the person's interest as a shareholder, beneficial owner, or holder of a voting trust certificate of the corporation. 8.5) Cost of Copies - Copies of all documents referred to in Article 8.2 shall be furnished at the expense of the corporation. A copy of the most recently generated share register shall be furnished at the expense of the corporation if the requesting party shows a proper purpose. In all other cases, the corporation may charge the requesting party a reasonable fee to cover the expenses of providing the copy. 8.6) Computerized Records - The records maintained by the corporation, including its share register, financial records, and minute books, may utilize any information storage technique, including, for example, punched holes, printed or magnetized spots, or microimages, even though that makes them illegible visually, if the records can be converted, by machine and within a reasonable time, into a form that is legible visually and whose contents are assembled by related subject matter to permit convenient use by people in the normal course of business. The corporation shall convert any of the records referred to in Articles 8.1 and 8.2 upon the request of a person entitled to inspect them, and the expense of the conversion shall be borne by the person who bears the expense of copying pursuant to Article 8.5. A copy of the conversion is admissible in evidence, and shall be accepted for all other purposes, to the same extent as the existing or original records would be if they were legible visually. 8.7) Financial Statements - The corporation shall upon written request by a shareholder stating a proper purpose therefor, furnish annual financial statements, including at least a balance sheet as of the end of each fiscal year and a statement of income for the fiscal year, which shall be prepared on the basis of accounting methods reasonable in the circumstances and may be consolidated statements of the corporation and one or more of its subsidiaries. In the case of statements audited by a public accountant, each copy shall be accompanied by a report setting forth the opinion of the accountant on the statements; in other cases, each copy shall be accompanied by a statement of the president or other person in charge of the corporation's financial records stating the reasonable belief of the person that the financial statements were prepared in accordance with accounting methods reasonable in the circumstances, describing the basis of presentation, and describing any respects in which the financial statements were not prepared on a basis consistent with those prepared for the previous year. ARTICLE 9 DISTRIBUTIONS 9.1) Distributions - The Board of Directors may authorize distributions by the corporation from funds legally available therefor at such times and in such amounts as the Board shall deem reasonable. 9.2) Record Date - Subject to any provisions of the Certificate of Incorporation, the Board of Directors may fix a date preceding the date fixed for the payment of any distribution or allotment of other rights as the record date for the determination of the shareholders entitled to receive payment of such distribution or allotment notwithstanding any transfer of shares on the books of the Corporation after such record date. 9.3) Restrictions - A distribution may be made to the holders of a class or series of shares only if: 1. All amounts payable to the holders of shares having a preference for the payment of that kind of distribution are paid; and 2. The payment of the distribution does not reduce the remaining net assets of the corporation below the aggregate preferential amount payable in the event of liquidation to the holders of shares having preferential rights, unless the distribution is made to those shareholders in the order and to the extent of their respective priorities. 3. The money or property available for distribution is insufficient to satisfy all preferences, the distributions shall be made pro rate according to the order of priority of preferences by classes and by series within those classes. ARTICLE 10 FINANCIAL AND PROPERTY MANAGEMENT 10.1) Fiscal Year - The fiscal year of the corporation shall be set by the Board of Directors. 10.2) Audit of Books and Accounts - The books and accounts of the corporation shall be audited at such times as may be ordered by the Board of Directors. 10.3) Contracts - The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 10.4) Checks - All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation shall be signed by the treasurer or such other officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 10.5) Deposits - All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select. 10.6) Voting Securities Held by Corporation - The president or other agent designated by the Board of Directors, shall have full power and authority on behalf of the corporation to attend, act and vote at any meeting of security holders of other corporations in which this corporation may hold securities. At such meeting the president, or such other agent, shall possess and exercise any and all rights and powers incident to the ownership of such securities which the corporation might possess and exercise. ARTICLE 11 WAIVER OF NOTICE Whenever any notice whatsoever is required to be given by these By-Laws or the Certificate of Incorporation of the corporation or any of the corporate laws of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to said notice, either before, at, or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 12 AMENDMENTS Subject to the limitations set forth in the Delaware General Corporation Law, these By-Laws may be amended by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been included in the notice of such meeting given to the directors. The undersigned Secretary hereby certifies that the foregoing Amended and Restated By-Laws were adopted as the complete By-Laws of the corporation by the Board of Directors on this 13th day of March, 2000. Patrick Delaney, Secretary EX-10.7 3 AGREEMENT Exhibit 10.7 AGREEMENT This Agreement is entered into between Minnesota Mining and Manufacturing Company ("3M") and CNS, Inc. ("CNS"). RECITALS WHEREAS, 3M and CNS entered into a Distribution Agreement with an effective date of August 2, 1995, ("the 1995 Agreement") and WHEREAS, under the terms of the 1995 Agreement, 3M became CNS's exclusive distributor of CNS's nasal dilator outside of the United States and Canada, CNS provided product to 3M with 3M's label, either in bulk or through packaging by CNS, and 3M licensed the Breathe Right(R) trademark from CNS, but agreed to use 3M's trade dress, and WHEREAS, certain disputes and disagreements have arisen between 3M and CNS, and 3M and CNS wish to finally resolve any such disputes or disagreements, and WHEREAS, the parties now desire to amend the 1995 Agreement and change their business relationship, and WHEREAS, the purpose of this new Agreement is to allow CNS to assume the international sales and distribution of nasal dilators from 3M, to provide for an orderly transition process for doing so, and to provide compensation to 3M for doing so, releasing certain of its rights under the 1995 Agreement. NOW, THEREFORE, the parties agree as follows: 1. Effective Date. The effective date of this Agreement is September 30, 1999. 2. Amendment. This Agreement modifies and amends the 1995 Agreement, and the parties deem this Agreement to be sufficient written amendment to meet the requirements of paragraph 17G of the 1995 Agreement. The terms of this Agreement control to the extent they are inconsistent with the terms of the 1995 Agreement. 3. Nonexclusive Distribution. Effective on the date hereof, 3M is authorized by CNS to continue to distribute CNS's nasal dilator strips outside of the United States and Canada, but its distribution shall no longer be exclusive. Notwithstanding the foregoing, 3M shall be the exclusive distributor of CNS nasal dilators to its current drug store and pharmacy customers outside the United States and Canada and to Boots, Migros and Franklin's (Australia) provided 3M maintains distribution at those customers through March 1, 2000. 3M's exclusive distribution rights for such customers will terminate on March 1, 2000. On that date, 3M's rights will be nonexclusive until the termination of 3M's distribution rights on June 30, 2000, as set forth in this Agreement. During the period from the date of this Agreement until June 30, 2000, 3M will sell no nasal dilator strips or dilators other than those supplied to it by CNS. CNS will not send any direct communications to 3M's exclusive customers (identified above) regarding the termination of the Distribution Agreement or the transfer of the business prior to the communication referenced in paragraph 13(a). 4. Payment. Within ten business days of the effective date of this Agreement, CNS shall pay to 3M $6,345,000. 5. End of Sales and Distribution. On June 30, 2000, all 3M's rights of any sort to sell or distribute CNS nasal dilators shall terminate. 6. Non-Competition. 3M will not sell any nasal dilator devices during the period beginning July 1, 2000 and ending June 30, 2002. 7. Fulfillment of Orders. CNS will continue to fill orders for nasal dilators to be sold by 3M between the date of this Agreement and June 30, 2000, and will cooperate to minimize ending inventory while assuring supply. Beginning January 1, 2000, CNS will supply nasal dialators to fill orders received by 3M in generic cold seal wrappers ("packaging") on a consignment basis. 3M will pay for the nasal dilators upon 3M's sale of the nasal dilators to its customers. 8. Remaining Inventory. To the extent any inventory of 3M packaged dilators is left in 3M's possession or control on June 30, 2000, such inventory shall be the sole responsibility of 3M and 3M shall destroy that inventory and shall have no rights to sell such inventory or return such inventory to CNS. The parties recognize and agree that the purpose of this provision is to provide an incentive to 3M to meet its responsibilities to continue its marketing and distribution responsibilities until the termination of its distribution rights and responsibilities, as set forth below. By September 30, 2000, 3M will return unsold nasal dilators in generic packaging to CNS. 9. Excessive Sales and Prices. In the period before June 30, 2000, 3M shall not sell 'excessive' amounts of inventory to customers by offering prices below 3M's original cost of CNS nasal dilators in local currency. For the purposes of this paragraph, 'excessive' means amounts substantially in excess of a reasonable forecast of sales by the customer. Nothing in this paragraph limits 3M's ability to promote CNS nasal dilators to consumers, for example, by offering 'buy one get two free' or by offering a fee nasal dilator with the purchase of other 3M products. 10. Product Returns. Customer returns of nasal strip product will be the responsibility of the Company -- 3M or CNS -- who originally sold that product. 11. Trade Fund Resolution. 3M will be responsible for any trade funding commitments that it enters with customers for nasal strips purchased from 3M, for example, promotional allowances, and volume incentives. 12. License. CNS hereby licenses to 3M the use of the CNS Breathe Right(R) trademark or trade name for use outside of the United States and Canada for sales of products provided or to be provided to 3M by CNS for sale and distribution. This license and 3M's use of the Breathe Right(R) trademark and trade name shall cease on June 30, 2000. 13. Business Transition. 3M shall make the following reasonable efforts to arrange for the transition to CNS of its business relationships concerning nasal dilators and of its sales and distribution of nasal dilators. To that end, 3M shall perform the following: a) Provide to 3M's customers, and others assisting 3M in distributing nasal dilators, a written communication concerning the transfer of the nasal dilator business from 3M to CNS. The communication shall be in the form of a letter, the text of which shall be prepared by 3M and approved by CNS. CNS will not withhold its approval unreasonably. The letter will be sent by March 1, 2000 and will state that after June 30, 2000, Breathe Right(R) nasal dilators, or whatever nasal dilator strips are being sold by 3M to customers, shall thereafter be available from 3M's former licensor, CNS, and its distributor specified by CNS. b) Provide to CNS by January 1, 2000, 3M's customer lists and a two year sales history ending September 30, 1999. 3M will not be obligated to provide such customer lists and sales history if, prior to January 1, 2000, CNS announces an intent to be acquired or is acquired by a competitor of any of 3M's First Aid Dressing and First Aid Supplies businesses. 14. Release. CNS and 3M hereby release each other, as well as the directors, officers, employees and agents of the other from all claims up to the date of this Agreement which the parties have against each other, known or unknown, including, but not limited to, claims relating to the parties' performance or lack thereof under the 1995 Agreement. This release does not excuse 3M from paying for any products that have been ordered or delivered to date, or excuse CNS from delivering ordered products. 15. Independent Contractors. 3M and CNS are independent contractors. They are not agents of each other, partners, joint ventures or franchisor/franchisee. Neither has the right to bind or act on the other's behalf. 16. No Assignment. Neither party will assign this Agreement without the consent of the other, except for an assignment by CNS to a successor of CNS's nasal dilator business. 17. No Waiver. Neither 3M nor CNS waives any of its rights provided by this Agreement because it fails to enforce them. 18. Entire Agreement. This Agreement is the entire agreement between 3M and CNS regarding the amendment of the 1995 Agreement. This Agreement supersedes any other agreement concerning such amendment and may be modified only by a written agreement. 19. Governing Law. This Agreement shall be governed by Minnesota law. 20. Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement or the 1995 Agreement, or the breach, termination or validity thereof, shall be settled by arbitration in accordance with the rules of the Center of Public Resources by a single arbitrator selected by mutual agreement of the parties from the panel of the Center for Public Resources. The arbitration will be governed by the United States Arbitration Act. a) The arbitrator shall apply Minnesota law and shall have the power to require specific performance, issue injunctions, declare the rights of the parties and award damages. b) Judgment of the arbitrator may be entered by any court with appropriate jurisdiction. c) The arbitration hearing shall begin no more than 120 days from the date Notice of Arbitration is delivered to the respondent. MINNESOTA MINING AND MANUFACTURING COMPANY By Dated: Its CNS, INC. By Dated: Its EX-10.9 4 LICENSE AGREEMENT Exhibit 10.9 [CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.] LICENSE AGREEMENT THIS AGREEMENT is made and effective as of this 10th day of November, 1997 by and between CNS, Inc., a Delaware corporation ("Licensee"), and Onesta Nutrition, Inc., a Minnesota corporation ("Licensor"). RECITALS WHEREAS, Licensor is now and has been engaged in developing certain Products (as defined in Subsection 1.1) for use in providing dietary fiber in tablet form. WHEREAS, the Products embody inventions and designs owned exclusively by Licensor and Licensor has available certain Know-how relating to the manufacture of the Products; WHEREAS, Licensor owns or controls, or may hereafter own or control, certain Know-how, patents or patent applications relating to the Products; WHEREAS, Licensee desires to obtain an exclusive worldwide license from Licensor of certain Know-how, patents and patent applications of Licensor relating to the manufacture and use of the Products for providing dietary fiber and Licensor is willing to grant such a license to Licensee. NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements hereinafter set forth and other good consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. GENERAL DEFINITIONS. As used herein, the following terms shall be defined in the manner set forth below: 1.1 Products. The term "Products" shall mean the soluble fiber supplement product described on Schedule 1.1 attached hereto, the manufacture, use or sale of which is covered by the Licensed Patents or is made or developed through the use of the Know-How, including all improvements thereto, and any other inulin-based soluble fiber supplement products developed by Licensor or any of its employees, consultants, agents or representatives during the term of this Agreement using any Licensed Patents or Know-how; provided, however, that for any such improvement or enhancement or similar product developed by Licensor to be included within the license herein granted, Licensor shall notify Licensee of any such improvement or enhancement and Licensee shall at its option make an election to include such improvement or enhancement in this License by providing written notice of such election to Licensor within thirty (30) days after Licensee learns of such improvement, enhancement or similar product. If Licensee shall make an such election, Licensee shall reimburse Licensor for reasonable expenses incurred in developing such improvement or enhancement or similar product. 1.2 Know-how. The term "Know-how" shall mean any and all tangible and intangible information, technology, documents and materials in the possession and control of Licensor, and necessary in order to enable Licensee to utilize fully the rights granted by Licensor to Licensee hereunder and shall include, without limiting the foregoing, the ideas, concepts, confidential information, trade secrets and techniques, as well as all the materials, documents, manuals, specifications, patterns, art work, bills of materials and other information of Licensor relating to the Products. 1.3 Licensed Patents. The term "Licensed Patents" shall mean the following: (i) the United States and foreign patent(s) and patent application(s) to the Products listed on Schedule 1.3 attached hereto; (ii) all future United States or foreign patent applications related to the Products and any patents arising therefrom; (iii) the rights, patents and patent applications, if any, in any country or jurisdiction in the world corresponding to the United States patent applications; and (iv) any division, continuation, continuation-in-part, divisional, re-examined, reissued or extended letters patent, applications and petty patents, utility models, utility model conversions, inventor's certificates relating to the inventions claimed in any of the foregoing United States patents and patents pending and foreign patent rights, which may be developed, acquired or controlled by Licensor during the term of this Agreement and with respect to which Licensor shall have the right to grant the license hereinafter provided. 1.4. Contract Year and Quarter. The term "Contract Year" shall mean each period following October 1 of 1998, 1999 and 2000. The term "Contract Quarter" shall mean each period of three consecutive months commencing January 1, April 1, July 1 and October 1. 1.5. Gross Revenues. The term "Gross Revenues" shall mean the gross amounts collected by Licensee from any end-user, sublicensee, assignee or other person or entity relating to or arising from the sale of Products after the deduction of (i) any amounts repaid or credited by reason of rejections or returns, and (ii) trade and quantity discounts actually allowed and taken. 1.6. Earned Royalty . The term "Earned Royalty" shall mean the royalty payable to Licensor on Products. 2. GRANT OF LICENSES. 2.1 Patent and Know-how License. Licensor hereby grants to Licensee a sole and exclusive, worldwide, transferable right and license under the Licensed Patents and Know-How to make, have made, use, import, offer for sale and sell the Products and to practice worldwide any process claimed or disclosed in the Licensed Patents and Know-how. Without limiting the foregoing, the Licensed Products may be distributed as a product to consumers, retailers, wholesalers or otherwise. 2.2 Sublicenses and Assignments. Licensee may sublicense and/or assign to any third party, including affiliates of Licensee, any and all rights granted hereunder. In the event of an assignment, Licensee shall enter into a written agreement with the assignee pursuant to which the assignee shall assume all of the obligations of Licensee under this Agreement and this Agreement shall be binding upon and inure to the benefit of such assignee. In the event of a sub-license, Licensee shall enter into a written agreement with sub-licensee (i) with a term no greater than the term of this Agreement, (ii) with rights granted to sub- licensee which are no greater than the terms of this Agreement, and (iii) pursuant to which Licensee shall use reasonable business efforts to impose upon sub-licensees similar obligations as Licensor has imposed upon Licensee under this Agreement. 2.3 Patent Procurement and Costs. Licensee shall be responsible for and pay all patent costs and expenses (including reasonable attorneys' fees) incurred by Licensor in obtaining, prosecuting, owning and maintaining any of the Licensed Patents issued or to be issued under the law of any country or jurisdiction, including filing, prosecution, working and maintenance costs and taxes. Licensee shall have the right to review and comment on Licensor's filings with respect to the Licensed Patents, at Licensee's own expense. Notwithstanding the above, Licensor shall direct and control the procurement of the Licensed Patents using patent counsel of its own choosing for such procurement (the choice and which counsel is subject to the reasonable consent of Licensee). Such patent costs and expenses incurred by Licensor and reimbursed by Licensee hereunder may be offset against the royalties payable under excess of running royalties payable under Section 4.1 over the minimum royalties payable under Section 4.3 in any Contract Quarter to the extent that such excess arises from sales of Licensed Products in the country or region in which such patent costs and expenses were incurred. 2.4 Exploitation. Licensee hereby agrees that during the term of this Agreement it will use its reasonable best efforts to manufacture, sell and market the Products, and will exert its reasonable best efforts to create a demand for the Products worldwide, and to increase and extend its business in the manufacture, sale and marketing of the Products worldwide. 3. REPRESENTATIONS AND WARRANTIES. 3.1 Licensor hereby warrants and represents to Licensee as follows: (a) Licensor is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. (b) This Agreement has been duly authorized, executed and delivered by Licensor and constitutes a valid and binding obligation of Licensor, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The execution, delivery and performance of this Agreement by Licensor and the consummation of the transactions contemplated hereby do not and will not conflict with or result in any material breach of any of the provisions of, or constitute a material default under, or result in a material violation of, or require any authorization, consent or approval, under the provisions of such party's Articles of Incorporation or Bylaws or any other agreement or instrument to which such party is bound or affected, or to he best of Licensor's knowledge, any law, statute, rule, regulation, judgment order or decree to which such party is subject. (c) Licensor owns all the rights of Jerome J. Licari, Ph-D and all other employees, agents, consultants or representatives of Licensor with respect to the Products, Licensed Patents and Know-how. (d) Licensor has filed the patent applications listed on Schedule 1.3. (e) To Licensor's knowledge, the Products, Licensed Patents and Know-how do not infringe on any patent, copyright or other intellectual property right of any third party. (f) Licensor has not received notice of any claims, actions, suits or proceedings pending or threatened effecting Licensor, the Licensed Patents or Know-how which, if adversely determined, would have a material adverse effect upon Licensee's ability to manufacture, have manufactured, use or sell the Products or otherwise practice the rights and technology licensed to Licensee by Licensor under this Agreement and, to the best of Licensor's knowledge, there is no reasonable basis for anyone to bring such claims, actions, suits or proceedings. (g) Licensor has not received any claim from any third-party proceedings relating to the Licensed Patents, Know-how, or the Products which are based upon infringement of any patent or misappropriation or misuse of trade secrets. (h) Licensor represents that the product, in its current form, is manufacturable in quantities sufficient enough to meet the sales levels required for the minimum guaranteed royalties. (i) That certain License Agreement between Licensor and Johnson & Johnson/Merck Consumer Pharmaceuticals Company ("JJMCP"), dated March 31, 1997, was terminated effective June 25, 1997, and Licensor retains a royalty-free unrestricted right to use any information concerning the manufacture, formulation and use of the Licensed Products not generally known to the public, and developed by JJMCP during the term of such agreement (other than information covered by any published patent or patent application). 3.2 Licensee hereby warrants and represents to Licensor as follows: (a) Licensee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) This Agreement has been duly authorized, executed and delivered by Licensee and constitutes a valid and binding obligation of Licensee, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The execution, delivery and performance of this Agreement by Licensee and the consummation of the transactions contemplated hereby do not and will not conflict with or result in any material breach of any of the provisions of, or constitute a material default under, or result in a material violation of, or require any authorization consent or approval, under the provisions of Licensee's Certificate of Incorporation or Bylaws or, to the best of Licensee's knowledge, any other agreement or instrument to which such party is bound or affected, or any law, statute, rule, regulation, judgment order or decree to which such party is subject. 4. CONSIDERATION AND REPORTS. 4.1 Royalties. Licensee agrees to pay to Licensor royalties as follows based on the Gross Revenues from the sale of Products: (a) [CONFIDENTIAL TREATMENT REQUESTED]% of Gross Revenues until royalties have been paid on an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross Revenues, then (b) [CONFIDENTIAL TREATMENT REQUESTED]% of Gross Revenues until royalties have been paid on an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross Revenues, and then (c) [CONFIDENTIAL TREATMENT REQUESTED]% of all Gross Revenues in excess of an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED]. The royalty provided for in this Subsection 4.1 shall be reduced to [CONFIDENTIAL TREATMENT REQUESTED]% of the otherwise applicable rate, on a country-by-country basis if no Licensed Patent issues in such country. 4.2 Quarterly Payments. All royalties due Licensor from Licensee hereunder shall be payable on a Contract Quarterly basis. Within forty-five (45) days after the end of each Contract Quarter during the term of this Agreement, Licensee shall pay to Licensor, by wire transfer to an account designated pursuant to Section 10.4, the royalty due Licensor under Subsection 4.1 through the end of the preceding Contract Quarter and shall furnish Licensor with a written statement setting forth the number of Products sold and the Gross Revenues received during such Contract Quarter, and the resulting amount of the royalty due Licensor under Subsection 4.1. 4.3 Minimum Royalties. (a) To maintain its rights hereunder, Licensee shall pay to Licensor minimum royalties as follows in the event that the Products may be marketed and sold without a prescription:

* Twelve-month periods beginning on the Contract Year. ** Through the Contract Year of the expiration date of the last of the Licensed Patents or if no Licensed Patent issues, December 26, 2015. (b) In the event the royalty is reduced pursuant to Subsection 4.1 above, the minimum royalties provided for in Subsection 4.3(a) shall be reduced by [CONFIDENTIAL TREATMENT REQUESTED] in each Contract Year, pro rata on a country-by-country basis. 4.4 Minimum Royalty Payment. Licensee shall pay Licensor within forty-five (45) days after the end of each Contract Quarter, by wire transfer to an account designated pursuant to Section 10.4, an amount equal to the minimum royalties payable pursuant to the terms of Subsection 4.3 for the Contract Quarter then ended, less: (a) the aggregate amount of Earned Royalties actually paid to Licensor pursuant to the terms of Subsections 4.1 and 4.2 for the Contract Quarter then ended; and (b) any Earned Royalties paid to Licensor during the prior Contract Quarters in the current Contract Year that exceed the amount of cumulative minimum royalties payable for those Contract Quarters; provided that in no event shall such deductions reduce the payment to Licensor in any Contract Year below the then applicable minimum annual royalty payable under 4.3 of this Agreement. Licensee's failure to pay any and all amounts payable under the preceding sentence within thirty (30) days after receipt of written notice from Licensor that such amounts have not been timely paid shall render the licenses granted hereunder void and thereupon, Licensee shall have no further rights or interests of any kind or nature with respect to the Products, Know-how, License or Patents and Licensee shall take any and all action that Licensor may request to further document the provisions hereof. In the event that any law, statute, regulation, rule, guideline, ruling or decision of any governmental or regulatory agency prevents Licensee from marketing or offering Products for sale, the minimum royalty payment will be suspended until such time that Licensee is no longer prevented from marketing or offering Products for sale, such suspension to be determined pro rata on a country-by-country basis. 4.5 Late Payment. Licensee shall have ten (10) days to make any late payments hereunder, without interest. Thereafter, Licensee shall pay a late payment fee to Licensor calculated at a variable rate of 2% over the prime per annum interest rate as set from time to time by Norwest Bank Minneapolis, N.A. , Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that are at any time overdue and payable to Licensor under this Agreement, such interest being calculated on each such overdue amount from the date when such amount became due to the date of actual payment thereof. Such late payment fee shall be in addition to and not in lieu of any and all other rights or remedies that Licensor may have under this Agreement or law relating to a default by Licensee under this Agreement. 4.6 Records. During the term of this Agreement and for three (3) years after termination of this Agreement, Licensee shall at all times maintain accurate and up-to-date records containing complete data from which amounts due to Licensor under this Agreement may be readily calculated. Further, Licensee shall preserve and permit examination of such records by Licensor's representatives at reasonable intervals and under reasonable conditions during the term of this Agreement and for three (3) years thereafter and, upon request, shall supply to Licensor's representatives all information useful in making a proper audit and verification of Licensee's performance of its obligations under this Agreement. 4.7 Underpayment. If Licensor determines by audit and inspection of Licensee's books and records that Licensee has failed to pay all royalties due under Subsection 4.1, Licensee shall pay Licensor 105% of such additional royalties as may be due, plus interest thereon. If the amount of underpayment exceeds 5% of the royalties due under Subsection 4.1, then Licensor shall, in addition to any other remedies available to it, recover from Licensee the reasonable costs incurred in making any such audit and inspection pursuant to Subsection 4.6 hereof which revealed such shortfall and Licensee shall pay Licensor 105% of such additional royalties, plus interest thereon. 5. INDEMNIFICATION. 5.1 Indemnification by Licensor. Licensor shall indemnify and hold Licensee harmless from and against any and all claims, damages, costs (including reasonable attorneys' fees), judgments and liabilities of any kind or nature arising out of any third party claim of (a) any breach by Licensor of any of its warranties, representations and covenants under this Agreement or (b) any misuse by Licensor of the patent process or fraud by Licensor on the patent office or notice by Licensor before the date hereof of a claim by any party of a prior or superseding right to practice the art of and commercialize the Products. 5.2 Indemnification by Licensee. Licensee shall indemnify and hold Licensor harmless from and against any and all claims, damages, costs (including reasonable attorneys'.fees), judgments -and liabilities of any kind or nature: (a) arising out of any third party claim of the breach by Licensee of any of its warranties, representations and covenants under this Agreement; or (b) arising out of any actual or alleged defect in a Product. 6. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes aware of activity on the part of any third party which may constitute infringement of the Licensed Patents, or any other intellectual property rights with respect to which Licensee is granted a license hereunder, Licensee shall give Licensor written notice thereof. Upon reasonable request by Licensor, Licensee shall, at its sole expense, initiate and thereafter diligently maintain reasonable efforts to prevent and abate such infringement, including the initiation of an appropriate civil action for infringement and the taking of such other action as may be necessary or appropriate, to enforce the Licensed Patents or other intellectual property rights with respect to -which Licensee is granted a license hereunder. In such event, (i) Licensor will permit the use of its name in, and as a party to, all such suits and execute all pleadings, documents and other papers necessary or appropriate in conjunction therewith and (ii) Licensee shall receive the full benefits of any action it takes pursuant to this subsection, including retaining all sums recovered in any such suit or in settlement thereof after paying Licensor the Earned Royalties which shall be calculated from the amount of Gross Revenues, if any, asserted by Licensee to support any award of compensatory damages (as opposed to punitive or any other damages). Licensor may, at its option and its cost and expense, participate in meetings with Licensee and/or its counsel and receive all pleadings, documents and other related papers useful for the purpose of keeping Licensor informed of the status of any proceedings commenced by Licensee pursuant to this Section 6. 7. TERM AND TERMINATION. 7.1 Term. This Agreement shall commence on the effective date hereof and shall expire, unless earlier terminated pursuant to Subsections 4.8, 7.2 or 7.3 of this Agreement, upon the later of (a) the expiration of the last of the Licensed Patents to expire or (b) December 26, 2015. 7.2 Termination by Licensor. If Licensee defaults in any of its obligations under this Agreement, Licensor shall have the right to terminate this Agreement by giving thirty (30) days' written notice of termination specifying the reason for termination, provided that such notice will be of no effect and termination will not occur if the specified default is cured prior to the expiration of said thirty (30) day notice period. 7.3 Termination by Licensee. (a) This Agreement may be terminated by Licensee at any time at will, with or without cause, by the giving of at least ninety (90) days' written notice to Licensor by Licensee, in which event such license shall terminate upon the effective date stated in any such notice. In the event of the termination of any such license, neither Licensor nor Licensee shall have any further obligation to the other party hereunder except as expressly provided in Sections 7.4 and 8.1 below. (b) Upon the termination of any license granted under this Agreement, Licensee may, after the effective date of such termination, sell any of its (i) completed Products, (ii) Products then in the process of manufacture and (iii) Products with respect to which manufacture has been committed at the time of termination by reason of either (x) any contracts for the purchase of materials to be used in the manufacture of such Products or (y) any contract for the sale of such Products. All such sales and uses shall be subject to the royalty provisions of Section 4 of this Agreement as though the termination of this Agreement had not occurred. (c) Except as expressly provided in Subsection 7.3(b), after termination of this Agreement, Licensee may not use develop, market or sell the Products, Know-how, or Licensed Patents in any way or manner that would violate any rights of Licensor and all rights with respect to the Licensed Products, Know-how or Licensed Patents shall revert to Licensor. In addition, Licensee shall assign to Licensor, and hereby does, effective only upon such termination, any and all (i) improvements to the Licensed Products, Know-how or Licensed Patents conceived or reduced to practice during the term of this Agreement and (ii) trademarks for the Licensed Products (other than master brand trademarks of Licensee which shall be retained by Licensee). Licensee shall take any and all steps reasonably requested by Licensor to fully document the complete vesting of such rights in Licensor upon any such termination. 7.4 Continued Obligations. Termination shall not relieve or release either party from its obligations to make any payment which may be owing to the other under the terms of this Agreement or from any other liability which either party may have to the other arising out of the terms of this Agreement. Additionally, notwithstanding anything contained herein to the contrary, Sections 3, 4 (including Subsection 4.8 to the extent then exercised), 5 and 8.2 shall survive termination of this Agreement and remain in full force and effect; provided, that Licensor and Licensee hereby acknowledge that they may not bring claims against one another based upon the representations and warranties contained in Section 3, except to the extent such representations and warranties are not accurate as of the date hereof. 8. LICENSEE'S UNDERTAKINGS. 8.1 Licensing Fee and Payment. Licensee will pay to Licensor the sum of $[CONFIDENTIAL TREATMENT REQUESTED] as a license fee. The license fee will be payable to, Licensee, by wire transfer to an account designated pursuant to Section 10.4, as follows: (a) $[CONFIDENTIAL TREATMENT REQUESTED] at the time of execution of this License Agreement. (b) $[CONFIDENTIAL TREATMENT REQUESTED] at the beginning of each of the next three calendar quarters. If this Agreement is terminated by Licensee prior to the payment of all license fees under this Section 8.1, the remaining payments shall be paid on or before the effective date of such termination. All license fees shall be non-refundable. Of the total $[CONFIDENTIAL TREATMENT REQUESTED] license fee, $[CONFIDENTIAL TREATMENT REQUESTED] shall be set off against and reduce the royalty payments to be made to Licensor under Section 4 of this Agreement. Such credit shall be applied at the rate of [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of the excess of running royalties payable under Section 4.1 over the minimum royalties payable under Section 4.3 in any Contract Quarter. 8.2 Confidentiality. Licensee shall maintain the confidentiality of Licensor's confidential information, both during and after the term of this Agreement. After this Agreement is terminated, Licensee shall not use any of Licensor's confidential information for any purpose that is not specifically provided for in Subsection 7.3(b) of this Agreement. 8.3 Press Release. Upon launch of the first Licensed Product, Licensee shall issue a press release, reasonably satisfactory to Licensor, which shall, in part, acknowledge Onesta's and/or Licari's role in developing the Licensed Products. 9. LICENSOR'S UNDERTAKINGS. 9.1 Disclosure of Improvements. Licensor agrees to promptly disclose to Licensee any improvement, enhancement or modification to the Products that Licensor may develop during the term of this Agreement or any other inulin-based soluble fiber supplement products. 10. MISCELLANEOUS. 10.1 Force majeure. Neither party shall be responsible for any delay or failure in the performance of any obligation hereunder due to strikes, lockouts, fires, floods, acts of God, embargoes, wars, riots, or act or order of any government or governmental agency; provided, however, nothing set forth in this Subsection 10.1 shall be construed to relieve Licensee of the requirement that it pay minimum royalties pursuant to Subsections 4.3 and 4.4 hereof. 10.2 Waiver. The waiver or failure of either party to enforce the terms of this Agreement in one instance shall not constitute a waiver of said party's right under this Agreement with respect to other violations. 10.3 Remedies. The election by either party of any particular right or remedy shall not be deemed to exclude any other right or remedy and all rights and remedies of either party shall be cumulative. The parties agree that, in addition to any other relief afforded under the terms of this Agreement or by law, each party shall have the right to enforce this Agreement by injunctive or mandatory relief to be issued against the other party, it being understood that both damages and specific performance shall be proper modes of relief and are not to be considered as alternative remedies. 10.4 Notices. All notices and replies thereto required hereunder shall be in writing, signed by the party giving notice, placed in an envelope and either delivered by hand or sent by facsimile or registered mail, postage prepaid, return receipt requested, and properly addressed to the other party. Notices sent by mail shall be deemed received on the date of receipt indicated by the receipt verification provided by the United States Postal Service. Notices sent by facsimile shall be deemed received on the date indicated on the sender's confirmation report. Notice shall be given, mailed or sent to the other party at the following addresses or at such other address as may be given by proper notice: If to Licensor: Onesta Nutrition, Inc. [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED] Attn: Jerome J. Licari, Ph.D Fax No.: [CONFIDENTIAL TREATMENT REQUESTED] Wire transfer information: Anchor Bank of Wayzata 1055 Wayzata Boulevard Wayzata, MN 55391 ABA Routing No: [CONFIDENTIAL TREATMENT REQUESTED] Account No: [CONFIDENTIAL TREATMENT REQUESTED] With a copy to: Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, MN 55402-1498 Attn: Karin A. Keitel Fax No.: 612-340-8827 If to Licensee: CNS, Inc. 4400 West 78th Street Minneapolis, MN 55435 Attn: Daniel E. Cohen, M.D. Fax No.: 612-820-6697 With a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South 8th Street Minneapolis, MN 55402-2205 Attn: Patrick Delaney Fax No.: 612-371-3207 Either party hereto may designate any other address for notices or account for wire transfer given hereunder by written notice to the other party given at least ten (10) days prior to the effective date of such change. 10.5 Entire Agreement. This Agreement represents the entire agreement between the parties with respect to the subject matter hereof; there are no oral promises, representations or warranties. No modification of this Agreement or waiver of any of its terms shall be binding upon the parties unless said modification or waiver is in writing, signed by both parties, and states that it is an amendment to this Agreement. 10.6 Parties in Interest. This Agreement shall inure to the benefit of, be binding upon, and be enforceable against the parties hereto, their respective successors and assigns. 10.7 Governing Law. This Agreement shall be governed by, construed and enforced under the internal laws (and not the laws of conflicts) of the State of Minnesota. Licensee irrevocably submits to the jurisdiction of the Minnesota state courts and federal courts sitting in Minneapolis or St. Paul, Minnesota in connection with any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of such action or proceeding shall be heard and determined in any such court. 10.8 Severability. If any portion of this Agreement is held invalid by the final judgment of any court of competent jurisdiction, such portion shall be deemed revised or "blue lined" so that it is enforceable to the fullest extent possible under applicable law and the remaining provisions shall remain in full force and effect as if such invalid provision had not been included herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CNS, INC. By -------------------------------------- Its: ---------------------------------- ONESTA NUTRITION, INC. By -------------------------------------- Its: ---------------------------------- LIST OF SCHEDULES Number Description ------ ----------- 1.1 Products 1.3 Licensed Patents SCHEDULE 1.1 DESCRIPTION OF PRODUCTS Soluble fiber supplement product covered by the Licensed Patents or made or developed through the use of Know-How. SCHEDULE 1.3 DESCRIPTION OF LICENSED PATENTS U.S. Patent Application Serial No. 60/009,231 filed December 26, 1995, "Dietary Fiber Delivery System" U.S. Patent Application Serial No. 08/771,960 filed December 23, 1995, "Dietary Fiber Delivery System" PCT Patent Application PCT/US 96/20245 filed December 23, 1996, "Dietary Fiber Delivery System" EX-10.10 5 LICENSE AGREEMENT Exhibit 10.10 [CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.] LICENSE AGREEMENT THIS AGREEMENT (the "Agreement") is made and effective as of this 12th day of March, 1999 by and between CNS, Inc., a Delaware corporation ("Licensee"), and WinEase, L.L.C., a Minnesota limited liability company ("Licensor"). RECITALS WHEREAS, Licensor is now and has been engaged in developing certain technology related to animal care and specifically has developed products and methods directed to the support of nasal passages for animals, including the "Products" (as defined in Paragraph 1.1 below); WHEREAS, Licensor owns certain patents, pending patent applications and Know-how (as defined in Paragraph 1.4) related to the Products and methods, these patents and pending applications listed in the attached Schedule 1.5, and Licensor is willing to license such patents, pending applications and Know-how to Licensee exclusively and in accordance with the terms of this Agreement; WHEREAS, Licensor has also developed certain trademarks related to the Products and owns certain trademark registrations and pending trademark applications as listed in the attached Schedule 1.6, and Licensor is willing to license such trademarks including the trademark registrations and pending applications in accordance with the terms of the Trademark License Agreement attached hereto as Exhibit A; WHEREAS, Licensee desires to obtain an exclusive, worldwide, royalty-bearing license from Licensor under all of those certain patents, patent applications, Know-how, Product Improvements (as defined in Paragraph 1.3), trademarks, and trademark applications relating to the development, manufacture, sale and use of the Products and Licensed Methods (as defined in Paragraph 1.2). NOW, THEREFORE, in consideration of these premises, and the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. GENERAL DEFINITIONS. As used herein, the following terms shall be defined in the manner set forth below: 1.1 Products. The term "Products" shall mean the nasal support devices for animals and parts and components thereof and related thereto and any other products similar in function and purpose developed by Licensor or any of its employees, consultants, agents or representatives prior to or during the term of this Agreement based upon or using the Know-how or any claim within Patent Rights. The term Products also specifically includes any product that is made by a Licensed Method or is intended to be used in accordance with a Licensed Method. 1.2 Licensed Methods. The term "Licensed Methods" shall mean any methods or techniques developed by Licensor of making or using the nasal support devices for animals and parts and components thereof and related thereto and any other products similar in function and purpose developed by Licensor or any of its employees, consultants, agents or representatives prior to or during the term of this Agreement based upon or using the Know-how or any claim within the Patent Rights. 1.3 Product Improvements. The term "Product Improvements" shall mean any improvement or enhancement to the Products or any similar product conceived of by Licensor or any of its officers, employees, consultants, agents or representatives after the effective date of this Agreement which utilize any of the Know-how, Patent Rights or Licensed Methods. 1.4 Know-how. The term "Know-how" shall mean any and all of the information of any description directly relating to the Products and Licensed Methods developed by or for Licensor at any time prior to or after the effective date of this Agreement and connected or associated with the Patent Rights, including, but not limited to, any and all tangible and intangible information, technology, documents and materials in the possession and control of Licensor (prior to the term of this Agreement), necessary or desirable in order to enable Licensee to utilize fully the rights granted by Licensor to Licensee hereunder and shall include, without limiting the foregoing, the ideas, concepts, confidential information, trade secrets and techniques, as well as all the materials, documents, manuals, schematics, blueprints, specifications, patterns, art work, bills of materials and technical specifications and other information owned or controlled by Licensor relating to the Products, Patent Rights and Licensed Methods. 1.5 Patent Rights. The term "Patent Rights" shall mean the following: (i) the United States and foreign patent(s) and patent application(s) listed on the attached Schedule 1.5 relating to the Products and Licensed Methods; (ii) all future United States or foreign patent applications related to the Products, Product Improvements and Licensed Methods and any patents arising therefrom; (iii) the rights, patents and patent applications, if any, in any country or jurisdiction in the world corresponding to the United States patents or patent applications; and (iv) any division, continuation, continuation-in-part, divisional, re-examined, reissued or extended letters patent, applications and petty patents, utility models, utility model conversions, inventor's certificates relating to the inventions claimed in any of the foregoing United States patents and patents pending and foreign patent rights, which may be developed, acquired or controlled by Licensor during the term of this Agreement and with respect to which Licensor has or shall have the right to grant the license hereinafter provided. 1.6 Trademark Rights. The term "Trademark Rights" shall mean those trademarks procured by Licensor and listed on the attached Schedule 1.6 for use in connection with Products and Licensed Methods, including all current and future registrations and pending trademark applications in the United States and foreign countries that are related to those trademarks listed in Schedule 1.6. The term Trademark Rights also includes any new trademarks that may be developed by Licensor for application to the Products or the Licensed Methods. 1.7 Contract Year and Quarter. The term "Contract Year" shall mean each period of twelve (12) consecutive months commencing on the first day of the first month of the Contract Quarter following the date Licensee elects, in its sole discretion, to commercially introduce the Products (the "Product Acceptance Date"); provided, however, the Product Acceptance Date shall in no event be later than September 1, 1999 unless otherwise agreed by both parties. The term "Contract Quarter" shall mean each period of three (3) consecutive months commencing on the first day of (i) July, 1999 in the event that the Product Acceptance Date occurs on or before August 15, 1999; or (ii) October, 1999 in the event that the Product Acceptance Date occurs after August 15, 1999. 1.8 Net Sales The term "Net Sales" shall mean the total amount collected by Licensee or any sublicensee for sales of the Products to third parties after a deduction of any: (i) sales, use or excise taxes; (ii) freight or shipping charges; (iii) duty or insurance included therein; (iv) credits or prepayments due to rejections; (v) defects or returns; and (vi) amounts for trade and quantity discounts actually allowed and taken. 1.9 Earned Royalty. The term "Earned Royalty" shall mean the royalty payable to Licensor on the Net Sales from the sale of the Products. 2. LICENSING AND COMMERCIALIZATION. 2.1 Patent Rights and Know-how License. Licensor hereby grants to Licensee a sole and exclusive, worldwide, royalty-bearing license, subject to Paragraph 2.3 below, to manufacture, have others manufacture for it, use, sell, distribute, export, or otherwise dispose of the Products and to practice the Licensed Methods to make or use the Products under the Patent Rights and the Know-how of Licensor. 2.2 Confidentiality of Know-how. Except as required by law or by a governmental agency or as may otherwise be necessary or desirable for Licensee to fully utilize the rights granted under this Agreement, Licensee agrees that it will not, directly or indirectly, disseminate, disclose or otherwise make available to any third party Know-how without the prior consent of Licensor and will take all steps reasonably necessary to carry out this obligation so long as Licensor has a reversionary right to such Know- how by the terms of this Agreement, or unless such Know-how is already known to Licensee or until such Know-how is, or becomes, generally known to the public or is subsequently received by Licensee in good faith and without any restrictions as to disclosure from a third party which has the right to make such disclosure. Notwithstanding the foregoing, Licensee may disclose any Know-how to its directors, officers, employees, representatives and agents who may need to know such information. 2.3 Sublicenses. Except as may be otherwise necessary or desirable to manufacture or have manufactured the Products or any components therefore, Licensee may not sublicense to any third party, including affiliates of Licensee, any rights granted by Licensor to Licensee hereunder in the United States. Licensee may, however, sublicense any such rights to a third party or affiliates outside the United States for selling the Products outside the United States and without the right to import the Products into the United States. In the event of any sublicense granted under this Paragraph 2.3, Licensee shall (1) retain all rights and be responsible for all obligations under this Agreement, and (2) enter into a written agreement with any such sublicensee (x) with a term no greater than the term of this Agreement, (y) with rights granted to any such sublicensee which are no greater than the terms of this Agreement, and (z) pursuant to which Licensee shall use reasonable business efforts to impose upon such sublicensees similar obligations as Licensor has imposed upon Licensee under this Agreement. 2.4 Assignments. Licensee may assign, convey or transfer any and all of its rights under this Agreement ("Transfer") to a successor in interest of substantially all of the assets or capital stock of Licensee (the "Acquirer"). In the event of such a Transfer, any such Acquirer shall assume all of the obligations of Licensee hereunder and this Agreement shall be binding upon and inure to the benefit of such Acquirer. Except as otherwise set forth in or contemplated by Paragraph 2.3 above, no other Transfer may be made by Licensee or the Acquirer unless Licensee or the Acquirer grants Licensor an exclusive right of first refusal to purchase all of the rights conferred under this Agreement in accordance with the following procedure: (a) First, Licensee or the Acquirer, as the case may be, shall give Licensor written notification of its intention to enter into a transaction which operates to effectuate a Transfer (a "Transaction") and shall not enter into any such Transaction without first disclosing all material information about the proposed Transaction to Licensor and offering to enter into a Transaction on substantially identical terms with Licensor; and then (b) Second, Licensor shall, unless otherwise waived in writing by Licensor, have a period of thirty (30) days after receipt of written notification of any proposed Transaction to exercise its right of first refusal and enter into a Transaction on substantially identical terms. The right of first refusal procedure outlined in this Paragraph 2.4 shall be repeated prior to entering into by Licensee or the Acquirer of any Transaction that is (a) on terms less favorable in a material respect to the Licensee or the Acquirer than specified in an earlier written notice to Licensor, or (b) with a party other than that specified in an earlier written notice. 2.5 Option for Product Improvements. Licensor shall own all of its Product Improvements. Upon Licensor's conception and reduction to practice of any Product Improvement, Licensor will disclose such Product Improvement to Licensee in writing within a reasonable period of time, and subsequently, Licensee shall have the first option to include any such Product Improvement within the exclusive license granted above in Paragraph 2.1. Licensee shall make its election under this option within thirty (30) days after disclosure from Licensor. 2.6 Patent Procurement and Costs. Licensee shall be solely responsible for and pay all patent costs and expenses (including reasonable attorneys' fees) to be incurred during the term of this Agreement in obtaining, prosecuting, and maintaining any of the Patent Rights issued or to be issued under the law of any country or jurisdiction identified on Schedule 2.6, including filing, prosecution, working and maintenance costs and taxes. Notwithstanding the above, Licensor shall direct and control the procurement and maintenance of the Patent Rights and shall select patent counsel for such procurement or maintenance (which counsel is subject to the reasonable consent of Licensee); provided, however, that Licensee shall have the right to terminate such patent counsel if Licensee has a reasonable basis for not being satisfied with such counsel's efforts or results, and in such event Licensee shall select a new patent counsel (which counsel is subject to the reasonable consent of Licensor). With respect to the procurement and maintenance of any of the Patent Rights in countries not identified on Schedule 2.6, Licensor shall not be responsible for or required to pay any patent costs or expenses unless it has given its prior written consent to the procurement of such Patent Rights in any such country. 2.7 Trademark Licensing. The Trademark Rights are licensed pursuant to the "Trademark License Agreement" that is attached to this Agreement as Exhibit A and made a part hereof. 3. REPRESENTATIONS AND WARRANTIES. 3.1 Licensor hereby warrants and represents to Licensee as follows: (a) Licensor is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Minnesota. (b) This Agreement has been duly authorized, executed and delivered by Licensor and constitutes a valid and binding obligation of Licensor, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as and to the extent that the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The execution, delivery and performance of this Agreement and the agreements attached hereto by Licensor and the consummation of the transactions contemplated thereby have been authorized by all necessary corporate action and do not and will not conflict with or result in any material breach of any of the provisions of, or constitute a material default under, or result in a material violation of, or require any authorization, consent or approval, under the provisions of any organizational charter, articles, bylaw, member control, operating or other agreement, contract or instrument to which Licensor is bound or affected, or any law, statute, rule, regulation, judgment order or decree to which Licensor is subject. (c) Licensor is the sole and exclusive owner of all the rights of James R. Chiapetta, Edward L. Blach and all other employees, agents, consultants or representatives of Licensor with respect to the Products, Licensed Methods, Patent Rights, Know-how and Trademark Rights. (d) Licensor has been allowed and the issue fee has been paid for the United States patent(s) as listed on Schedule 1.5 covering the Products or Licensed Methods. Additional United States and international patent applications that are directed to the Products and Licensed Methods are currently pending as set forth on Schedule 1.5. Licensor has no knowledge of information that would render any of the listed patent applications (or patents granted therefrom) invalid or unenforceable. (e) Licensor has good and marketable title to the Trademark Rights, Patent Rights and Know-how, free and clear of any and all liens, pledges, claims, licenses, assignments, conditional sales contracts, agreements or encumbrances of any kind that would impair Licensor's ability to grant the licenses under this Agreement or the Trademark License Agreement. (f) Licensor has no knowledge that any of the Trademark Rights, Products, Licensed Methods, Patent Right or Know-how infringes on any patent, copyright, trademark, trade secret, trade dress or any other intellectual property right of any third party. (g) None of Licensor's undertakings or activities in connection with the development, manufacture and sale of the Products involve the wrongful use of the proprietary rights or assets of any third party or give rise to any claim by any third party of ownership or rights in the Trademark Rights, Patent Rights, Licensed Methods or Know-how. (h) Licensor has not received notice of any claims, actions, suits or proceedings pending or threatened effecting Licensor, the Trademark Rights, the Patent Rights, the Licensed Methods or the Know-how, which, if adversely determined, would have a material adverse effect upon Licensee's ability to manufacture, have manufactured, use or sell the Products or otherwise practice the rights and technology licensed to Licensee by Licensor under this Agreement and, to Licensor's knowledge, there is no reasonable basis for anyone to bring such claims, actions, suits or proceedings. (i) Licensor has not received any claim from any third-party proceedings relating to the Trademark Rights, Licensed Methods, Patent Rights or Know-how, or that the Products are based upon infringement of any patent or misappropriation or misuse of trade secrets or any other intellectual property right. 3.2 Licensee hereby warrants and represents to Licensor as follows: (a) Licensee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) This Agreement has been duly authorized, executed and delivered by Licensee and constitutes a valid and binding obligation of Licensee, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. The execution, delivery and performance of this Agreement and the agreements attached hereto by Licensee and the consummation of the transactions contemplated thereby do not and will not conflict with or result in any material breach of any of the provisions of, or constitute a material default under, or result in a material violation of, or require any authorization, consent or approval, under the provisions of Licensee's Certificate of Incorporation or Bylaws or other agreement, contract or instrument to which Licensee is bound or affected, or any law, statute, rule, regulation, judgment order or decree to which Licensee is subject. 4. PAYMENTS, ROYALTIES AND REPORTS. 4.1 Initial License Fee. On the date hereof, Licensee will pay to Licensor the sum of $[CONFIDENTIAL TREATMENT REQUESTED] as an initial license fee. 4.2 Additional License Fees. Unless this Agreement is earlier terminated or notice of termination is furnished in accordance with Paragraph 7.3 hereof, Licensee will pay to Licensor additional license fees in accordance with the following: (a) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the Product Acceptance Date; (b) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the earlier of: (i) six (6) months after the Product Acceptance Date; or (ii) Net Sales from the sales of Products equal or exceed $[CONFIDENTIAL TREATMENT REQUESTED] in the aggregate; and (c) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the earlier of: (i) twelve (12) months after the Product Acceptance Date; or (ii) aggregate Net Sales from the sales of Products equal or exceed $[CONFIDENTIAL TREATMENT REQUESTED] U.S. in the aggregate. 4.3 Royalties on Account of Net Sales. (a) Licensee agrees to pay to Licensor royalties as follows based on the annual Net Sales from the sale of Products which are manufactured, used, sold or imported into a jurisdiction in which Licensor owns or controls an unexpired granted patent of Patent Rights containing a valid claim covering such manufacture, use, sale or importation: (a) [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales until royalties have been paid on a total of $[CONFIDENTIAL TREATMENT REQUESTED] U.S., then (b) [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales until royalties have been paid on a total of $[CONFIDENTIAL TREATMENT REQUESTED] U.S., then (c) [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales until royalties have been paid on a total of $[CONFIDENTIAL TREATMENT REQUESTED] U.S., and then (d) [CONFIDENTIAL TREATMENT REQUESTED]% of all Net Sales in excess of a total of $[CONFIDENTIAL TREATMENT REQUESTED] U.S. (b) The royalty percentages provided for in Paragraph 4.3(a) above shall be reduced by [CONFIDENTIAL TREATMENT REQUESTED] ([CONFIDENTIAL TREATMENT REQUESTED]) on account of Net Sales of Products which are manufactured, used, sold or imported into a jurisdiction in which Licensor does not own or control an unexpired granted patent of Patent Rights containing a valid claim covering such manufacture, use, sale or importation. (c) In the event that any third party sells or markets a nasal support device that competes with the Products in a particular jurisdiction and Licensee is unable to prohibit such competitor from marketing or selling such a competitive product in the particular jurisdiction through patent proceedings or other measures set forth in or contemplated by Section 6, the royalties provided for hereunder shall be proportionately reduced such that the royalty percentages then in effect under either Paragraphs 4.3(a) and 4.3(b) above shall be multiplied by the market share held by Licensee in the particular jurisdiction as determined by Licensee every six (6) months in a good faith analysis of the relevant markets and the competitive effect of such products on Net Sales. (d) It is further understood and agreed by the parties that a Product sold and subject to royalty under this Agreement shall not be subject to more than one royalty payment and that the royalties provided for under this Agreement shall in no event be reduced to less than [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales. 4.4 Quarterly Payments. All royalties due Licensor from Licensee hereunder shall be payable on a Contract Quarterly basis. Within thirty (30) days after the end of each Contract Quarter during the term of this Agreement, Licensee shall pay to Licensor the royalty due Licensor under Paragraph 4.3 through the end of the preceding Contract Quarter and shall furnish Licensor with a written statement setting forth the number of Products sold and the Net Sales received during such Contract Quarter, and the resulting amount of the royalty due Licensor under Paragraph 4.3. 4.5 Minimum Royalties. To maintain its rights hereunder, Licensee shall pay to Licensor minimum royalties after the Product Acceptance Date in accordance with Paragraph 4.4 and the following:

*Twelve-month periods beginning on the Contract Year. **Unless earlier terminated in accordance with Section 7 of this Agreement, through the Contract Year of the expiration date of the last of the Patent Rights. 4.7 Minimum Royalty Payment. Licensee shall pay Licensor within thirty (30) days after the end of each Contract Quarter, an amount equal to (i) the minimum royalties payable pursuant to the terms of Paragraph 4.5 for the Contract Quarter then ended, less (ii): (a) the aggregate amount of Earned Royalties actually paid to Licensor pursuant to the terms of Paragraphs 4.3 and 4.4 for the Contract Quarter then ended; and (b) any Earned Royalties paid to Licensor during the prior Contract Quarters in the current Contract Year that exceed the amount of cumulative minimum royalties payable for those Contract Quarters. Licensee's failure to pay any and all amounts payable under the preceding sentence within thirty (30) days after receipt of written notice from Licensor that such amounts have not been timely paid shall render the licenses granted hereunder void and thereupon, Licensee shall have no further rights or interests of any kind or nature with respect to the Products, Patent Rights and Know-how, and Licensee shall take any and all action that Licensor may reasonably request to further document the provisions hereof. In the event that any law, statute, regulation, rule, guideline, ruling, order or decision prevents Licensee from marketing or offering the Products for sale, the minimum royalty payment will be suspended until such time that Licensee is no longer prevented from marketing or offering the Products for sale. 4.8 Late Payment. Licensee shall pay a late payment fee to Licensor for any Contract Quarter when the royalty amount that is due and payable is not made within thirty (30) days after the end of that Contract Quarter. The late payment fee shall be calculated at a variable rate of two percent (2%) over the prime per annum interest rate as set from time to time by Norwest Bank Minneapolis, N.A., Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that are at any time overdue and payable to Licensor under this Agreement, such interest being calculated on each such overdue amount from the date when such amount became due to the date of actual payment thereof. Such late payment fee shall be in addition to and not in lieu of any and all other rights or remedies that Licensor may have under this Agreement or law relating to a default by Licensee under this Agreement. 4.9 Records. During the term of this Agreement and for three (3) years after termination of this Agreement, Licensee shall at all times maintain accurate and up-to-date records containing complete data from which amounts due to Licensor under this Agreement may be readily calculated. Further, Licensee shall preserve and permit examination of such records by Licensor's representatives or independent auditors at reasonable intervals and under reasonable conditions during the term of this Agreement and for three (3) years thereafter and, upon request, shall supply to Licensor's representatives or independent auditors all information reasonably requested that is useful in making a proper audit and verification of Licensee's performance of its obligations under this Agreement and of any sublicensee's performance in accordance with the terms of this Agreement. 4.10 Underpayment. If Licensor determines by audit and inspection of Licensee's books and records that Licensee has failed to pay all royalties due under Paragraph 4.4, Licensee shall pay Licensor one hundred five percent (105%) of such additional royalties as may be due in addition to the interest as provided for in Paragraph 4.8 above. If the amount of underpayment exceeds 5% of the royalties due under Paragraph 4.4, then Licensor shall, in addition to any other remedies available to it, recover from Licensee the reasonable costs incurred in making any such audit and inspection pursuant to Paragraph 4.9 hereof which revealed such shortfall. 5. INDEMNIFICATION. 5.1 Indemnification by Licensor. Licensor shall defend, indemnify and hold Licensee and its shareholders, directors, officers, agents, representatives, successors and assigns harmless from and against any and all claims, damages, costs (including reasonable attorneys' fees), judgments, fines, penalties, losses, diminution in value and liabilities of any kind or nature: (a) arising out of the breach by Licensor of any of its warranties, representations and covenants under this Agreement or the Trademark License Agreement; (b) arising out of any misuse by Licensor of the patent process or fraud by Licensor on the patent office. 5.2 Indemnification by Licensee. Licensee shall defend, indemnify and hold Licensor and its shareholders, directors, officers, agents, representatives, successors and assigns harmless from and against any and all claims, damages, costs (including reasonable attorneys' fees), judgments, fines, penalties, losses, diminution in value and liabilities of any kind or nature arising out of any act of Licensee including, but not limited to, those: (a) arising out of the breach by Licensee of any of its warranties, representations and covenants under this Agreement or the Trademark License Agreement; or (b) arising out of any actual or alleged defect in a Product. 6. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes aware of activity on the part of any third party which may constitute infringement of the Patent Rights, or any other intellectual property rights with respect to which Licensee is granted a license hereunder, Licensee shall give Licensor written notice thereof. Licensee shall, at its sole discretion and expense, have the first exclusive right to initiate and thereafter maintain reasonable efforts to prevent and abate such infringement, including the initiation of an appropriate civil action for infringement and the taking of such other action as may determine to be necessary or appropriate to enforce the Patent Rights or other intellectual property rights with respect to which Licensee is granted a license hereunder. In such event, (i) Licensor will permit the use of its name in, and as a party to, all such suits and execute all pleadings, documents and other papers necessary or appropriate in conjunction therewith, and (ii) Licensee shall receive the full benefits of any action it takes pursuant to this Paragraph, including retaining all sums recovered in any such suit or in settlement thereof after paying Licensor the Earned Royalties which shall be calculated from the amount of Net Sales, if any, asserted by Licensee to support any award of compensatory damages (as opposed to punitive or any other damages). In the event that Licensee fails or refuses to take or cause to be taken any such measures against any third party after six (6) months from the date of receipt of written notice to Licensee by Licensor of such infringement, Licensor may take such legal action in its own name or in the name of Licensee (if needed) and at its own expense upon giving fourteen (14) days advance, written notice of its intention to do so. In this case, all damages recovered as a result of such action by Licensor shall be and become the property of Licensor. If either party litigates under this Section 6, the other party may, at its option and its cost and expense, participate in meetings with the litigating party and/or its counsel and receive all pleadings, documents and other related papers useful for the purpose of keeping the other party informed of the status of any proceedings commenced by the litigating party. 7. TERM AND TERMINATION. 7.1 Term. This Agreement and the Trademark License Agreement shall commence on the effective date hereof and shall expire, unless earlier terminated pursuant to Paragraphs 7.2 or 7.3 of this Agreement, upon the expiration of the last of the Licensed Patents to expire. 7.2 Termination by Licensor. If Licensee is in material default of any of its obligations under this Agreement, Licensor shall have the right to terminate this Agreement by giving thirty (30) days' written notice of termination specifying the reason for termination, provided that such notice will be of no effect and termination will not occur if the specified default is cured prior to the expiration of said thirty (30) day notice period. 7.3 Termination by Licensee. (a) This Agreement and the Trademark License Agreement may be terminated by Licensee at any time at will, with or without cause, by the giving of at least ninety (90) days' prior written notice to Licensor by Licensee in which event any license granted hereunder shall, except as otherwise set forth in or contemplated by Paragraph 7.3(b) hereof, terminate upon the effective date of the termination (the "Termination Date") stated in any such notice. In the event of the termination of any such license, neither Licensor nor Licensee shall have any further obligation to the other party hereunder except as expressly provided in Paragraphs 7.3(b), 7.3(c) or 7.4 of this Agreement below. (b) Upon termination of any license granted hereunder or under the Trademark License Agreement, Licensee may, after the effective date of such termination, sell any of its (i) completed Products, (ii) Products then in the process of manufacture, and (iii) Products with respect to which manufacture has been committed at the time of termination by reason of either (x) any contracts for the purchase of materials to be used in the manufacture of such Products or (y) any contract for the sale of such Products, and may, in its sole discretion, utilize any of the rights granted by Licensor under the Trademark License Agreement. All such sales and uses shall be subject to the royalty provisions of Section 4 of this Agreement as though the termination of this Agreement had not occurred. (c) Except as expressly provided in Paragraph 7.3(b), after termination of this Agreement, Licensee may not use develop, market or sell the Products, Product Improvements, Licensed Methods, Patent Rights and Know-how, in any way or manner that would violate any rights of Licensor and Licensee shall take any and all steps reasonably requested by Licensor to completely vest all rights licensed hereunder to Licensee back to Licensor upon any such termination. Furthermore, Licensee may not use any trademark of the Trademark Rights, and all Trademark Rights shall remain the property of Licensor or will thereafter be assigned to Licensor. Termination of this Agreement shall operate to terminate the Trademark License Agreement. (d) In the event that Licensee terminates this Agreement and the Trademark License Agreement under this Section 7, Licensee shall, upon written request of Licensor, deliver to Licensor copies of all material scientific and marketing research documentation related to or used in connection with the Products including, but not limited to, manufacturing sources and technical specifications, reports, surveys, know-how, trademarks (except the Breathe Right(R) trademark), customer lists and other information prepared for or by Licensee with respect to which Licensee shall have the right to deliver; provided, however, that the delivery of any such information and materials will not impair any trade secret relating to Licensee's other existing or contemplated products or be deemed by Licensee to be otherwise confidential in nature. (e) In the event that Licensee terminates this Agreement under this Section 7, Licensee shall grant to Licensor a limited, non-exclusive, worldwide, non-royalty bearing license to any and all improvements to the Products developed by Licensee or any of its employees or consultants between the date hereof and Termination Date which Licensee shall have the right to grant; provided, however, that (i) nothing contained in this Paragraph 7(e) shall be in any way construed to confer upon Licensor or any third party any rights to such improvements which may be subject to the proprietary protection of a party other than Licensee including, without limitation, the rights granted to Licensee by Creative Integration & Design, Inc. and its affiliates; (ii) the license granted shall be applicable to the Products and limited for use in the area of nasal support devices for animals and no other purpose. 7.4 Continued Obligations. Termination shall not relieve or release either party from its obligations to make any payment which may be owing to the other under the terms of this Agreement or from any other liability which either party may have to the other arising out of the terms of this Agreement. Additionally, notwithstanding anything contained herein to the contrary, Sections 3, 5 and 9 shall survive termination of this Agreement and remain in full force and effect. 8. LICENSEE'S UNDERTAKINGS. 8.1 Exploitation. Licensee hereby agrees that during the term of this Agreement it will use its best efforts to manufacture, sell and market the Products, and will exert its best efforts to create a demand for the Products in appropriate worldwide markets, and to increase and extend its business in the manufacture, sale and marketing of the Products in appropriate worldwide markets. 8.2 Distribution. Licensee agrees to undertake and will use its best efforts to investigate and, if determined by Licensee to be commercially feasible, develop a direct distribution system whereby the Products may be marketed directly to the end user. 8.3 Marking. Licensee agrees to apply appropriate patent notices to the Products and to any product advertisements and packaging. 8.4 Additional Consent or License. In the event that Licensee believes it to be necessary or desirable to obtain the consent or a license from Creative Integration & Design, Inc. to practice some or all of the Patent Rights under this Agreement, the fees paid by Licensee for any such consent or license shall not affect the royalties set forth in this Agreement. In addition, Licensor acknowledges and agrees that any and all of the rights granted to Licensee by Creative Integration & Design, Inc. are not in any way intended to be considered transferrable or impaired hereunder any circumstances. 9. MISCELLANEOUS. 9.1 Recitals, Schedules and Exhibits Incorporated. The Recitals, Schedules and Exhibits are true and correct, incorporated herein and made a part of this Agreement as specifically set forth. 9.2 Force Majeure. Neither party shall be responsible for any delay or failure in the performance of any obligation hereunder due to strikes, lockouts, fires, floods, acts of God, embargoes, wars, riots, or act or order of any government or governmental agency; provided, however, nothing set forth in this Paragraph 9.2 (except as otherwise set forth in or contemplated by Paragraph 4.7 of this Agreement) shall be construed to relieve Licensee of the requirement that it pay minimum royalties pursuant to Paragraphs 4.5 hereof. 9.3 Waiver. The waiver or failure of either party to enforce the terms of this Agreement in one instance shall not constitute a waiver of said party's right under this Agreement with respect to other violations. 9.4 Remedies. The election by either party of any particular right or remedy shall not be deemed to exclude any other right or remedy and all rights and remedies of either party shall be cumulative. The parties agree that, in addition to any other relief afforded under the terms of this Agreement or by law, each party shall have the right to enforce this Agreement by injunctive or mandatory relief to be issued against the other party, it being understood that both damages and specific performance shall be proper modes of relief and are not to be considered as alternative remedies. 9.5 Notices. All notices and replies thereto required hereunder shall be in writing, signed by the party giving notice, placed in an envelope and either delivered by hand or sent by facsimile or registered mail, postage prepaid, return receipt requested, and properly addressed to the other party. Notices sent by mail shall be deemed received on the date of receipt indicated by the receipt verification provided by the United States Postal Service. Notices sent by facsimile shall be deemed received on the date indicated on the sender's confirmation report. Notice shall be given, mailed or sent to the other party at the following addresses or at such other address as may be given by proper notice: If to Licensor: WinEase, LLC [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED] Attn: James R. Chiapetta Fax No.: [CONFIDENTIAL TREATMENT REQUESTED] If to Licensee: CNS, Inc. 4400 West 78th Street Minneapolis, MN 55435 Attn: Daniel E. Cohen, M.D. Fax No.: (612) 820-6697 With a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South 8th Street Minneapolis, MN 55402-2205 Attn: Patrick Delaney Fax No.: (612) 317-3207 Either party hereto may designate any other address for notices given hereunder by written notice to the other party given at least ten (10) days prior to the effective date of such change. 9.6 Entire Agreement. This Agreement, together with the attached schedules and exhibits, represents the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and discussions (whether written or oral); there are no oral promises, representations or warranties not set forth in this Agreement. No modification of this Agreement or waiver of any of its terms shall be binding upon the parties unless said modification or waiver is in writing, signed by both parties, and states that it is an amendment to this Agreement. 9.7 Parties in Interest. This Agreement shall inure to the benefit of, be binding upon, and be enforceable against the parties hereto, their respective successors and assigns. 9.8 Governing Law. The parties hereby irrevocably submit and consent to the jurisdiction of Minnesota state and federal courts over any action or proceeding arising out of or relating to this Agreement and further agree that all claims in respect of such action or proceeding shall be heard and determined in any such court which shall construe and enforce the Agreement under the internal laws (and not the laws of conflicts) in such state. Licensor and Licensee hereby waive any argument that venue in such forums is not convenient. 9.9 Severability. If any portion of this Agreement is held invalid by the final judgment of any court of competent jurisdiction, such portion shall be deemed revised or "blue lined" so that it is enforceable to the fullest extent possible under applicable law and the remaining provisions shall remain in full force and effect as if such invalid provision had not been included herein. 9.10 Reasonableness. Licensor and Licensee agree that the restrictions, covenants, agreements and obligations contained in this Agreement are reasonable and necessary to protect the legitimate interests of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CNS, INC. By: -------------------------------------- Its: --------------------------------- WINEASE, LLC By: -------------------------------------- Its: --------------------------------- LIST OF SCHEDULES Number Description ------ ----------- 1.5 Patent Rights 1.6 Trademark Rights 2.6 Countries List SCHEDULE 1.5 DESCRIPTION OF LICENSED PATENTS U.S. Patent Applications and all other applications and continuations thereof filed in connection with the Products together with any and all international filings as further described in Section 1.3 of this Agreement. Application Status ----------- ------ U.S. patent application serial no. 08/843,741 Issue fee paid 12/3/98 U.S. patent application serial no. 09/018,603 Filed 2/4/99 U.S. patent application serial no. 09/250,658 Filed 2/16/99 M&G docket no. 12460.1-US-I2 Filed 3/8/99 PCT/US98/07885 Filed 4/17/98 SCHEDULE 1.6 DESCRIPTION OF CERTAIN TRADEMARK RIGHTS U.S. trademark registration and pending trademark applications as further described in Section 1.6 of this Agreement. FLAIR NSD SCHEDULE 2.6 COUNTRIES LIST 1. United States; 2. Canada; 3. China; 4. Japan; 5. Mexico; 6. New Zealand; 7. Australia; and 8. Countries located in Europe. EXHIBIT A TRADEMARK LICENSE AGREEMENT This Trademark License Agreement (the "Agreement") is entered into and is effective as of this 12th day of March, 1999 by and between WinEase, L.L.C. ("LICENSOR"), a Minnesota limited liability company, and CNS, Inc. ("LICENSEE"), a Delaware corporation, upon the following terms and conditions: Recitals WHEREAS, LICENSOR and LICENSEE have entered into that certain license agreement on even date herewith (the "License Agreement"); WHEREAS, LICENSOR is the sole and exclusive owner of the certain "Trademark Rights" (as defined in the License Agreement); and WHEREAS, LICENSEE wishes to have the right but not the obligation use the Trademark Rights in connection with the sale and marketing of the "Products" (as defined in the License Agreement) and to license from LICENSOR whatever rights LICENSOR may have in the Trademark Rights for use in connection with the Products; WHEREAS, LICENSOR is willing to grant such a license on the terms and conditions set forth in this Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged by the parties hereto, LICENSOR and LICENSEE agree as follows: Terms and Conditions 1. Definitions. The following definitions shall apply to this Agreement: 1.1 The term "Marks" shall mean the Trademark Rights. 1.2 The term "Licensed Goods" shall mean the Products. 1.3 The term "Term" shall mean the time period specified in paragraph 3 of this Agreement. 1.4 The term "Territory" shall mean worldwide. 2. Grant of Rights and Licenses. Subject to all of the terms and conditions of this Agreement, LICENSOR hereby grants to LICENSEE an exclusive, worldwide, royalty-free right and license during the Term of this Agreement to reproduce, display, broadcast, publish and otherwise use any of the Marks in connection with the Licensed Goods by LICENSEE throughout the Territory, and LICENSEE hereby accepts such right and license subject to the terms and conditions of this Agreement. Notwithstanding anything contained in this Agreement to the contrary, LICENSEE shall not be under any obligation to use any of the Marks in connection with the sale of the Products or otherwise. 3. Term. This Agreement and any licenses granted by LICENSOR hereunder shall commence as of the effective date hereof and shall continue in full force and effect through the term of the License Agreement, at which time they will automatically terminate, unless sooner terminated in accordance with the terms and conditions of the License Agreement. 4. Quality Assurance. 4.1 LICENSOR is familiar with LICENSEE'S human nasal dilator products and finds them to be of acceptable quality. LICENSEE agrees that any of the Licensed Goods used with the Marks will be of substantially similar quality. LICENSEE agrees to submit evidence of the nature of the Licensed Goods used with the Marks to LICENSOR for review and approval from time to time upon LICENSOR's reasonable request. 4.2 LICENSEE agrees to take all responsibility for any Licensed Goods with which the Marks are used. LICENSEE agrees to comply in all material respects with all applicable laws and regulations and obtain all appropriate governmental approvals pertaining to the Licensed Goods offered in connection with the Marks. 5. Trademark Use and Ownership. 5.1 In the event that LICENSEE shall at any time elect to use any of the Marks, LICENSEE agrees to use the Marks only in the form and manner with appropriate legends as may be prescribed from time to time by LICENSOR. 5.2 In the event that LICENSEE shall at any time elect to use any of the Marks, LICENSEE agrees that it shall cause to appear in connection with the Licensed Goods, such reasonable trademark notice as LICENSOR may reasonably designate. 5.3 LICENSEE acknowledges and agrees that LICENSOR is the owner of all rights in and to the Marks and that LICENSEE will not during the Term of this Agreement or at any time thereafter use the Marks or any element thereof in any form and for any goods or services or challenge the use or registration thereof except as permitted under this Agreement or contemplated by the License Agreement without the prior written permission of LICENSOR. 5.4 LICENSEE agrees that it will not state or imply either directly or indirectly that LICENSEE or LICENSEE's activities, other than those permitted by this Agreement, are supported, endorsed, or sponsored by LICENSOR and, upon the direction of LICENSOR, LICENSEE. 5.5 LICENSEE recognizes the goodwill associated with the Marks and acknowledges that said goodwill belongs exclusively to LICENSOR and that any use of the Marks by LICENSEE at any time (whether during or after the term of this Agreement) will, except as otherwise contemplated by the transactions set forth in the License Agreement, inure solely to the benefit of LICENSOR, and LICENSEE hereby assigns any such goodwill in its entirety to LICENSOR upon termination of this Agreement. Nothing contained herein shall be construed to confer upon LICENSOR any rights of LICENSEE in or to the Breathe Right(R) mark. 5.6 LICENSEE will comply with the provisions of all laws of the United States and each state in which it elects, in its sole discretion, to use the Marks regarding trademarks and service marks. 6. Infringement. LICENSEE agrees to notify LICENSOR promptly of any known use of the Mark by others not duly authorized by LICENSOR. Notification of such infringement shall include all details known by LICENSEE that would enable or aid LICENSOR to investigate such infringement. 7. Disputes Relating to the Mark. The parties acknowledge and agree that all of the provision of Paragraph 6 of the License Agreement shall govern the parties' rights with respect to disputes relating to the Marks with third parties. 8. No Agency. Nothing contained herein shall be deemed to create an agency, joint venture, franchise, or partnership relationship between LICENSEE, on the one hand, and LICENSOR, on the other hand, and no party shall so hold itself out. LICENSEE shall have no right to obligate or bind LICENSOR in any manner whatsoever. 9. Limited Warranty. 9.1 LICENSOR warrants it has the lawful capacity to execute this Agreement, but does not warrant and shall not be held to have warranted the validity or scope of the Marks licensed under this Agreement except as may otherwise be set forth in the License Agreement. 9.2 LICENSOR makes no representations or warranties with respect to the Licensed Goods provided by LICENSEE and disclaims any liability arising out of the Licensed Goods offered by LICENSEE under the Marks except as may otherwise be set forth in the License Agreement. 10. Assignability. This Agreement shall inure to the benefit of LICENSOR, its successors and assigns, but will be personal to LICENSEE and shall be assignable by LICENSEE only to the extent that the rights of LICENSEE are assignable under the License Agreement. 11. Termination. The termination of the License Agreement shall operate to terminate this Agreement. 12. Effect of Termination. 12.1 Except as may otherwise be set forth in Section 7 of the License Agreement, the license granted hereunder shall cease immediately upon termination of this Agreement for any reason. 12.2 The exercise by any party of its rights to terminate this Agreement as provided herein shall be in addition to and not in lieu of any other remedies such party may have under this Agreement or otherwise. 13. Waiver. No waiver by a party of any breach of any term or provision of this Agreement shall be construed to be a waiver of any preceding or succeeding breach of the same or any other term or provision hereof. The parties' various rights and remedies under this Agreement shall be construed to be cumulative and no one of them is exclusive of any other or of any right or remedy allowed by law or in equity. 14. Notices. All notices to be given hereunder must be in writing and shall be given hereto in the manner and at the addresses set forth in the License Agreement. 15. No Act Contrary to Law; Severability. Nothing contained in this Agreement shall be construed to require the commission of any act contrary to law and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, governmental regulation or order or ordinance, then the latter shall prevail, and in such event the provision or provisions of the Agreement affected shall be curtailed and limited only to the extent necessary to bring it or them within legal requirements. All other terms of the Agreement shall remain unaffected. 16. Governing Law; Jurisdiction. This Agreement shall be deemed to have been made in the State of Minnesota, and its validity, construction and effect shall be governed by and enforced pursuant to the substantive laws of the State of Minnesota without regard to its conflicts of laws principles. 17. Entire Agreement. This Agreement, together with the License Agreement and attached schedules, constitutes the entire agreement between the parties relating to the subject matter hereof and shall supersede any and all prior written or oral agreements between the parties relating to the subject matter hereof. This Agreement may not be amended except by a written instrument signed by each of the parties hereto. Each party acknowledges that it has not executed this Agreement in reliance upon any representation or promise made by any person, except as expressly provided for in this Agreement or the License Agreement. 18. Inconsistent Provisions. To the extent that any term or provision in this Agreement is inconsistent with any term or provision in the License Agreement, the terms and provisions of the License Agreement shall in all respects control. 19. Unavoidable Delay. If any party's obligations hereunder are affected by reason of fire, flood, casualty, Act of God, lockout, strike, labor conditions, unavoidable accident, LICENSOR calamity, mechanical or other breakdown, riot, enactment of law or by any similar cause (collectively referred to as "Unavoidable Delay"), its obligations hereunder herein shall be suspended during the period of such suspension period due to the Unavoidable Delay, except that any such suspension period due to such Unavoidable Delay shall in no event exceed six (6) months. 20. Headings. The headings or captions of this Agreement or any paragraph hereof are inserted for purposes of convenience only and shall not be deemed to limit, affect the scope, meaning or intent of this Agreement, nor shall they otherwise be given any legal effect. 21. Recitals. The Recitals are true and correct, incorporated herein and made a part of this Agreement. 22. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original and will, when taken together, constitute this Agreement notwithstanding that each party is not a signator to the same counterpart. 23. Binding on Successors. This Agreement will fully bind and inure to the benefit of each party and its respective heirs, successors, permissible assigns, and agents. 24. Further Documents. The parties agree to execute such further documents as may be reasonably requested by the others to effectuate any of the provisions or purposes of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their authorized agents effective as of the date first written above. LICENSOR: WinEase, LLC By --------------------------------------- Print Name: ------------------------------ Title: ----------------------------------- LICENSEE: CNS, Inc. By --------------------------------------- Print Name: ------------------------------ Title: ----------------------------------- EX-10.11 6 EXCLUSIVE LICENSE AGREEMENT Exhibit 10.11 [CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.] EXECUTION COPY -------------- CNS-CRONKS EXCLUSIVE LICENSE AGREEMENT TABLE OF CONTENTS Page ---- WITNESSETH...................................................................-1- 1 - DEFINITIONS..............................................................-1- 2 - GRANT....................................................................-4- 3 - REPRESENTATIONS AND WARRANTIES OF CRONKS.................................-5- 4 - DILIGENCE................................................................-6- 5 - ROYALTIES................................................................-7- 6 - REPORTS AND RECORDS......................................................-9- 7 - PATENT PROSECUTION......................................................-10- 8 - INFRINGEMENT............................................................-11- 9 - INDEMNIFICATION AND INSURANCE...........................................-13- 10 - ASSIGNMENT.............................................................-14- 11 - DISPUTE RESOLUTION.....................................................-14- 12 - TERMINATION............................................................-15- 13 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS.............................-17- 14 - MISCELLANEOUS PROVISIONS...............................................-18- APPENDIX A.........................................................-20- APPENDIX B.........................................................-21- CNS-CRONKS EXCLUSIVE LICENSE AGREEMENT This Agreement is made and entered into as of the last date of signature hereto (the "EFFECTIVE DATE") by and between Peter and Kristen Cronk (married) located at 919 McElwee Road, Moorestown, NJ 08057 (hereinafter referred to as "CRONKS"), and CNS, Inc., a corporation duly organized under the laws of the State of Delaware and having its principal office at 4400 West 78th Street, Minneapolis, Minnesota 55435 (hereinafter referred to as "LICENSEE"). WITNESSETH WHEREAS, CRONKS are the owners of certain PATENT RIGHTS (as later defined herein) and information and KNOW HOW (as later defined herein) relating to improvements to nasal dilators, and methods of making and using the same, and have the right to grant licenses to the said KNOW HOW and PATENT RIGHTS; WHEREAS, LICENSEE desires to obtain an exclusive license under the PATENT RIGHTS and KNOW HOW upon the terms and conditions hereinafter set forth; and WHEREAS, CRONKS desire to have the PATENT RIGHTS and KNOW HOW developed and commercialized and are willing to grant an exclusive license thereunder to LICENSEE. NOW, THEREFORE, inconsideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: 1 - DEFINITIONS For the purposes of this Agreement, the following words and phrases shall have the following meanings: 1.1 "LICENSEE" shall mean LICENSEE or any ASSIGNEE (as later defined). 1.2 "PATENT RIGHTS" shall mean all the following CRONKS' intellectual property: a. the United States patents listed in Appendix A; b. the United States patent applications listed in Appendix A, and divisionals, continuations and claims of continuation-in-part applications which shall be directed to subject matter specifically described in this Paragraph b. or Paragraph a. above; c. any and all patents resulting from reissues or reexaminations of the United States patents described in Paragraphs a. and b. above. d. the foreign patent applications listed in Appendix A, and divisionals, continuations and claims of continuation-in-part-applications which shall be directed to subject matter specifically described in such foreign patent applications, and the resulting patents; e. the foreign patent applications filed after the EFFECTIVE DATE in the countries listed in Appendix B or elsewhere and divisionals, continuations and claims of continuation-in-part applications which shall be directed to subject matter specifically described in such patent applications, and the resulting patents; f. any foreign patents, resulting from equivalent foreign procedures to United States reissues and reexaminations, of the foreign patents described in d., e. and f. above; and g. any and all other future United States and foreign patents and patent applications covering the PRODUCTS which may be developed, acquired or controlled by CRONKS during the term of this Agreement and with respect to which CRONKS shall have the right to grant the license hereinafter provided. 1.3 "PRODUCTS" shall mean any product or part thereof which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in any of the PATENT RIGHTS as well as any and all improvements, modifications or enhancements thereto, whether now existing or in the future developed, and any other products, methods or compositions similar in function or purpose developed by CRONKS or any of their agents, employees or affiliates during the term of this Agreement. 1.4 "KNOW HOW" shall mean any and all tangible and intangible information, technology, documents and materials in the possession and control of CRONKS, necessary or desirable in order to enable LICENSEE to utilize fully the rights granted by CRONKS to LICENSEE hereunder and shall include, without limiting the foregoing, the ideas, methods, concepts, confidential information, trade secrets and techniques, as well as all the materials, documents, manuals, schematics, blueprints, specifications, compositions, patterns, artwork, bills of materials and technical specifications and other information of CRONKS relating to the PRODUCTS. 1.5 "CONTRACT QUARTER" shall mean March 31, June 30, September 30 and December 31 of each calendar year beginning in the year 2000. 1.6 "NET SALES" shall mean the gross sales price for LICENSED PRODUCTS from any end-user, sublicensee or other person or entity relating to or arising from the sale of PRODUCTS after deduction of the following: a. discounts allowed in amounts customary in the trade for quantity purchases, cash payments and prompt payments; b. sales, tariff duties and/or use taxes directly imposed and with reference to particular sales; c. outbound transportation or other costs directly related to the outbound transportation of the PRODUCTS; and d. amounts allowed or credited on account of rejections or returns. No deductions, shown above, shall be made from the sales price shall be allowed unless all such deductions are shown on an invoice. No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll. 1.7 "MINIMUM ROYALTIES" shall be the amounts set forth in and payable by LICENSEE in accordance with Paragraph 5.1(c). 1.8 "RUNNING ROYALTIES" shall be the amounts payable by LICENSEE as determined in accordance with the percentages on account of NET SALES of the PRODUCTS as set forth in Paragraph 5.1(d). 1.9 "ABATEMENT EFFORTS" shall have the meaning ascribed to the term in Paragraph 8.2. 1.10 "ASSIGNEE" shall have the meaning ascribed to the term in Paragraph 10.1. 1.11 "CLAIMS" shall have the meaning ascribed to the term in Paragraph 9.2. 2 - GRANT 2.1 CRONKS each hereby grant to LICENSEE the exclusive, world-wide right and license to exploit and practice under the PATENT RIGHTS (as well as any invention disclosed or claimed therein) and under the KNOW HOW and the exclusive, world-wide right and license to make, have made, use, lease, sell, offer for sale, import and export the PRODUCTS until the expiration of the last to expire of the PATENT RIGHTS, unless this Agreement shall be sooner terminated according to the terms hereof. 2.2 LICENSEE shall have the right to enter into sublicensing agreements with third parties for the rights, privileges and licenses granted hereunder. In the event of a sublicense, LICENSEE shall enter into a written agreement with sublicensee (i) with a term no greater than the term of this Agreement, (ii) with rights granted to sublicensee which are no greater than the terms of this Agreement, and (iii) pursuant to which Licensee shall impose upon any such sublicensees substantially the same obligations as CRONKS have imposed upon LICENSEE under this Agreement. 2.3 Any material breach of a sublicense under this Agreement with respect to obligations of such sublicensee to CRONKS shall be treated as a material breach of this Agreement by LICENSEE and all provisions for notice and remedies to cure such breach and terminate this Agreement shall apply. 2.4 LICENSEE agrees to forward to CRONKS a copy of any and all sublicense agreements promptly upon execution by the parties. 2.5 LICENSEE shall not receive from sublicensees consideration that is material in value in lieu of cash payments in exchange for any sublicense under this Agreement, without the express prior written permission of CRONKS. 2.6 Nothing in this Agreement shall be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology or patent rights of CRONKS or any other entity other than the PATENT RIGHTS and KNOW HOW. 3 - REPRESENTATIONS AND WARRANTIES OF CRONKS Each of the CRONKS, jointly and severally, represent and warrant to LICENSEE as follows: 3.1 CRONKS are the sole and exclusive owners of all the PATENTS RIGHTS, KNOW HOW and other rights granted under this Agreement. 3.2 Claims have been allowed and the issue fee has been paid for the United States patent(s) as listed on Appendix A covering the PRODUCTS. Additional United States and foreign patent applications that are directed to the PRODUCTS are currently pending as set forth on Appendix A. To the best of their knowledge, CRONKS have disclosed to the United States Patent and Trademark Office all material evidence relating to the validity or enforceability of the PATENT RIGHTS. 3.3 CRONKS have good and marketable title to the PATENT RIGHTS and KNOW HOW, free and clear of any and all liens, pledges, claims, licenses, assignments, conditional sales contracts, agreements or encumbrances of any kind that would impair the ability of CRONKS to grant the exclusive licenses under this Agreement. 3.4 To the best of CRONKS' knowledge, the PATENT RIGHTS, PRODUCTS and KNOW HOW do not infringe on any patent, copyright, trademark, trade secret, trade dress or any other intellectual property right of any third party. 3.5 To the best of CRONKS' knowledge, none of the undertakings or activities of CRONKS in connection with the development of the PRODUCTS involve the wrongful use of the proprietary rights or assets of any third party. 3.6 CRONKS have not received notice of any claims, actions, suits or proceedings pending or threatened effecting CRONKS, the PATENT RIGHTS or the KNOW HOW which, if adversely determined, would have a material adverse effect upon LICENSEE's ability to manufacture and have manufactured, use or sell the PRODUCTS or otherwise practice the rights and technology licensed to LICENSEE by CRONKS under this Agreement. 4 - DILIGENCE 4.1 LICENSEE shall use its best efforts to bring one or more of the PRODUCTS to market through a thorough, vigorous and diligent program for exploitation of the PATENT RIGHTS and to continue active, diligent marketing efforts for one or more PRODUCTS throughout the term of this Agreement. 4.2 In addition, LICENSEE shall adhere to the following milestones: a. LICENSEE shall, within sixty (60) days of executing this Agreement, provide to CRONKS, correspondence or other documentation generally describing how LICENSEE intends to research, develop, market, distribute and sell the PRODUCTS. b. LICENSEE shall make a first commercial sale of a PRODUCT on or before March 31, 2000. 4.3 LICENSEE's failure to perform in accordance with Paragraphs 4.1 and 4.2 above shall be grounds for CRONKS to terminate this Agreement pursuant to Paragraph 12.3 hereof. 5 - ROYALTIES 5.1 For the rights, privileges and licenses granted hereunder, LICENSEE shall pay royalties to CRONKS in the manner hereinafter provided to the end of the term of the PATENT RIGHTS or until this Agreement shall be terminated: a. Up-Front License Fee: of [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be non-refundable, and deemed earned and due immediately upon the EFFECTIVE DATE. b. Liquidated Expense Fee: of [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be non-refundable, and due immediately upon the EFFECTIVE DATE. c. Minimum Royalty Fees: (i) for the calendar year 2000, [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), payable for each CONTRACT QUARTER in four (4) equal installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]) each; (ii) for the calendar year 2001, [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), payable for each CONTRACT QUARTER in four (4) equal installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]) each; and (iii) for the calendar year 2002, and each year thereafter while PATENT RIGHTS are in force in any country, [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), payable for each CONTRACT QUARTER in four (4) equal installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]) each; provided, however, that RUNNING ROYALTIES due on NET SALES for each said CONTRACT QUARTER, if any, shall be creditable against any of the MINIMUM ROYALTIES due during the calendar year. RUNNING ROYALTIES paid in excess of MINIMUM ROYALTIES shall not be creditable against MINIMUM ROYALTIES for future calendar years. d. Running Royalties: shall, subject to setoff, adjustment or credit in accordance with Paragraph 5.1(c) above, be payable in an amount equal to: (i) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) for the first [CONFIDENTIAL TREATMENT REQUESTED] Dollars in NET SALES; then (ii) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of the next [CONFIDENTIAL TREATMENT REQUESTED] Dollars in NET SALES; and then (iii) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of NET SALES over [CONFIDENTIAL TREATMENT REQUESTED] Dollars; for PRODUCTS manufactured, used, leased or sold by LICENSEE its sublicensees, or by others on their behalf. e. In addition to RUNNING ROYALTIES, [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of other payments, including, but not limited to, sublicense issue fees, up-front fees, and milestone fees, received by LICENSEE from sublicensees in consideration for the right to utilize the licenses granted hereunder and sell the PRODUCTS. 5.2 All payments due hereunder shall be paid in full, without deduction of taxes or other fees which may be imposed by any government, except as otherwise provided in Paragraph 1.6(b). 5.3 No multiple royalties shall be payable because any PRODUCT, its importation, manufacture, use, lease, offer for sale or sale are or shall be covered by more than one claim, patent application or patent licensed under this Agreement. 5.4 Royalty payments shall be paid in United States dollars to CRONKS' address in Paragraph 13, or at such other place CRONKS may reasonably designate consistent with the laws and regulations controlling in any foreign country. If any currency conversion shall be required in connection with the payment of royalties hereunder, such conversion shall be made by using the exchange rate as published in the Wall Street Journal on the last business day of the CONTRACT QUARTER to which such royalty payments relate. 5.5 In the event PATENT RIGHTS are invalidated or declared unenforceable by a court or patent office of competent jurisdiction in any country where they existed, LICENSEE shall pay a RUNNING ROYALTY of only [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of NET SALES for products sold, made or imported into said jurisdiction, for a period of two (2) years from the date said decision becomes final, or unappealable, which products would have been, but for the unfavorable decision, PRODUCTS. Such payments shall be in consideration of CRONKS' KNOW HOW only. 6 - REPORTS AND RECORDS 6.1 LICENSEE shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to CRONKS hereunder. Said books of account shall be kept at LICENSEE's principal place of business or the principal place of business of the appropriate division of LICENSEE to which this Agreement relates. Said books and the supporting data shall be open at all reasonable times for three (3) years following the end of the calendar year to which they pertain to the reasonable inspection of CRONKS or their agents, which shall in no event be more than twice in a calendar year, for the purpose of verifying LICENSEE's royalty calculations or compliance in other respects with this Agreement. Should such inspection lead to the discovery of a greater than five percent (5%) discrepancy in reporting of RUNNING ROYALTIES to CRONKS' detriment, LICENSEE agrees to pay the reasonable cost of the inspection which resulted in the discovery of the discrepancy, plus interest as required under Paragraph 6.4. 6.2 All royalties due CRONKS from LICENSEE under this Agreement shall be payable on a CONTRACT QUARTERLY basis. Within forty-five (45) days after the end of each CONTRACT QUARTER during the term of this Agreement, LICENSEE shall pay CRONKS the royalties due in accordance with Paragraphs 5.1(c) and 5.1(d). LICENSEE shall simultaneously deliver with the payment of the royalties due to CRONKS true and accurate reports, giving such particulars to the business conducted by LICENSEE and its sublicensees under this Agreement as shall be pertinent to a royalty accounting hereunder. These reports shall include at least the following: a. number of PRODUCTS manufactured and/or sold by or for LICENSEE and all sublicensees; b. total invoiced dollar amount for PRODUCTS manufactured and/or sold by or for LICENSEE and all sublicensees; c. accounting for NET SALES, noting the deductions applicable as provided in Paragraph 1.6; d. RUNNING ROYALTIES less any applicable MINIMUM ROYALTIES previously paid, due under Paragraph 5.1(c); e. royalties due on other payments from sublicensees under Paragraph 5.1(e); f. total royalties due; and g. names and addresses of all sublicensees, if any, of LICENSEE. 6.3 If no RUNNING ROYALTIES shall be due under this Agreement, LICENSEE shall so report. 6.4 Royalty and other payments set forth in Article 5 and amounts due under Article 7 shall, if overdue, bear interest until payment at a per annum rate two percent (2%) above the prime rate as published in the Wall Street Journal on the due date. The payment of such interest shall not foreclose CRONKS from exercising any other rights they may have as a consequence of the lateness of any payment. 7 - PATENT PROSECUTION 7.1 CRONKS shall apply for, seek prompt issuance of, and maintain the PATENT RIGHTS through their choice of law firm during the term of this Agreement. Appendix B is a list of the foreign countries in which patent applications corresponding to the United States Patent applications listed in Appendix A shall be filed. Appendix B may be amended by mutual agreement of both parties. The filing, prosecution and maintenance of all PATENT RIGHTS applications and patents shall be the primary responsibility of CRONKS and their law firm; provided, however, LICENSEE and its counsel shall have reasonable opportunities to advise CRONKS and shall cooperate with CRONKS in such filing, prosecution and maintenance. LICENSEE shall have the right to terminate any such patent counsel retained by CRONKS if LICENSEE has a reasonable basis for not being satisfied with such counsel's efforts, and in such event CRONKS shall select a new patent counsel (which counsel is subject to the reasonable consent of LICENSEE). 7.2 Payment of all fees and costs relating to the filing, prosecution and maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE. LICENSEE shall pay such fees and costs to CRONKS choice of law firm within thirty (30) days of invoicing from said law firm; late payments shall accrue interest and shall be subject to Paragraph 6.4. 8 - INFRINGEMENT 8.1 LICENSEE shall inform CRONKS, and CRONKS shall inform LICENSEE promptly in writing of any alleged infringement of the PATENT RIGHTS or other intellectual property rights with respect to which LICENSEE is granted a license hereunder by a third party and of any available evidence thereof. 8.2 Upon reasonable request by CRONKS or in LICENSEE's own discretion, LICENSEE shall, at its sole expense, initiate and thereafter diligently maintain reasonable efforts to prevent and abate any infringement of the PATENT RIGHTS or other intellectual property rights with respect to which LICENSEE is granted a license hereunder, including, without limitation, the initiation of an appropriate civil action for infringement and the taking of such other action as may be necessary or appropriate ("ABATEMENT EFFORTS"). In furtherance thereof, CRONKS hereby agree that LICENSEE may join CRONKS as a party plaintiff in any suit, without expense to CRONKS. LICENSEE shall indemnify CRONKS against any order for costs or legal fees that may be made against CRONKS in such proceedings. In the event that LICENSEE shall undertake the enforcement and/or defense of the PATENT RIGHTS or other intellectual property rights licensed hereunder, LICENSEE shall receive the full benefits of any action it takes pursuant to this Paragraph, including retaining all sums recovered in any suit or in settlement thereof after paying CRONKS the RUNNING ROYALTIES which shall be calculated from the amount of NET SALES, if any, asserted by LICENSEE to support any award of compensatory damages (as opposed to punitive or any other damages). In connection with the foregoing, the amount of damages awarded and received by LICENSEE on account of such infringer's sales shall be added to LICENSEE's NET SALES and paid in the CONTRACT QUARTER in which such sums are received by LICENSEE or within forty-five (45) days after the expiration of such CONTRACT QUARTER. 8.3 A refusal by LICENSEE to undertake ABATEMENT EFFORTS within ninety (90) days of a reasonable request made by CRONKS in accordance with Paragraph 8.2 above, or to consent to allowing CRONKS to undertake such ABATEMENT EFFORTS, shall constitute a material breach of this Agreement and be grounds for termination by CRONKS in accordance with Paragraph 12.3 unless LICENSEE provides CRONKS with a reasonable business justification for its refusal in writing within said ninety (90) day period, which justification is acceptable to CRONKS. Any disagreement regarding this Paragraph 8.3 shall be subject to the dispute resolution provisions of Article 11. 8.4 In the event that a declaratory judgment action or defense alleging invalidity of any of the PATENT RIGHTS shall be brought against LICENSEE, CRONKS, at their option, shall have the right but not the obligation, within thirty (30) days after commencement of such action, to intervene at their sole expense. 8.5 In any infringement which may be instituted by LICENSEE to enforce the PATENT RIGHTS or other intellectual property rights licensed pursuant to this Agreement, CRONKS shall, at the request and expense of LICENSEE, cooperate in all respects and testify if requested and make available relevant records, papers, information, samples, specimens, and the like. 9 - INDEMNIFICATION AND INSURANCE 9.1 LICENSEE shall at all times during the term of this Agreement and thereafter, indemnify, defend and hold CRONKS harmless from and against all claims, costs, proceedings, demands, judgments and liabilities of any kind whatsoever, including legal expenses and reasonable attorneys' fees, arising out of the death of or injury to any person or persons or out of any damage to property, resulting from the production, manufacture, sale, use lease, consumption or advertisement of the PRODUCTS. 9.2 CRONKS shall, jointly and severally, at all times during the term of this Agreement and thereafter, indemnify, defend and hold LICENSEE harmless from and against all claims, costs, proceedings, demands, judgments and liabilities of any kind whatsoever, including legal expenses and reasonable attorneys' fees ("CLAIMS"), arising out of the breach by CRONKS of any of their representations and warranties under Paragraphs 3.1 and 3.3 of this Agreement. Except for LICENSEE's remedy at equity for specific performance, CRONKS' liability under this Paragraph 9.2 for CLAIMS arising out of a breach by CRONKS of all representations and warranties under this Agreement other than those set forth in Paragraph 3.1 and 3.3 shall be limited to Ten Thousand Dollars ($10,000). Except as otherwise expressly set forth in this Agreement, CRONKS make no representations and extend no warranties of any kind, either express or implied. 9.3 LICENSEE shall obtain and carry in full force and effect commercial, general liability insurance in amounts which shall protect LICENSEE and CRONKS with respect to events covered by Paragraph 9.1 above. Such insurance shall be written by a reputable insurance company and shall list CRONKS as an additional insured thereunder throughout the term of this Agreement. 10 - ASSIGNMENT 10.1 LICENSEE may assign any and all rights granted hereunder to any third party ("ASSIGNEE") upon providing CRONKS with at least thirty (30) days prior written notice. 11 - DISPUTE RESOLUTION 11.1 Except for the right of either party to apply to a court of competent jurisdiction for a temporary restraining order, a preliminary injunction, or other equitable relief to preserve the status quo or prevent irreparable harm, any and all claims, disputes or controversies arising under, out of, or in connection with the Agreement, including any dispute relating to patent enforcement, validity or infringement, which the parties shall be unable to resolve within sixty (60) days shall be mediated in good faith. The party raising such dispute shall promptly advise the other party of such claim, dispute or controversy in a writing which describes in reasonable detail the nature of such dispute. By not later than five (5) business days after the recipient has received such notice of dispute, each party shall have selected for itself a representative who shall have the authority to bind such party, and shall additionally have advised the other party in writing of the name and title of such representative. By not later than ten (10) business days after such notice of dispute, the party against whom the dispute shall be raised, shall select a mediation firm either in the area of their principal residence (in the case of CRONKS) or in the area of its principal place of business (in the case of LICENSEE) and such representatives shall schedule a date with such firm for a mediation hearing. The parties shall enter into good faith mediation and shall pay their own expenses, and shall share the costs and expenses of the mediator equally. 11.2 If the representatives of the parties have not been able to resolve the dispute within fifteen (15) business days after such mediation hearing, then any and all claims or controversies arising under, out of, or in connection with this Agreement, including any dispute relating to patent validity or infringement, shall be resolved by final and binding arbitration to be held in Philadelphia, Pennsylvania, in the event that the dispute is raised or initiated by LICENSEE against CRONKS, or held in Minneapolis, Minnesota, in the event that the dispute is raised or initiated by CRONKS against LICENSEE, in either case using a single neutral arbitrator, acceptable to both parties, but otherwise employing the rules of the American Arbitration Association, or the Patent Arbitration Rules if applicable, then prevailing. The arbitrator shall in all cases and for all purposes apply the law set forth in Paragraph 14.1 and have no power to add to, subtract from or modify any of the terms or conditions of this Agreement, nor to award punitive damages. Any award rendered in such arbitration may be enforced by either party in all state or federal courts located in Pennsylvania or in Minnesota to whose jurisdiction and venue for such purposes CRONKS and LICENSEE each hereby irrevocably consent and submit. 11.3 Notwithstanding the foregoing, nothing in this Article shall be construed to waive any rights or timely performance of any obligations existing under this Agreement. 12 - TERMINATION 12.1 If LICENSEE shall cease to carry on its business, or enters into bankruptcy voluntarily or involuntarily, this Agreement shall terminate upon written notice by CRONKS. 12.2 Should LICENSEE fail to make any payment whatsoever due and payable to CRONKS hereunder, CRONKS shall have the right to terminate this Agreement effective on thirty (30) days' written notice, unless LICENSEE shall make all such payments to CRONKS within said thirty (30) day period. Upon the expiration of the thirty (30) day period, if LICENSEE shall not have made all such payments to CRONKS, the rights, privileges and license granted hereunder shall automatically terminate. 12.3 Upon any material breach or default of this Agreement by LICENSEE (including, but not limited to, breach or default under Paragraph 4.3), other than those occurrences set out in Paragraphs 12.1 and 12.2 hereinabove, which shall always take precedence in that order over any material breach or default referred to in this Paragraph 12.3, CRONKS shall have the right to terminate this Agreement and the rights, privileges and license granted hereunder effective on ninety (90) days' written notice to LICENSEE. Such termination shall become automatically effective unless LICENSEE shall have cured any such material breach or default prior to the expiration of the ninety (90) day period. 12.4 LICENSEE may in its sole discretion terminate this Agreement at any time, for any reason, by giving CRONKS at least sixty (60) days prior written notice in which event such license shall terminated upon the effective date stated in any such notice; provided, however, that LICENSEE shall, except as otherwise set forth in and contemplated by Paragraph 12.5 below, do all of the following: (a) Cease making, using, selling, offering for sale, and importing all PRODUCTS; (b) Cancel and terminate all sublicense agreements between LICENSEE and all of LICENSEE's sublicensees; and (c) Render all required payments of fees, and earned royalties, and MINIMUM ROYALTIES to CRONKS. 12.5 Upon termination of this Agreement by LICENSEE in accordance with Paragraph 12.4, LICENSEE and any sublicensee thereof may, for a period of one (1) year after the effective date of such termination, sell all PRODUCTS, and complete the PRODUCTS in the process of manufacture at the time of such termination or for which a written contract exists for the purchase of material or for the sale of the PRODUCTS, and sell the same, provided that LICENSEE shall make the payments to CRONKS as required by Paragraph 5, 7 or 8 of this Agreement and shall submit the reports required by Paragraph 6 hereof. 12.6 Upon termination of this Agreement for any reason, nothing herein shall be construed to release either party from any obligation that matured prior to the effective date of such termination; and Paragraphs 1, 6, 9, 10, 11, 12.5, 12.6 and 14 shall survive any such termination. 12.7 Upon termination of this Agreement for any reason, any sublicensee not then in default shall have the right to seek a license from CRONKS and CRONKS agree to negotiate such licenses in good faith under reasonable terms and conditions. 13 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS 13.1 Any payments, notices or other communications pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by first class mail, addressed to it at its address below, or as it shall otherwise designate by written notice given to the other party: In the case of CRONKS: Peter Cronk [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED] In the case of LICENSEE: Daniel E. Cohen, M.D. Chairman and Chief Executive Officer CNS, Inc. 4400 West 78th Street Minneapolis, Minnesota 55435 With a copy to: Patrick Delaney, Esq. Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis, Minnesota 55402 14 - MISCELLANEOUS PROVISIONS 14.1 All disputes arising out of or related to this Agreement, or the performance, enforcement, breach or termination hereof, and any remedies relating thereto, shall be construed, governed, interpreted and applied in accordance with the internal laws of the State of Minnesota U.S.A., (without regard to the laws of conflicts), except that questions affecting the construction and effect of any patent outside the United States shall be determined by the law of the country in which the patent shall have been granted. 14.2 The parties hereto acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument signed by the parties. 14.3 The provisions of this Agreement are severable, and in the event that any provisions of this Agreement shall be determined to be invalid or unenforceable under any controlling body of the law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 14.4 LICENSEE agrees to mark the PRODUCTS sold in the United States with the applicable United States patent numbers. All PRODUCTS shipped to or sold in other countries shall be marked in such a manner as to conform with the patent laws and practice of the country of manufacture or sale. 14.5 The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party. 14.6 Neither party shall be responsible for any delay or failure in the performance of any obligation hereunder due to strikes, lockouts, fires, floods, acts of God, embargoes, wars, riots, or act or order of any government or governmental agency; provided, however, that nothing set forth in this Paragraph 14.6 shall be construed to relieve LICENSEE of the requirement that it pay MINIMUM ROYALTIES hereunder. IN WITNESS WHEREOF, the parties have duly executed this Agreement the day and year set forth below. for: CRONKS for: CNS, Inc. By: By Peter Cronk Daniel E. Cohen, M.D. Chairman and Chief Executive Officer Date: Date: By: Kristen Cronk Date: APPENDIX A PATENT RIGHTS on the EFFECTIVE DATE UNITED STATES PATENT RIGHTS U.S. Patent No. 5,706,800, issued January 13, 1998 and entitled "Medical Nasal Dilator" U.S. Patent Application Serial No. 08/942,797 filed on October 2, 1997, and entitled "Improved Medicated Nasal Dilator" U.S. Patent Application Serial No. 09/099,825 filed on June 18, 1998, and entitled, "Adhesively Applied External Nasal Strips and Dilators Containing Medications and Fragrances". FOREIGN PATENT RIGHTS Non-PCT South African Patent Application Serial No. 98/0144, filed on January 8, 1998, and entitled "Medicated Nasal Dilator". PCT PCT Application Serial No. US98/01513, filed on January 28, 1998, and entitled "Medical Nasal Dilator" (designating Europe, China, Canada, Brazil, Australia, Japan). APPENDIX B PCT DESIGNATED FOREIGN COUNTRIES Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and maintained in accordance with Article 7: 1. Europe: Italy, Portugal, United Kingdom, Germany, Spain and France; 2. Canada; 3. Brazil; 4. Australia; 5. China; and 6. Japan. EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES CNS International, Inc. CNS FSC, Inc. EX-23.1 8 INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors CNS, Inc. We consent to incorporation by reference in the registration statements Nos. 333-60017, 33-29454, 33-42971 and 33-59719 on Form S-8 of CNS, Inc. of our report dated January 20, 2000, relating to the consolidated balance sheets of CNS, Inc. and subsidiaries as of December 31, 1999, and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, which report is included in the December 31, 1999, annual report on Form 10-K of CNS, Inc. /s/ KMPG LLP Minneapolis, Minnesota March 28, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 859,852 37,997,409 11,369,815 0 4,905,449 61,935,669 3,738,059 1,728,000 65,336,835 11,752,761 0 0 0 192,946 53,391,128 65,336,835 46,050,208 46,050,208 18,358,435 46,387,608 0 0 0 (15,857,489) (2,101,138) (13,756,351) 0 0 0 (13,756,351) (.89) (.89)

~~-----END PRIVACY-ENHANCED MESSAGE-----~~