-----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, QxLNMMHkwpA21Xwm4dyq/tlFLVoWguWxQ/sbxmb/pZFtnljK3OBHcf7qrMKLR7Ed nX8WBI9j4svAYMCnXT8Dlg== 0000897101-04-001140.txt : 20040614 0000897101-04-001140.hdr.sgml : 20040611 20040614171648 ACCESSION NUMBER: 0000897101-04-001140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040614 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: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16612 FILM NUMBER: 04862218 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 cns042906_10k.htm CNS, Inc. Form 10-K dated March 31, 2004

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

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

For the fiscal year ended March 31, 2004

OR

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		41-1580270
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

7615 Smetana Lane
Eden Prairie, MN 55344
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (952) 229-1500

Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:

Title of each class
Common Stock, par value of $.01 per share
Preferred Stock purchase rights

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

As of March 31, 2004, the aggregate market value of the Company’s Common Stock held by non-affiliates is $141,098,952, computed by reference to the closing sales price of the Company’s Common Stock of $11.01 on September 30, 2003, the last business day of the Company’s most recently completed second fiscal quarter.

Indicated by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): YES X No

As of June 4, 2004, the Company had outstanding 13,845,743 shares of Common Stock of $.01 par value per share.

Documents Incorporated by Reference: Portions of the Company’s Proxy Statement for its Annual Meeting of Stockholders to be held on August 25, 2004, are incorporated by reference into Part III of this Form 10-K.

		Page
PART I
Item 1.	Business	3
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters
	and Issuer Repurchases of Securities	15
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 8.	Financial Statements and Supplementary Data	30
Item 9.	Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure	30
Item 9A.	Controls and Procedures	30
PART III
Item 10.	Directors and Executive Officers of the Registrant	31
Item 11.	Executive Compensation	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	32
Item 13.	Certain Relationships and Related Transactions	32
Item 14.	Principal Accountant Fees and Services	32
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	33
SIGNATURES		34
EXHIBIT INDEX		36
INDEX TO FINANCIAL STATEMENTS		F-1

PART I

Item 1. BUSINESS

General

CNS, Inc. (the “Company”) is in the business of developing and marketing consumer health care products, including Breathe Right® nasal strips, Breath Right Snore Relief™ throat spray, Breathe Right Vapor Shot!™ personal vaporizer and FiberChoice® chewable fiber tablets. The Company focuses on products that address important consumer needs within the aging well/self care market, including better breathing and digestive health.

The Company’s principal product, the Breathe Right nasal strip, improves breathing by reducing nasal airflow resistance. Nasal strips provide temporary relief from nasal congestion, reduce snoring and reduce breathing difficulties due to a deviated nasal septum. Breathe Right nasal strips, and the entire Breathe Right product line, provide “drug free” solutions to these consumer conditions.

The Company further extended the Breathe Right brand in fiscal 2003 by launching Breathe Right Snore Relief throat spray. Snore Relief spray works by lubricating and soothing dry throats, while a natural astringent firms loose throat tissue to reduce the vibrations that cause snoring. Breathe Right nasal strips are also an effective snoring treatment. Nasal strips work by opening nasal passages and thereby reducing mouth breathing that leads to snoring. These two product lines provide a portfolio of solutions for snoring.

In fiscal 2004, the Company launched Breathe Right Vapor Shot!™ personal vaporizer. Vapor Shot! is a drug-free convenient personal vaporizer designed to relieve day-time congestion related to colds, flu and allergies. This product builds on the existing line of Breathe Right mentholated vapor strips, which are primarily used to relieve night-time congestion.

The Company introduced its FiberChoice® chewable fiber tablets in March, 2000. The FiberChoice product is a 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® and FiberChoice brands and introducing other new products, the Company is exploring possibilities for acquiring or licensing new consumer health care products that have established consumer brands, particularly those that complement the Company’s drug-free, better breathing and digestive health platforms. The Company is also considering opportunities for licensing new products and technologies.

On January 23, 2002, the Company implemented a fiscal year-end change from December 31 of each year to March 31 of each year. The change in its fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cold/flu season within the same fiscal year.

Management

The Company’s management structure is organized into strategic business teams to expand the Breathe Right and Fiber-Choice brands and to develop and launch new products: Breathe Right Brand Team; FiberChoice Team; International Team and New Business Development Team. The Company believes that its team focus and organization model enables the Company to more effectively implement its business strategies.

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 and other products that carry 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 branded products.

FiberChoice Team. The FiberChoice Team is responsible for the strategic development and management of the FiberChoice fiber supplement business including new product development related to the “digestive health” product platform. The Company introduced FiberChoice® chewable fiber tablets in March, 2000.

International Team. The International Team is responsible for developing and managing the Company’s overseas markets and its relationships with international distributors and representatives. The Company began shipping Breathe Right® nasal strips to new distributor partners in Europe, Australia and Japan during 2000. The international team is focused on continued development of nasal strips in existing country markets, as well as the future introduction of selected Breathe Right new products within international markets, and further geographic expansion over time into new country markets that present meaningful opportunities.

New Business Development Team. The New Business Development Team is focused on the expansion of the Company’s product base through the development, acquisition or licensing of promising consumer health care products. The New 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 established product lines and brands that may become the basis for a third brand platform.

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.” Breathe Right nasal strips come in tan, clear, mentholated and stars-for-kids varieties.

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 drugs, thereby avoiding any medicinal side effects. The Breathe Right nasal strip is offered in three sizes (kids, small/medium and large) to accommodate the range of nose sizes. The Breathe Right nasal strip is packaged for the consumer market in various quantities ranging between 8 to 38 strips per box. The Company believes that the Breathe Right nasal strips are priced competitively compared to medicinal decongestants with retail prices ranging between $3.99 and $14.99 per box.

The Company expanded the Breathe Right nasal strip line with the introduction of Breathe Right nasal strips with mentholated vapors and Breathe Right nasal strip for kids in 2000. The mentholated vapor strip uses traditional Breathe Right strip technology but contains a soothing mentholated aroma for additional relief. The Company believes that its mentholated vapor strip product has increased the Company’s customer base for nasal strip products by more clearly communicating that Breathe Right nasal strips can reduce nasal congestion. In fiscal 2004, the Company will increase advertising and promotion of its clear nasal strip, as a good solution for consumers with dry or sensitive skin types.

Other Breathe Right Brand Products. Breathe Right Snore Relief™ throat spray is a drug-free product that addresses a different cause of snoring than nasal strips by lubricating and soothing dry throats while a natural astringent firms loose tissues to reduce the vibrations that produce snoring. This product leverages the Company’s existing position in the better breathing/snoring product category and complements existing Breathe Right® product offerings. Breathe Right VaporShot! personal vaporizer works by dropping an effervescent tablet into hot water in the customized VaporShot! cup which delivers an intense shot of mentholated vapors that instantly provides soothing comfort for your nose. This product leverages the Company’s line of Breathe Right mentholated vapor strips for colds. 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.

FiberChoice® Chewable Fiber Tablets. FiberChoice is an orange-flavored, chewable tablet that offers consumers an effective, convenient, good-tasting way to supplement their daily intake of dietary fiber. Two tablets contain four grams of fiber and provide more than twice the amount of fiber per dose versus other convenient fiber supplements. The active ingredient in FiberChoice tablets is inulin, a natural fiber source. Inulin is also a prebiotic that helps promote the growth of healthy intestinal tract bacteria. FiberChoice tablets can be taken without water and have been clinically proven to be as effective as powder alternatives. The product is available in both regular and sugar-free varieties and is packaged in 90-count and 36-count bottles and 10-count tubes.

Markets

Breathe Right Brand Product Line. The Breathe Right brand of products includes Breathe Right nasal strip, Breathe Right Snore Relief throat spray, Breathe Right Vapor Shot! personal vaporizer and Breathe Right saline nasal spray. The Company intends to continue expanding the Breathe Right brand with the introduction of additional products within the better breathing product category.

Air impedance in the nose accounts for approximately one-half of the total airway resistance involved in the respiratory system. 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 nasal problems such as deviated septa are 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 especially during the cold/flu season. Consumers suffering from these conditions are currently the primary users of the Company’s Breathe Right products and are the main targets of its advertising.

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. Most 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 Breathe Right nasal strips are often used as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral decongestants). This broad cold/flu/allergy market represents significant potential for the Breathe Right brand. In 1999, the Company commenced marketing efforts aimed at repositioning the Breathe Right nasal strip as well as the Breathe Right brand as a product that provides relief for the common cold. This repositioning as a product for colds was reinforced by the introduction of Breathe Right mentholated vapor strips and Breathe Right Vapor Shot! personal vaporizer.

•

Snoring Relief. Based on results from clinical trials, Breathe Right products were effective in reducing snoring in approximately 85% of the participants. 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.

•

Athletic Market. The Company believes that Breathe Right nasal strips make nasal breathing more comfortable and may improve endurance during athletic activity, particularly when a mouth guard is used. An exercise physiology study published in peer-reviewed medical literature in 1997 concluded that Breathe Right nasal strips provided physiologic advantages in ventilation and heart rate during mid-level exercise. Other exercise physiology studies have been conducted and add to the substantiation of the positive effects of Breathe Right nasal strips during exercise. The Company retains the services of selected athletes to endorse Breathe Right nasal strips to increase the visibility of the product, which leads to greater awareness of the product and the Breathe Right brand.

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 $340 million in U.S. retail sales. The Company believes this is an attractive product category due to the aging of the baby-boomer generation. 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. Baby boomers are generally more active and demanding than their parents. These consumers search for solutions that do not hamper their active lifestyles. Additionally, most Americans only get 10-15 grams of fiber a day, while dietary experts recommend 25-30 grams daily. Two FiberChoice tablets provide four grams of fiber per dose and can be taken with or without water. The Company believes that its FiberChoice chewable fiber tablet represents a solution as an effective, convenient and good-tasting alternative for supplementing dietary fiber intake.

Growth Strategies

Marketing Campaigns for Breathe Right® Nasal Strips. The Company’s marketing efforts for Breathe Right products are directed to different consumer markets — the nasal congestion market and the snoring market. The Company has primarily used television advertising to market its products. The Company’s advertising focuses on the Breathe Right brand benefits of providing instant, drug-free relief from nasal congestion and snoring. The Company also uses product promotion programs, such as sampling, coupons and public relations activities to encourage product trial and repeat purchases. Marketing communications are generally designed to promote trial of Breathe Right brand products by increasing consumer awareness of the benefits of each product.

Marketing efforts for Breathe Right nasal strips as an aid in the prevention of snoring have also included direct mail sampling and sampling through direct response television. In both programs, self-identified snorers were sent a sample of Breathe Right nasal strips along with a brochure explaining the causes of snoring and how the Company’s Breathe Right products can alleviate the condition.

In fiscal year 2005, the Company intends to build its Breathe Right brand by focusing its marketing efforts on the relaunch of clear nasal strips and on building additional awareness and trial of Breathe Right VaporShot! and mentholated vapor nasal strips.

Marketing Campaigns for FiberChoice® Chewable Fiber Tablets. The Company’s marketing efforts for FiberChoice tablets are directed toward all consumers who do not get the recommended amount of fiber in their diet. In 2002, the Company tested a new advertisement in four markets that simply states that busy people usually do not get the fiber they need from their diets and that FiberChoice tablets offer at least twice as much fiber per dose than any other convenient fiber supplement. During fiscal 2003, the Company expanded its successful four-market advertising test to thirteen markets. The Company broadened the FiberChoice brand marketing efforts to 68% of the United States in fiscal 2004 with strong results.

Increasing Product Trial and Frequency of 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 and repeat purchases of its products.

Developing New Products. The Company believes that the Breathe Right and FiberChoice brand names are two of the Company’s most valuable assets and intends to leverage these assets by future introduction of new products.

The Company is focused on the future expansion of its product lines through the acquisition and development of unique consumer health care products and technologies that have good market potential, particularly those that complement the Company’s drug-free, better breathing platform or digestive health platform. 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.

Developing Domestic Distribution. Breathe Right® and FiberChoice products are sold to mass merchandise stores, drug stores, grocery stores, warehouse clubs, military base stores and on-line retailers in the United States. The Company sells its products through a direct sales force that concentrates on serving certain key retail accounts as well as through sales representatives referred to in the industry as brokers.

Breathe Right nasal strips are typically positioned in the cough, cold and allergy sections of stores because they provide benefits similar to those obtained with other decongestant products. Breathe Right saline nasal spray is also usually positioned in the same section of the store as Breathe Right nasal strips since the products are typically used by those suffering from congestion, allergies and colds. Breathe Right Snore Relief throat spray and Breathe Right Vapor Shot! personal vaporizer are also usually positioned in the cold/flu section of stores, adjacent to Breathe Right nasal strips. FiberChoice chewable tablets are positioned in the bulk fiber and laxative sections of stores.

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, Kroger and Albertson’s and warehouse clubs such as Sam’s Club and Costco, as well as regional and independent stores in the retail channels. In fiscal 2004, Wal-Mart accounted for approximately 26% 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 Company’s products or result in a loss of revenue.

Expanding Company Presence in International Markets. The Company believes that there is significant market potential for its products outside the United States. The Company devotes significant resources to the development of its international business. The Company is considering additional distributors and representatives for distribution of its nasal strip products in additional international markets. The Company believes that the network that it has established 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. The Company is currently testing FiberChoice in selected international markets.

From August of 1995 through September of 1999, The 3M Company (“3M”) was the exclusive distributor of the Company’s Breathe Right nasal strip products outside the United States and Canada. The contractual relationship with 3M produced lower than anticipated results in international markets. The Company believed that international markets required 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 enabled the Company to take a direct and immediate role in the sale, marketing and distribution of its nasal strip products in international markets. As part of the agreement, 3M also agreed not to sell any nasal dilator devices for a period of two years, which period ended on June 30, 2002.

In 2000, the Company established a broad-ranging international distribution system for the Breathe Right nasal strip business that consists of both sales representatives and reselling distributors. The Company has established relationships with distributors in Canada, Australia, Japan, Hong Kong and major markets in Europe. The Company is also pursuing additional distribution opportunities. Sales are supervised by the Company from its Minnesota headquarters and by CNS International, Inc., a wholly-owned domestic subsidiary with one business manager in Europe. The business manager supervises and coordinates the activities of the distributors and sales representatives in Europe. Distributors are appointed largely on an exclusive basis, with territories consisting of one or more countries, and it is expected that this pattern will continue. The Company retains control over the packaging and advertising in all territories. Most shipments are made in bulk, either to reselling distributors who package for the local market, or to warehouse facilities abroad, where final packaging is arranged by the Company directly before shipment to retailers.

Manufacturing and Operations

The Company currently subcontracts with multiple manufacturers to produce its products. The Company does no in-house product production. Each of the manufacturers makes Breathe Right and FiberChoice products to the Company’s specifications using materials specified by the Company. 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 regularly inspect the contract manufacturers to observe processes and procedures in an attempt to ensure compliance with FDA Good Manufacturing Practice Standards. Finished goods are also inspected to ensure that they meet quality requirements. 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 9001:2000/EN 46001.

To ensure consistent quality and supply, the Company has multi-year contracts with manufacturers that purchase most of the major components for the Breathe Right nasal strips directly from 3M. In 2001, the Company entered into a multi-year contract with 3M that provides for consistent supply, adherence to specifications and pricing. Although similar materials are currently available from other suppliers, the Company has historically utilized 3M components in its products. Although the Company believes that this relationship will not be disrupted or terminated, the inability to obtain sufficient quantities of these components or the need to develop alternative sources in a timely and cost-effective manner could adversely affect the Company’s operations until new sources of these components become available.

Competition

Breathe Right Nasal Strips. 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 sold over the counter, other nasal sprays and external nasal dilators, while competition in the snoring remedies market also consists primarily of nasal dilators, throat sprays, herbs, supplements and homeopathic remedies.

Although the Company is currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in September, 1998 with an external nasal dilation device. Schering Plough Corp. recently sold its nasal strip business to Aso Corp., a subsidiary of Aso International of Japan. In May 2003, Aso Corp. announced it was acquiring the marketing, sales and distribution of Schering Plough’s nasal strip device effective June 3, 2003. Other companies have also entered the nasal dilation market with private label products.

Many of the Company’s competitors 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 of these strategies and other steps taken by the Company, the Breathe Right nasal strip has maintained approximately 90% of the nasal dilator market despite the entry of other competitors into the market place.

The Company believes the patents owned and licensed by the Company on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States and most major international markets. The Company intends to aggressively enforce its patent rights covering the Breathe Right nasal strip and has engaged in litigation to protect its patent rights.

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 broader consumer markets with many alternative decongestant and sinus relief products and snoring remedies in the United States and international markets.

FiberChoice® Chewable Fiber Tablet. The market for dietary fiber supplements is highly competitive and dominated by large companies with greater resources and better established brand recognition than the Company. Competitors included Metamucil® manufactured by Proctor and Gamble, Citrucel® manufactured by GlaxoSmithKline and FiberCon® manufactured by Wyeth. The Company believes that its FiberChoice chewable fiber tablet is a unique product with significant market potential that offers consumers an effective, convenient and good-tasting alternative to existing products with more fiber per dose than any other convenient fiber supplement. The technology of the FiberChoice chewable fiber tablet is currently protected by one issued U.S. patent with other U.S. and international patents pending.

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. Nasal dilators, such as the Company’s Breathe Right strips, have been classified by the FDA as Class I devices.

Before a new medical device can be introduced into the market, the manufacturer generally must obtain FDA clearance through either a 510(k) pre-market notification or a pre-market approval application (“PMA”). A 510(k) clearance will be granted if the submitted data establish that the proposed device is “substantially equivalent” to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for PMAs. The PMA process can be expensive, uncertain and lengthy, frequently requiring from one to several years 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) pre-market notification approvals to market the Breathe Right nasal strip as a device that can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing difficulties due to a deviated nasal septum.

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 currently developing regulations for certain provisions of the DSHEA that may affect the regulation of the Company’s FiberChoice product line. However, at this time, the impact of any proposed regulation on the Company or its products is not certain.

Sales of the Company’s products outside the United States are subject to regulatory requirements that vary widely from country to country. 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 Breathe Right® nasal strips in Europe. Regulatory approvals have also been obtained for the Breathe Right nasal strip in Australia and additional approvals in other jurisdictions will be sought by the Company as needed for all of its products.

No assurance can be given that the FDA or state or foreign regulatory agencies will give on a timely basis, if at all, the requisite approvals or clearances for additional applications for the Breathe Right nasal strip or for any of the Company’s other 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, waste management and disposal, among others.

Patents, Trademarks and Proprietary Rights

The Company has registered trademarks, owns several patents and pending patent applications, and has a number of patents through licenses which are used in connection with its business. Some of these patents and licenses cover significant product formulations, methods and designs for the Company’s current and possible future products. The Company believes its trademarks are important as protection for the Company’s image in the marketplace. The Company’s success is and will continue to be dependent upon the existence of and ability to protect its patents, trademarks and those under its 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 patents and licensed patents on the basis of prior art or introduce competitive products. 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 worldwide rights to manufacture and sell the Breathe Right nasal strip in its various versions and the FiberChoice® chewable fiber tablet. Specifically, the Company has the exclusive right pursuant to those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensors’ patents issued in any country, including those that issue on pending applications. The Company is obligated to pay royalties to the licensors based on sales of the products typically including certain minimum royalty amounts in order to maintain its exclusivity.

The original 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. Seven of these patent applications have resulted in issued patents in the United States, including one with claims that cover the single-body construction of the 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 later licensor of the Breathe Right mentholated vapor strip has filed several patent applications with the U.S. Patent and Trademark Office as well as international patent offices resulting in both issued and pending applications. The Company, in addition to the patents and patent applications pending in the U.S. mentioned above, has filed corresponding patent applications 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 one issued U.S. Patent and other issued and pending international patents seeking patent protection for different aspects of this product.

Although the Company believes that its owned and licensed patents on nasal strips 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 that may be issued in the future, 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 nasal strips and its other products. In order to enforce any patents issued covering nasal strips, including 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 engaged in litigation to enforce its patent rights relating to the Breathe Right nasal strip. In 1999, the Company brought a suit in federal district court to enforce one of the licensed nasal strip patents containing the broadest claims and providing the most comprehensive protection. In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of the Company’s primary licensed patent. On September 29, 2000, the Patent Office issued an Office Action in Reexamination and rejected certain of the claims. Other claims that were not subject to reexamination remain in effect. The Company has joined the licensor in the exercise of its right to contest the action of the Patent Office and has provided reasons that it believes establish that the claims should not have been rejected. The Company and its licensor are also seeking to amend certain claims to provide the Company with additional protection under the patent. The final outcome of the reexamination by the Patent Office is therefore uncertain. Although an adverse ruling from the Patent Office would narrow the protection available for nasal dilators and limit the breadth of the Company’s patent protection, the Company believes that its current portfolio of both pending patent applications and newly issued patents will enable it to maintain significant patent protection for its nasal strip products.

The Company has registered its Breathe Right and FiberChoice trademarks in the United States and in several foreign countries and is seeking further registration of those trademarks and other trademarks.

Employees

At June 11, 2004, the Company had 54 full-time employees and 3 part-time employees, of whom 15 were engaged in operations, 21 in general administration, and 21 in marketing and sales. 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 current 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 (51)		Chairman of the Board and Director

Marti Morfitt (46)		President, Chief Executive Officer and Director

Samuel Reinkensmeyer (43)		Vice President of Finance and Chief Financial Officer

John J. Keppeler (42)		Vice President of Worldwide Sales

Linda Kollofski (51)		Vice President of Marketing

Larry R. Muma (53)		Vice President of Operations

Carol J. Watzke (56)		Vice President of Consumer Strategy

Daniel E. Cohen has served as the Company’s Chairman of the Board since 1993 and has served as a director of the Company since its formation in 1982. Mr. Cohen also served as the Company’s Chief Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.

Marti Morfitt has served as the Company’s President and Chief Executive Officer since June 2001 and its President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has served as a director of the Company since 1998. From September 1982 to February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems.

Samuel Reinkensmeyer has served as the Company’s Chief Financial Officer since October 14, 2003. From March 2000 until joining the Company, Mr. Reinkensmeyer was employed by ValueVision Media Inc., a television and Internet retailer which owns and operates ShopNBC and ShopNBC.com serving most recently as its Senior Vice President of Finance and Investor Relations. From August 1988 to February 2000, he served in various financial positions at The Pillsbury Company, most recently as Finance Director, Pillsbury North America. Previously, Mr. Reinkensmeyer worked for Citicorp and PriceWaterhouse.

John J. Keppeler has served as the Company’s Vice President of Worldwide Sales since August of 1999 and has served as the Company’s Vice President of Sales from 1998 to 1999. From November of 1986 to June of 1998, Mr. Keppeler served in a series of sales and customer marketing positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving as Director of Category & Customer Development for the Green Giant and Progresso Business.

Linda Kollofski has served as the Company’s Vice President of Domestic Marketing since February of 2004 and as Vice President of New Business Development from November of 2002 to January of 2004. Prior to joining the Company in 2002, Ms. Kollofski was principal of Linda K. Consulting, Inc. from October of 1994 to October of 2002. Ms. Kollofski provided marketing expertise to various Pillsbury brands including Haagen-Daz, Totino’s and Green Giant as well as to Telex Communications, Hazeldon Foundation publishing business and the Company’s FiberChoice brand. Previously, Ms. Kollofski served in senior marketing and new business development positions with the Hazeldon Foundation, Dow Brands, Pillsbury and Munsingwear.

Larry R. Muma has served as the Company’s Vice President of Operations since January of 2001. From May of 2000 to December of 2000, Mr. Muma served as Director of Supply Chain for Novartis, Inc., a worldwide manufacturer and distributor of health care and pharmaceutical products. From February of 1992 to April of 2000, Mr. Muma served in various operations positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, serving from February 1994 to April of 1999 as Vice President of Operations for Pillsbury North America and most recently from April of 1999 to April of 2000 as Vice President of Operations Frozen Division.

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 73,000 square feet of office and warehouse space in Eden Prairie, Minnesota. The lease expires in November of 2010 and contains a renewal option. Monthly payments on the lease are $61,766.

Item 3. LEGAL PROCEEDINGS

On February 18, 2004, the Company, together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to the Company. The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the asserted patents are invalid and not infringed and asks for its attorneys’ fees and costs. CNS quickly sought a preliminary injunction forbidding Silver Eagle from making, using or selling or offering the infringing dilator for sale, which the Court denied. The matter, which will now proceed to trial, is in the discovery stage.

Additionally, from time to time, the Company may become a party to litigation and subject to claims incident to the ordinary course of business.

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

None.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 which cover the Company’s fiscal years ending March 31, 2004 and 2003.


Fiscal Year Ended March 31, 2004	High	Low
Quarter Ended March 31, 2004	14.49	9.91
Quarter Ended December 31, 2003	13.70	11.02
Quarter Ended September 30, 2003	11.72	8.52
Quarter Ended June 30, 2003	8.92	6.25
Fiscal Year Ended March 31, 2003	High	Low
Quarter Ended March 31, 2003	7.19	5.87
Quarter Ended December 31, 2002	6.79	5.08
Quarter Ended September 30, 2002	6.15	5.00
Quarter Ended June 30, 2002	7.11	5.54

On June 4, 2004, the last sale price of the Common Stock was $10.20 per share.

Shareholders

As of June 4, 2004, there were approximately 600 owners of record of the Company’s Common Stock.

Dividends

The Company paid three quarterly dividends of $.04 per share of Common Stock during fiscal 2004. No dividends were paid during fiscal 2003. The payment of future dividends, if any, 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.

Information Regarding Equity Compensation Plans

The following table sets forth information regarding the Company’s equity compensation plans in effect as of March 31, 2004. Each of the Company’s equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.

Securities Authorized for Issuance under Equity Compensation Plans

Plan Category	Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of shares of common stock remaining available for future issuance under equity compensation plans
Equity compensation plans	1,887,560	$5.87	451,590
approved by stockholders:
Equity compensation plans not	-0-	-0-	-0-
approved by shareholders:
Totals	1,887,560	$5.87	451,590

The equity compensation plans approved by CNS, Inc. shareholders are the 2000 Amended Stock Option Plan, the 1994 Amended Stock Plan, the 1990 Stock Plan and the 1987 Employee Incentive Stock Option Plan. No shares remain available for future awards under any of the 1990 or 1987 Plans.

The Company also maintains a 1989 Employee Stock Purchase Plan, participation in which is available to substantially all of the Company’s employees. Participating employees may purchase the Company’s common stock at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the stock at the beginning or end of the participation period. The six-month participation period runs from January 1 to June 30 and from July 1 to December 31 each year. Employees may contribute up to 10% of their base compensation to the plan subject to certain IRS limits on stock purchases through the plan. This plan has been approved by the Company’s shareholders.

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, 1999 through March 31, 2004 have been derived from the Company’s Consolidated Financial Statements included elsewhere in this Report or previously filed with the Securities and Exchange Commission on Form 10-K, which have been audited by KPMG LLP, independent certified public accountants.

FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)

	Years ended
	Mar 31 2004		Mar 31 2003		Dec 31 2001			Dec 31 2000			Dec 31 1999
Net sales	$	86,980	$	79,075	$	76,242		$	61,777		$	38,409
Operating income (loss)		12,748		9,639		(1,225	)		(17,843	)		(18,696	)
Net income (loss)		8,547		6,516		81			(15,660	)		(13,756	)
Diluted net income (loss) per share	$	0.59	$	0.46	$	0.01		$	(1.09	)	$	(0.89	)
Working capital	$	54,900	$	45,266	$	32,712		$	32,507		$	50,183
Total assets		73,534		65,375		50,618			56,344			65,337
Stockholders' equity		58,644		49,054		36,612			36,937			53,584

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 this discussion, our fiscal years ended March 31, 2004 and 2003 and December 31, 2001 are referred to as fiscal year 2004, 2003 and 2001, respectively.

History

The Company was founded in 1982. From 1987 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. In 1995, the Company divested itself of the assets related to its sleep disorders business to focus on the Breathe Right® nasal strip.

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. The Company has also received FDA clearance to market the Breathe Right nasal strip for the reduction or elimination of snoring, for the temporary relief of nasal congestion and for the temporary relief of breathing difficulties due to a deviated nasal septum.

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 enabled the Company to regain control of the marketing, sales and distribution of Breathe Right nasal strips in international markets. In exchange for the one-time contract termination fee, the international distribution agreement with 3M terminated on June 30, 2000. During 2000, the Company established an international distribution network that consists of both sales representatives and reselling distributors and reintroduced nasal strips in Europe, Japan and Australia.

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. During 2000, the U.S. Patent and Trademark Office (“Patent Office”) reexamined the Company’s primary licensed patent and rejected certain claims. Other claims that were not subject to reexamination remain in effect. The Company has joined its licensor in the exercise of its right to contest the action of the Patent Office. The Company and its licensor have amended and are also seeking to further amend certain claims to provide the Company with additional protection under the patent. The final outcome of the reexamination is uncertain. Although an adverse ruling could narrow the range of protection available for nasal dilators and limit the breadth of the Company’s patent protection, the Company believes that its current portfolio of both pending patent applications and issued patents will enable it to maintain significant patent protection for its nasal strip products.

Beginning in 1998, the Company strengthened its management team to add consumer packaged goods and new products experience. The Company also formed teams to focus on individual product lines. The Company completed positioning research work to expand the Breathe Right® brand and developed a road map for new product development. During 1999 and 2000, the Company invested aggressively in marketing, selling and product development expenses to build the Breathe Right brand and launch additional products.

In 2000, the Company expanded its domestic Breathe Right product line to include nasal strips for colds with mentholated vapors that are sized for the entire family and nasal strips for children that are available in multiple colors. Breathe Right nasal strips for colds with mentholated vapors were introduced in selected overseas markets in 2001.

During 2000, the Company launched FiberChoice® chewable fiber tablets. The tablets are positioned in the bulk fiber category and give the Company an entry into the digestive health products market. FiberChoice chewable fiber tablets can be taken without water and have been clinically proven to be as effective as powder alternatives.

In 2001, the Company streamlined and realigned the Company’s resources to better match its strategic goals and to focus on building its core product lines. The Company recorded a special charge related to costs associated with this plan. Approximately 25% of the workforce, from throughout the organization, was eliminated. The cost savings relating to this plan were realized beginning in July of 2001.

In 2002, the Company changed its fiscal year-end from December 31 to March 31. The change in its fiscal year end aligns the Company’s financial reporting with its business and customer planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cold/flu season within the same fiscal year. The first period to be reported in 2002 was a three-month stub period ending March 31, 2002.

In fiscal 2003, the Company continued to expand its Breathe Right product line by launching Breathe Right Snore Relief^TM throat spray. Snore Relief spray lubricates and soothes dry throats, while a natural astringent firms loose tissue to reduce the vibrations that cause snoring. Breathe Right strips open nasal passages and reduce the mouth breathing that leads to snoring. These two products provide a portfolio of solutions for snoring.

Breathe Right VaporShot! personal vaporizer was introduced during fiscal 2004. This product builds on the Company’s existing line of Breathe Right mentholated vapor strips for colds. Breathe Right VaporShot! personal vaporizer is a styrofoam cup with a fitted, vapor concentrating lid. It works by dropping an effervescent tablet into hot water in the VaporShot! cup which then delivers an intense shot of mentholated vapors that instantly provides soothing comfort for your nose. This product leverages the Company’s existing position in the better breathing product category and complements existing Breathe Right product offerings.

Growth Strategy and Financial Focus

CNS designs and markets consumer health care products, including Breathe Right nasal strips, Breathe Right Snore Relief throat spray, Breathe Right Vapor Shot! Personal vaporizer and FiberChoice chewable fiber tablets. The Company’s products address consumer needs within the “better breathing” and “digestive health” segments of the consumer healthcare products market.

For the year ended March 31, 2004, a breakdown of the Company’s net sales is as follows:

	% of Net sales
Domestic Breathe Right products	73.7	%
Domestic FiberChoice products	10.7
International (primarily Breathe Right products)	14.9
Other	.7

Total sales	100.0	%

The Company’s core competency is consumer marketing and sales within the mass merchandise, drug, and food channels of retail distribution. The Company considers its product lines to be unique and differentiated relative to competing products. CNS generates strong consumer demand for its products through substantial investments in advertising and promotional campaigns, which stimulate brand and product awareness, as well as consumer trial and repeat purchases.

The Company’s financial focus is to achieve sustainable long-term growth in revenues, operating profit and operating cash flow.

Revenue. CNS is concentrating its revenue growth efforts in three areas. The first priority is the growth of the high margin Breathe Right brand, both domestically and internationally, in order to leverage the Company’s most valuable brand equity. The second priority for revenue growth is the continued development of the “digestive health” platform, anchored by the successful FiberChoice brand. The final growth priority is the acquisition or internal development of a third brand platform that will further leverage the Company’s existing core competencies in the United States market.

Operating Profit. During the past three fiscal years, the Company has increased its operating profit at a rate which exceeds the growth rate of net sales. This has been achieved primarily through a combination of targeting growth in higher margin products, by lowering product cost of goods sold, and improving the efficiency of the Company’s advertising and promotion campaigns. The Company intends to continue its focus on improving operating profit margins over the long term.

Operating Cash Flow. The Company is also focused on growing its operating cash flow primarily through sustainable growth in revenue and net income, as well as continued focus on maintaining an efficient level of working capital. The Company’s operating model is to contract with third parties to manufacture its products, thereby avoiding the capital investment associated with manufacturing plants and equipment, and also retaining flexibility to partner with industry-leading manufacturers who can supply the Company’s various product lines. The Company also focuses on maintaining an efficient level of working capital by closely managing days sales outstanding of accounts receivable, inventory levels and payment terms with suppliers.

Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make judgments, estimates and decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant circumstances. Note 1 to the consolidated financial statements provides a summary of the significant accounting policies followed in the preparation of the financial statements.

The Company’s critical accounting policies include the following:

Revenue Recognition, Sales Returns and Other Allowances, and Allowance for Doubtful Accounts. Revenue from sales is recognized when all of the following criteria have been met: a valid customer order with a fixed price has been received; title and risk of loss transfer to the customer; there is no further significant obligation to assist in the resale of the product; and collectibility is reasonably assured. Revenue is reduced for provisions for trade promotions, estimated sales returns, certain promotional costs and other allowances in the same period as the related sales are recorded. Management must make estimates of potential future product returns and other allowances related to current period revenue. Management analyzes historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances. The Company has established a reserve of $1.3 million for future sales returns and other allowances as of March 31, 2004. Similarly, management must make estimates of the uncollectability of accounts receivables. Management specifically analyzes customer account balances, historical bad debts, current economic trends and changes in the timing of customer payments. The balance of accounts receivable was $11.4 million, net of the allowance for doubtful accounts of $380,000 as of March 31, 2004.

Inventory Valuation. Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. The Company analyzes the cost and the market value of inventory items and establishes the appropriate valuation reserves. The Company has established a reserve for excess or obsolete inventory of $551,000 as of March 31, 2004. Management believes that the inventory valuation results in carrying inventory at the lower of cost or market.

Accounting for Income Taxes. As part of the process of preparing financial statements, the Company is required to estimate income taxes, both state and federal. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be utilized to offset future taxable income during the periods in which these temporary differences are deductible. Based on the level of historical taxable income and projections of future taxable income for the periods, in which the deferred tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences. Accordingly, the Company eliminated the valuation allowance of $9.1 million related to the net deferred tax assets as of March 31, 2002.

Trade and Consumer Promotions. Management judgment is involved in recognizing the amount and timing of trade and consumer promotion activities. Management regularly reviews current period and prior period promotional liabilities and assesses customers’ and consumers’ participation and performance levels related to various promotional activities. The vast majority of year end liabilities associated with these activities are resolved within the following fiscal year and therefore, do not require highly uncertain long-term estimates. The Company has established a liability for trade and consumer promotions of $1.6 million as of March 31, 2004.

Operating Results

On January 23, 2002, the Company changed its fiscal year-end from December 31 to March 31. The first period to be reported in 2002 was a three-month stub period ended March 31, 2002. The change in fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cold/flu season within the same fiscal year.

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 operations for the periods indicated. For fiscal 2001, certain amounts have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on the operating net (loss) or net income. Amounts are in thousands, except per share amounts.

	For the Years Ended							For the Three Months Ended
	March 31,				December 31,			March 31,
	2004		2003		2001			2002
Net sales	$	86,980	$	79,075	$	76,242		$	19,135
Cost of goods sold		26,904		25,992		27,698			6,390

Gross profit		60,076		53,083		48,544			12,745

Operating expenses:
Advertising and promotion		33,101		30,930		34,256			8,796
Selling, general and administrative		14,227		12,514		14,583			3,213
Special charges		0		0		930			0

Total operating expenses		47,328		43,444		49,769			12,009

Operating income (loss)		12,748		9,639		(1,225	)		736
Investment income		725		821		1,242			236
Gain on sales of marketable securities		0		18		64			36

Income before income taxes		13,473		10,478		81			1,008
Income tax expense (benefit)		4,926		3,962		0			(9,126	)

Net income	$	8,547	$	6,516	$	81		$	10,134

Basic net income per share	$	.63	$	.48	$	.01		$	.74

Diluted net income per share	$	.59	$	.46	$	.01		$	.71

Operating results shown as a percent of net sales:

	For the Years Ended									For the Three Months Ended
	March 31,						December 31,			March 31,
	2004			2003			2001			2002
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		30.9			32.9			36.3			33.4

Gross profit		69.1			67.1			63.7			66.6

Operating expenses:
Advertising and promotion		38.0			39.1			45.0			46.0
Selling, general and administrative		16.4			15.8			19.1			16.8
Special charges		0.0			0.0			1.2			0

Total operating expenses		54.4			54.9			65.3			62.8

Operating income (loss)		14.7			12.2			(1.6	)		3.8
Investment income		0.8			1.0			1.6			1.2
Gain on sales of marketable securities		0.0			0.0			0.0			.2

Income before income taxes		15.5			13.2			0.0			5.2
Income tax expense (benefit)		5.7			5.0			0.0			(47.7	)

Net income		9.8	%		8.2	%		0.0	%		52.9	%

Net sales

The following is a breakdown of net sales by brand and geographic area:

	For the Years Ended						For the Three Months Ended
	March 31,				December 31,		March 31,
	2004		2003		2001		2002		2001
									(unaudited)
Domestic
Breathe Right	$	64,126	$	57,855	$	53,816	$	13,591	$	16,551
FiberChoice		9,290		7,084		6,373		1,536		2,137
Other		588		319		36		68		39

Total domestic		74,004		65,258		60,225		15,195		18,727
International
Japan		4,430		5,360		8,055		1,996		2,644
UK		2,349		2,275		2,378		426		665
Italy		1,899		2,020		2,312		260		621
Canada		1,372		1,161		1,102		346		296
Other		2,926		3,001		2,170		912		515


Total international		12,976		13,817		16,017		3,940		4,741

Net sales	$	86,980	$	79,075	$	76,242	$	19,135	$	23,468

Net sales for fiscal 2004 of $87.0 million increased 10.0% over fiscal 2003 sales of $79.1 million and an increase of 14.1% compared to fiscal 2001 sales. Domestic sales of Breathe Right® branded products grew to $64.1 million, representing an increase of 10.8 % over fiscal 2003 and 19.2% over fiscal 2001. The growth in the Breathe Right brand was the result of successful promotions of the Company’s nasal strip product line, as well as the launch of Breathe Right Snore Relief throat spray in fiscal 2003 and Breathe Right Vapor Shot! personal vaporizer in fiscal 2004. Domestic FiberChoice® sales for fiscal 2004 grew to $9.3 million, representing an increase of 31.1% over fiscal 2003 and 45.8% over fiscal 2001. Growth in domestic FiberChoice sales resulted from increased advertising and promotional campaigns, supporting the “fiber for health” consumer positioning.

International sales decreased to $13.0 million dollars, down 6.1% versus fiscal 2003 and down 19.0% versus fiscal 2001. This decrease resulted primarily from lower shipments to the Company’s distributor in Japan, caused by high distributor inventory levels in that market. The Company expects to further lower distributor inventory levels in Japan during fiscal 2005 and thereby better align future shipments with consumer demand. As a result, the Company expects its net sales to its Japan distributor to decline in fiscal 2005; however, sales growth is expected in subsequent years.

During fiscal 2004, CNS decided to exit its line of Flair equine products which are included in “other” on the net sales breakdown, shown on the prior page. The Company has terminated its agreements with its distributor of Flair products and the licensor of technology related to this business, effective April 30, 2004. Net sales of Flair products totaled $375,000 for fiscal 2004 and $268,000 for fiscal 2003.

Gross profit rate

The Company’s gross margin rate is dependent on a number of factors and may fluctuate from quarter to quarter as well as year to year. These factors include the mix of products sold, the level at which promotional programs are executed, and the cost of materials and manufacturing. Gross margins continued to improve in fiscal 2004 to 69.1% compared to 67.1% and 63.7% in fiscal 2003 and 2001 respectively. The improving gross margin rates in 2004 and 2003 resulted primarily from lower product cost and increasing efficiency in procuring and distributing the Company’s product lines.

Advertising and promotion expense

Advertising and promotion expenses were $33.1 million for fiscal 2004 compared to $30.9 million and $34.3 million for fiscal 2003 and fiscal 2001, respectively. For fiscal 2004, advertising and promotional expenses as a percentage of net sales of 38.0% continued to decrease compared to 39.1% and 45.0% for fiscal 2003 and fiscal 2001, respectively. This reduction is the result of economies of scale driven by growth of the Company’s product lines, as well as continuing efforts to develop more efficient and effective methods of stimulating consumer demand.

Selling, general and administrative expense

Selling, general and administrative expenses were $14.2 million for 2004 compared to $12.5 million for 2003 and $14.6 million for 2001. Selling, general and administrative expense declined in fiscal 2003 as a result of the reduction and realignment of the Company’s workforce to better match its strategic direction and to focus on building the core Breathe Right and FiberChoice product lines. Selling, general and administrative expense increased in fiscal 2004 due to severance and recruitment costs associated with several changes on the Company’s management team.

Special charges

The Company recorded a special charge of $930,000 in 2001 for the costs of implementing the Company’s corporate restructuring plan to streamline and realign the Company’s resources. The charge was primarily for severance benefits. As of March 31, 2004, the Company made all of the payments relating to this plan and therefore the balance of the accrued liability was $0.

Investment income

Investment income was $725,000 for 2004 compared to $839,000 and $1.3 million for 2003 and 2001, respectively. The benefit of higher levels of marketable securities was more than offset by a decrease in market interest rates and a shift in the investment portfolio to lower yield, tax exempt securities, resulting in lower levels of investment income. The following table compares the average bond equivalent yield of various marketable securities held by the Company as of March 31, 2004 and March 31, 2003 (dollar amounts in thousands):

	March 31,
	2004					2003
	Fair Value		Ave. Yield			Fair Value		Ave. Yield
Commercial paper	$	0		n/a	%	$	5,415		1.28	%
Municipal obligations		15,157		1.96			0		n/a
Corporate bonds		9,471		2.52			7,361		4.23
U.S. Government obligations		15,922		2.28			12,285		2.68

Total marketable securities	$	40,550		2.23	%	$	25,061		2.83	%

The average remaining days to effective maturity of the Company’s portfolio of marketable securities has decreased to 403 days as of March 31, 2004 compared to 417 days as of March 31, 2003.

Income tax expense (benefit)

Income tax expense was $4.9 million for 2004 compared to $4.0 million and $0 for 2003 and 2001, respectively. The effective tax rate for 2004 was 36.6% compared to an effective tax rate in 2003 of 37.8%. The reduction in the effective tax rate is the result of utilizing foreign export incentives and a change in investment strategy from taxable corporate and U.S. Government obligations to tax exempt municipal obligations. Refer to the following effective tax rate reconciliation table:

	For the Years Ended March 31,
	2004			2003
Federal Statutory rate		35.0	%		35.0	%
State rate, net of federal benefit		2.3			2.3
Other		(0.7	)		0.5

Effective tax rate		36.6	%		37.8	%

The Company did not recognize an income tax expense in 2001. Income before tax was offset by changes in deferred tax assets, including utilization of net operating loss and credit carryforwards for which a full valuation allowance had been previously established.

The Company recognized a tax benefit of $9.1 million during the three month period ending March 31, 2002 as a result of reinstating net deferred tax assets, including the benefit of net operating loss carryforwards. Management believed at this time, based on the level of historical taxable income and projections of future taxable income for the periods in which the deferred tax assets were deductible, that it was more likely than not the Company would realize the benefits of the deductible differences. As of March 31, 2004, the Company has a deferred tax asset of $158,000 relating to state net operating loss and credit carryforwards.

Operating and Net Income

Increases in sales, as well as improved gross margin rates and efficiencies in advertising and promotions, have provided significant improvement in operating income as well as net income. Operating income for fiscal 2004 was $12.7 million, up 32.3% compared to fiscal 2003 operating income of $9.6 million and up strongly from a net operating loss of $1.2 million for fiscal 2001. Diluted net income per share increased from $.01 in fiscal 2001, to $.46 per share for fiscal 2003 and $.59 per share for fiscal 2004.

Seasonality

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 well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. The Company believes that significant portions of Breathe Right® product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons, corresponding with the Company’s third and fourth quarters.

Liquidity and Capital Resources

At March 31, 2004, the Company had cash, cash equivalents and marketable securities of $49.4 million, an increase of 18.8% or $7.8 million from $41.6 million as of March 31, 2003. The Company has no long term debt. The Company believes that its existing funds will be sufficient to support its planned operations for the foreseeable future.

	For the Years Ended									For the Three Months Ended
	March 31,						December 31,			March 31,
	2004			2003			2001			2002
Operating activities:
Net income (loss)	$	8,547		$	6,516		$	81		$	10,134
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization		958			1,251			1,244			330
Deferred income taxes		2,468			3,489			0			(9,126	)
Other		60			16			90			74
Changes in operating assets and liabilities:
Accounts receivable		(383	)		671			275			626
Inventories		(866	)		1,199			(1,070	)		1,357
Prepaid expense and other current assets		(1,801	)		(36	)		1,964			294
Accounts payable and accrued expenses		(428	)		6,057			(5,401	)		(3,742	)

Net cash provided by (used in) operating activities	$	8,555		$	19,163		$	(2,817	)	$	(53	)

Operating Activities. The Company generated cash from operating activities of $8.6 million during fiscal 2004 compared to $19.2 million during fiscal 2003. For fiscal 2001, the Company used cash in operating activities of $2.8 million. The improvement in net income from $81,000 in fiscal 2001 to $6.5 million and $8.5 million in fiscal 2003 and 2004, respectively, contributed significantly to the improvement in cash flow. During fiscal years 2004 and 2003, the Company utilized deferred tax assets of $2.5 million and $3.5 million, respectively, having a positive impact on cash flow. For fiscal 2004, cash flow from operating activities was reduced by an increase in inventory of $866,000 and an increase in prepaid expenses and other current assets of $1.8 million. The increase in inventory was caused by higher finished goods inventory levels associated with the early end to the fiscal 2004 cold/flu season. The increase in prepaid expenses resulted primarily from overpayments of the Company’s estimated income tax liability. In fiscal 2003, the Company recorded a significant increase in accounts payable and accrued expenses of $6.1 million, resulting from trade promotions and advertising campaigns that were executed in the latter part of fiscal 2003 and not paid until fiscal 2004.

Investing Activities. Purchases of marketable securities exceeded sales and maturities by $15.6 million and $5.9 million in 2004 and 2003, respectively. For 2004, marketable securities purchased consisted primarily of U.S. Government obligations and tax exempt municipal securities.

The Company purchased $478,000 and $60,000 of property and equipment in 2004 and 2003, respectively, primarily associated with upgrading its network of personal computers and software. The Company purchased $310,000; $510,000 and $357,000 of product rights during the 2004, 2003 and 2001, respectively.

Financing Activities. The Company paid cash dividends during 2004 of $1.6 million. No dividends had been paid during prior periods. In making the decision to initiate a cash dividend, the Company’s Board of Directors considered, among other things, the recent revisions to the U.S. income tax code that provides for favorable tax treatment of corporate dividends.

The Company purchased 458,000 shares of its common stock for $2.8 million in 2003 and purchased 202,000 shares for $1.0 million in 2001. The Company did not repurchase any shares of its common stock in 2004. These treasury shares will be used to meet the Company’s obligations under its employee stock purchase plan and stock option plans, and for possible future acquisitions. The Company is authorized to repurchase an additional 531,000 shares as of March 31, 2004.

The Company received $1.8 million in 2004 and $949,000 in 2003 from the exercise of stock options and issuance of stock under the employee stock purchase plan.

Significant Agreements and Lease Obligations. The Company has entered into certain agreements and operating leases in order to secure product rights and office space. The following is a summary of significant agreements and lease obligations (in thousands):

Year ending March 31,	Minimum Royalties		Operating Leases		Total
2005	$	795	$	780	$	1,575
2006		795		780		1,575
2007		795		762		1,557
2008		795		741		1,536
2009		795		741		1,536
Later years				1,236

Total			$	5,040

The Company has agreements that exclusively license intellectual property rights for certain products. Royalties due under these agreements are based on various percentages of net sales of related product lines. The licensing agreements are valid for the lives of the related patents, however, they may be terminated earlier under certain conditions. Total minimum royalties are not determinable since royalties continue for the life of current and potential future patents related to the licensed intellectual property.

The Company has entered into operating leases for office space and office equipment. Leases expire at various dates beginning in 2007 through 2010. Management is not aware of any significant agreements or obligations that would have a material negative impact upon the Company’s short-term or long-term liquidity.

Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force finalized its tentative consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, which provides guidance on the timing of revenue recognition for sales undertakings to deliver more than one product or service. The Company will adopt EITF 00-21 on transactions beginning fiscal 2005, as required. The Company does not anticipate that the adoption of this pronouncement will have a material impact on the Company’s consolidated financial statements.

In December 2003, the Financial Accounting Standards Board (“FASB”) published a revision to FASB Interpretation 46 (“FIN 46”) to clarify some of the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, and to exempt certain entities from its requirements. The FASB issued, FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve financial reporting of special purpose and other entities. In accordance with FIN 46, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entity’s assets, liabilities and results of operating activities must consolidate the entity in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. As of March 31, 2004, the Company is not involved in any variable interest entities.

Forward-Looking Statements

Certain statements contained in this Annual Report 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 currently has a seasonal pattern of sales that is typically higher in the third and fourth quarters of each fiscal year due to increased nasal strip usage during the cold/flu season and its revenues and earnings may be impacted by the severity of such season; (iii) 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; (iv) the Company’s competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of the patents on its Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation and could be narrowed as a result of the outcome of the reexamination of one such patent by the United States Patent and Trademark Office; (v) the Company has faced and will continue to face challenges in successfully developing and introducing new products; (vi) the Company operates in competitive markets where recent and potential entrants into the nasal dilator segment pose competitive challenges; (vii) the Company is dependent upon contract manufacturers for the production of substantially all of its products; and (viii) the Company currently purchases most of its nasal strip products from different contract manufacturers that obtain the raw materials from a single supplier.

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 an investment policy which limits 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 average life of the investment portfolio as of March 31, 2004 was 403 days.

The table below provides information about the Company’s cash and cash equivalents and marketable securities as of March 31, 2004:

	Cost		Fair Value
	(in thousands)

Due within one year	$	28,677	$	28,755
Due after one year through three years		20,559		20,666

	$	49,236	$	49,421

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Balance Sheets of the Company as of March 31, 2004 and 2003, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income (Loss), and Cash Flows for each of the years ended March 31, 2004 and 2003 and December 31, 2001 and for the three months ended March 31, 2002 and 2001 (unaudited), the Notes to the Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm, are listed under Item 15 of this Report.

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

None.

Item 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel E. Reinkensmeyer, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

(b) Changes in Internal Control Over Financial Reporting.

There have been no significant changes in internal control over financial reporting that occurred during the fourth fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The following sets forth certain information with respect to the Company’s directors:

Daniel E. Cohen, 51, has served as the Company’s Chairman of the Board since 1993 and has served as a director of the Company since its formation in 1982. Mr. Cohen also served as the Company’s Chief Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.

Patrick Delaney, 61, has served as a director of the Company since 1983 and as the Company’s Secretary since 1995. A practicing attorney since 1967, Mr. Delaney retired as a partner in the Minneapolis-based law firm of Lindquist & Vennum P.L.L.P., counsel to the Company in December 2002. Mr. Delaney is a professional writer and serves on the board of a number of privately-held companies. In addition, he is a director of Community First Bankshares, Inc., a publicly-held multi-bank holding company.

R. Hunt Greene, 53, has served as a director of the Company since 1985. Mr. Greene has been an investment banker for over twenty years. He is presently Managing Director and Member of Greene Holcomb & Fisher LLC (“GH&F”), a Minneapolis investment banking firm that was formed in 1995. GH&F has provided the Company with certain financial advisory and investment banking services from time to time since 1996.

Andrew J. Greenshields, 66, has served as a director of the Company since 1986. Mr. Greenshields has been President of Pathfinder Ventures, Inc., Minneapolis, Minnesota, since 1980. He is also a general partner of Pathfinder Venture Capital Fund III and a general partner of Spell Capital Partners, LP, both of which are Minneapolis-based financial limited partnerships. Mr. Greenshields is also a director of Aetrium, Inc., a manufacturer of semi-conductor handling equipment.

H. Robert Hawthorne, 59, has served as a director of the Company since 1999. Mr. Hawthorne was Chief Executive Officer of Ocean Spray Cranberries, Inc., a Boston-based food and beverage company, from February 2000 to November 2002. From 1997 to 1999, Mr. Hawthorne served as a director, President and Chief Executive Officer of Select Comfort Corporation, a Minneapolis-based company that manufactures air beds and sleep related products. From 1986 to 1997, Mr. Hawthorne 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 February 1992 to December 1997 as President of The Pillsbury Brands Group, a subsidiary of The Pillsbury Company.

Marti Morfitt, 46, has served as the Company’s President and Chief Executive Officer since June 2001 and its President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has served as a director of the Company since 1998. From September 1982 to February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems.

Richard W. Perkins, 73, has been a director of the Company since 1993. Mr. Perkins has been President, Chief Executive Officer and a director of Perkins Capital Management, Inc., a Minneapolis-based investment management company, since 1985. He is also a general partner of Spell Capital Partners, LP, a Minneapolis-based venture capital limited partnership. He is also a director of the following publicly-held companies: Synovis Life Technologies, Inc., a manufacturer of medical products; PW Eagle, Inc., a manufacturer of plastic pipe; Lifecore Biomedical, Inc., a medical device company; Nortech Systems, Inc., a contract manufacturer for the electronics industry; Vital Images, Inc., a medical diagnostic software company; Teledigital, Inc., a provider of software to the cellular phone industry; and Two Way TV (U.S.), Inc., a provider of software to the television game industry.

Morris J. Siegel, 54, has served as a director of the Company since April 18, 2003. Mr. Siegel is the founder and retired chairman of Celestial Seasonings, Inc., a manufacturer and marketer of specialty herb teas. In 2000, Celestial Seasonings merged with The Hain Food Group, a natural, specialty, organic and snack food company. Mr. Siegel then served as vice chairman of the merged company, The Hain Celestial Group, Inc. and was Chief Executive Officer of Celestial Seasonings until September 2002. In 1987, Mr. Siegel founded Earth Wise, Inc., a marketer of environmentally friendly cleaning products and recycled trash bags. Mr. Siegel currently serves as a director of Whole Foods Market, Inc., a North American natural foods grocer. Mr. Siegel is also a director Annie’s HomeGrown Foods, Inc., which manufactures, markets and sells premium all natural and organic foods, and is a subsidiary of Solera Capital LLC.

Karen T. Beckwith, 43, has served as a director of the Company since October 1, 2003. Since January 2003, Ms. Beckwith has served as the President and Chief Executive Officer of Gelco Information Network, a leading provider of expense and trade management solutions. From 1999 to January 2003, Ms. Beckwith served in various executive positions of Gelco Information Network, most recently as its Chief Financial Officer. Prior to that, she held a number of finance positions at Ceridian Corporation from 1995 to 1999, including Senior Vice President of Finance and Business Development and Integration.

_________________

Certain other 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 August 25, 2004 (the “2004 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.

Executive Officers

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 2004 Proxy Statement and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required under this item is contained in the section entitled “Security Ownership of Principal Stockholders and Management” in the Company’s 2004 Proxy Statement and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item is contained in the section entitled “Certain Relationships and Related Transactions” in the Company’s 2004 Proxy Statement and is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item is contained in the section entitled “Relationship with Independent Accountants” in the Company’s 2004 Proxy Statement and is incorporated herein by reference.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Report:

Financial Statements.

			Form 10-K Page Reference

Report of Independent Registered Public Accounting Firm			F-1

Consolidated Statements of Operations for the Years Ended
March 31, 2004, March 31, 2003 and December 31, 2001 and
for the three months ended March 31, 2002 and March 31, 2001 (unaudited)			F-2

Consolidated Balance Sheets as of March 31, 2004 and 2003			F-3

Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended March 31, 2004, March 31, 2003 and
December 31, 2001 and for the three months ended March 31, 2002			F-4

Consolidated Statements of Cash Flows for the Years Ended
March 31, 2004, March 31, 2003 and December 31, 2001 and
for the three months ended March 31, 2002 and March 31, 2001 (unaudited)			F-5

Notes to Consolidated Financial Statements			F-6

Financial Statement Schedules.

None.

Exhibits.

See “Exhibit Index” on the page following the Signature Page.

(b) Reports on Form 8-K.

During the fourth quarter covered by this report, the Company filed Current Reports on Form 8-K (a) dated January 22, 2004 reporting under Items 5 a quarterly dividend and attaching at Item 7 a related press release and (b) dated March 8, 2004 reporting under Items 5, 9 and 7 a press release announcing revised guidance for the fourth quarter ending March 31, 2004 and its product plans for fiscal year 2005 and attaching certain remarks of Marti Morfitt, the Company’s Chief Executive Officer, made at a March 8, 2004 telephone conference.

During the fourth quarter covered by this report, the Company also furnished a Current Report on Form 8-K dated January 22, 2004 reporting under Items 7 and 12 a press release disclosing material non-public information regarding its results of operations for the quarter ended December 31, 2003.

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: June 11, 2004	By:		/s/ Marti Morfitt

		Marti Morfitt 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 June 11, 2004 on behalf of the Registrant in the capacities indicated.

(Power of Attorney and Signatures)

Each person whose signature appears below constitutes and appoints DANIEL E. COHEN and MARTI MORFITT 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 or she might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

/s/ Marti Morfitt

Marti Morfitt
Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Samuel Reinkensmeyer

Samuel Reinkensmeyer
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ Karen T. Beckwith

Karen T. Beckwith
Director

/s/ Daniel E. Cohen

Daniel E. Cohen
Chairman of the Board and Director

/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

/s/ Morris J. Siegel

Morris J. Siegel
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 (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).

4.1

Form of Amended and Restated Rights Agreement dated as of December 20, 2002 by and between CNS, Inc. and Wells Fargo Bank Minnesota, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A/A, Commission File No. 0-16612).

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, as amended (incorporated by reference to Exhibits 4.1 and 4.2 to the Company’s Registration Statement on Form S-8, Commission File No. 333-68310).

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).

10.5*

CNS, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 (File No. 333-109110)).

10.6**

License Agreement dated January 30, 1992 between the Company and Creative Integration and Design, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-2, Commission File No. 33-46120).

10.7**

License Agreement dated November 10, 1997 between the Company and Onesta Nutrition, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ending December 31, 1999 (the “1999 Form 10-K”)).

10.8**

License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen Cronk (incorporated by reference to Exhibit 10.11 of the 1999 Form 10-K).

10.9**

Distributor Agreement between the Company and Eisai Co., Ltd. dated August 1, 2000 (incorporated by reference to Exhibit 10.11 to the Company’s 1999 Form 10-K).

10.10**

Repackaging Agreement between the Company and Herusu, Co., Ltd. dated August 1, 2000 (incorporated by reference to Exhibit 10.12 to the Company’s 2000 Form 10-K).

10.11**

Supply Agreement between the Company and Tapemark, Inc. dated October 15, 2001 (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 (the "September 30, 2001 Quarterly Report")).

10.12**

Supply Agreement between the Company and WebTec Converting, LLC dated October 5, 2001 (incorporated by reference to Exhibit 10.16 to the September 30, 2001 Quarterly Report).

10.13**

Medical Specialties Material Purchase Agreement between the Company and Minnesota Mining and Manufacturing Company dated August 1, 2001 (incorporated by reference to Exhibit 10.17 to the September 30, 2001 Quarterly Report).

10.14*

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”)).

10.15*

First Amendment to Executive Employment Agreement between the Company and Daniel E. Cohen dated June 29, 2001 (incorporated by reference to Exhibit 10.19 to the September 30, 2001 Quarterly Report).

10.16*

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).

10.19*

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).

10.20*

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).

10.21*

Employment Agreement between the Company and Larry R. Muma dated January 2, 2001 (incorporated by reference to Exhibit 10.21 to the 2000 Form 10-K).

10.22*

Agreement between the Company and Teri P. Osgood dated February 14, 2002 (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for March 31, 2003 (the "2003 Form 10-K").

10.23*

Employment Agreement between the Company and Linda Kollofski dated October 29, 2002 (incorporated by reference to Exhibit 10.27 to the 2003 Form 10-K).

10.24*

Employment Agreement between the Company and John Kundtz dated July 22, 2002 (incorporated by reference to Exhibit 10.28 to the 2003 Form 10-K).

10.25*

Second Amendment to Executive Employment Agreement between the Company and Daniel E. Cohen dated June 29, 2003.

10.26*

Letter Agreement between the Company and Samuel E. Reinkensmeyer dated September 18, 2003.

10.27*

Employment Agreement between the Company and Samuel E. Reinkensmeyer dated October 15, 2003.

10.28*

Agreement between the Company and Milton W. (Andy) Anderson dated October 10, 2003.

10.29*

Agreement between the Company and John Kundtz dated January 26, 2004.

10.30

Lease Agreement between the Company and Liberty Property Limited Partnership dated December 21, 1999.

21.1

Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the 1999 Form 10-K).

23.1

Consent of Independent Registered Public Accounting Firm

24.1

Powers of Attorney (included on signature page hereof).

31.1

Certificate of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.

31.2

Certificate of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.

Certification Pursuant to 18 U.S.C. Section 1350.

_________________
*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.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
CNS, Inc.:

We have audited the accompanying consolidated balance sheets of CNS, Inc. and subsidiaries as of March 31, 2004 and 2003 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years ended March 31, 2004 and 2003 and December 31, 2001 and the three months ended March 31, 2002. These consolidated 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 the standards of the Public Company Accounting Oversight Board (United States). 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 March 31, 2004 and 2003 and the results of their operations and their cash flows for the years ended March 31, 2004 and 2003 and December 31, 2001 and the three months ended March 31, 2002 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Minneapolis, Minnesota
April 26, 2004

F-1

CNS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)

	For the Years Ended							For the Three Months Ended
	March 31,				December 31,			March 31,
	2004		2003		2001			2002			2001
											(unaudited)
Net sales	$	86,980	$	79,075	$	76,242		$	19,135		$	23,468
Cost of goods sold		26,904		25,992		27,698			6,390			8,706

Gross profit		60,076		53,083		48,544			12,745			14,762

Operating expenses:
Advertising and promotion		33,101		30,930		34,256			8,796			13,935
Selling, general and administrative		14,227		12,514		14,583			3,213			4,766
Special charges		0		0		930			0			0

Total operating expenses		47,328		43,444		49,769			12,009			18,701

Operating income (loss)		12,748		9,639		(1,225	)		736			(3,939	)
Investment income		725		821		1,242			236			345
Gain on sales of marketable securities		0		18		64			36			17

Income (loss) before income taxes		13,473		10,478		81			1,008			(3,577	)

Income tax expense (benefit)		4,926		3,962		0			(9,126	)		0

Net income (loss)	$	8,547	$	6,516	$	81		$	10,134		$	(3,577	)

Basic net income (loss) per share	$	0.63	$	.48	$	.01		$	.74		$	(.25	)

Weighted average number of common shares outstanding		13,576		13,467		14,131			13,711			14,123

Diluted net income (loss) per share	$	0.59	$	.46	$	.01		$	.71		$	(.25	)

Weighted average number of common
and potential common shares outstanding		14,488		14,044		14,431			14,198			14,123

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

F-2

CNS, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)

	March 31,
Assets	2004			2003
Current assets:
Cash and cash equivalents	$	8,871		$	16,554
Marketable securities		40,550			25,061
Accounts receivable, net of allowance for doubtful accounts
of $380 in 2004 and $330 in 2003		11,394			11,011
Inventories		4,132			3,266
Deferred income taxes		2,008			4,660
Prepaid expenses and other current assets		2,835			1,035

Total current assets		69,790			61,587
Property and equipment, net		1,562			1,605
Product rights, net		1,107			1,293
Deferred income taxes		1,075			890

	$	73,534		$	65,375

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,970		$	7,615
Accrued expenses		7,055			7,948
Accrued income taxes		865			758

Total current liabilities		14,890			16,321
Stockholders’ equity:
Preferred stock – authorized 8,484 shares;
none issued or outstanding		0			0
Common stock – $.01 par value; authorized 50,000 shares;
issued 19,295 shares in 2004 and 2003		193			193
Additional paid-in capital		59,835			59,879
Treasury shares – at cost; 5,512 shares in 2004 and 5,989 shares in 2003		(23,878	)		(26,694	)
Retained earnings		22,379			15,472
Accumulated other comprehensive income		115			204

Total stockholders’ equity		58,644			49,054
Commitments and contingencies (notes 9, 10 and 11)

	$	73,534		$	65,375

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

F-3

CNS, INC.
Consolidated Statements of Cash Flows
(in thousands)

	For the Years Ended									For the Three Months Ended
	March 31,						December 31,			March 31,
	2004			2003			2001			2002			2001
													(unaudited)
Operating activities:
Net income (loss)	$	8,547		$	6,516		$	81		$	10,134		$	(3,577	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		958			1,251			1,244			330			271
Deferred income taxes		2,468			3,489			0			(9,126	)		0
Other		60			16			90			74			0
Changes in operating assets and liabilities:
Accounts receivable		(383	)		671			275			626			(1,182	)
Inventories		(866	)		1,199			(1,070	)		1,357			(1,767	)
Prepaid expenses and other current assets		(1,801	)		(36	)		1,964			294			362
Accounts payable and accrued expenses		(428	)		6,057			(5,401	)		(3,742	)		(5,544	)

Net cash provided by (used in) operating activities		8,555			19,163			(2,817	)		(53	)		(11,437	)

Investing activities:
Purchases of marketable securities		(90,325	)		(36,255	)		(44,911	)		(11,218	)		(6,970	)
Sales and maturities of marketable securities		74,749			30,389			55,550			10,846			17,425
Payments for purchases of property and equipment		(478	)		(60	)		(394	)		(8	)		(255	)
Payments for product rights		(310	)		(510	)		(357	)		0			(148	)

Net cash provided by (used in) investing activities		(16,364	)		(6,436	)		9,888			(380	)		10,052

Financing activities:
Proceeds from the issuance of common stock
under Employee Stock Purchase Plan		150			94			114			0			0
Proceeds from the exercise of stock options		1,616			855			174			72			88
Purchase of treasury shares		0			(2,755	)		(1,010	)		(2,438	)		(51	)
Dividends paid		(1,640	)		0			0			0			0

Net cash provided by (used in) financing activities		126			(1,806	)		(722	)		(2,366	)		37

Net increase (decrease) in cash and cash equivalents		(7,683	)		10,921			6,349			(2,799	)		(1,348	)
Cash and cash equivalents:
Beginning of period		16,554			5,633			2,083			8,432			2,083

End of period	$	8,871		$	16,554		$	8,432		$	5,633		$	735

Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	132		$	0		$	0		$	0		$	0
Cash paid during the year for income taxes		2,994			237			0			35			0

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

F-4

CNS, INC.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(in thousands)

	Common stock				Additional			Treasury shares						Retained			Accumulated other			Total
	Number of shares		Par value		paid-in capital			Number of shares			Cost			earnings (deficit)			comprehensive income (loss)			stockholders’ equity
Balance at December 31, 2000		19,295	$	193	$	61,182			5,179		$	(23,279	)	$	(1,259	)	$	100		$	36,937
Stock issued in connection with
Employee Stock Purchase Plan		0		0		(189	)		(36	)		303			0			0			114
Stock options exercised		0		0		(262	)		(51	)		436			0			0			174
Other		0		0		54			0			0			0			0			54
Treasury shares purchased		0		0		0			202			(1,010	)		0			0			(1,010	)
Comprehensive income:
Net income for the year		0		0		0			0			0			81			0			81
Unrealized gains on marketable securities
net of income tax effect of $0		0		0		0			0			0			0			262			262

Total comprehensive income																					343

Balance at December 31, 2001		19,295	$	193	$	60,785			5,294		$	(23,550	)	$	(1,178	)	$	362		$	36,612
Stock options exercised		0		0		(95	)		(20	)		167			0			0			72
Other		0		0		106			0			0			0			0			106
Treasury shares purchased		0		0		0			482			(2,438	)		0			0			(2,438	)
Comprehensive income:
Net income for the period		0		0		0			0			0			10,134			0			10,134
Unrealized losses on marketable securities
net of income tax effect of $58		0		0		0			0			0			0			(264	)		(264	)

Total comprehensive income																					9,870

Balance at March 31, 2002		19,295	$	193	$	60,796			5,756		$	(25,821	)	$	8,956		$	98		$	44,222
Stock issued in connection with
Employee Stock Purchase Plan		0		0		(69	)		(19	)		163			0			0			94
Stock options exercised		0		0		(862	)		(206	)		1,717			0			0			855
Other		0		0		14			0			2			0			0			16
Treasury shares purchased		0		0		0			458			(2,755	)		0			0			(2,755	)
Comprehensive income:
Net income for the year		0		0		0			0			0			6,516			0			6,516
Unrealized gains on marketable securities
net of income tax effect of $60		0		0		0			0			0			0			106			106

Total comprehensive income																					6,622

Balance at March 31, 2003		19,295	$	193	$	59,879			5,989		$	(26,694	)	$	15,472		$	204		$	49,054
Stock issued in connection with
Employee Stock Purchase Plan		0		0		2			(24	)		148			0			0			150
Stock options exercised		0		0		(1,051	)		(453	)		2,668			0			0			1,617
Tax benefit of options exercised		0		0		1,005			0			0			0			0			1,005
Dividends ($.12 per share )		0		0		0			0			0			(1,640	)		0			(1,640	)
Comprehensive income:
Net income for the year		0		0		0			0			0			8,547			0			8,547
Unrealized losses on marketable securities
net of income tax effect of $52		0		0		0			0			0			0			(89	)		(89	)

Total comprehensive income																					8,458

Balance at March 31, 2004		19,295	$	193	$	59,835			5,512		$	(23,878	)	$	22,379		$	115		$	58,644

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

F-5

CNS, INC.

Notes to Consolidated Financial Statements
March 31, 2004 and 2003 and December 31, 2001

(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, including Breathe Right® nasal strips, Breathe Right Snore Relief™ throat spray, Breathe Right Vapor Shot™ personal vaporizer and FiberChoice® chewable fiber supplement. The Company’s products are sold over-the-counter in retail outlets, including mass merchant, drug, grocery and club stores. The Company primarily uses international distributors to market Breathe Right nasal strips outside the U.S.

Fiscal Year Change In 2002, the Company changed its fiscal year-end from December 31 to March 31. The three-month transition period ended March 31, 2002 bridges the gap between the Company’s old and new fiscal year-ends.

Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with potential future product returns, settlement of trade and consumer promotion liabilities, the uncollectibility of accounts receivable and inventory obsolescence.

Basis of Presentation Certain amounts from prior years’ financial statements have been reclassified to conform to the current year presentation.

Revenue Recognition The Company records sales when all of the following criteria have been met: a valid customer order with a fixed price has been received; title and risk of loss transfer to the customer; there is no further significant obligation to assist in the resale of the product; and collectibility is reasonably assured. Provisions for trade promotions, returns and customer discounts are provided for as a reduction in determining net sales in the same period that the related sales are recorded.

Fair Value of Financial Instruments Cash, cash equivalents and accounts receivable are carried at amounts that approximate fair value.

Cash Equivalents Cash equivalents consist primarily of money market funds with original maturities of three months or less.

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, net of deferred income taxes, are included in stockholders’ equity as a separate component of other comprehensive income. 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. Realized securities gains or losses are included in gain (loss) on sales of marketable securities in the consolidated statements of operations.

F-6

Inventories Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory reserves have been established for potential product obsolescence.

Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Equipment is depreciated using the straight-line method over three to 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, net of accumulated amortization and are amortized over three to seven years using the straight-line method. The Company reviews its product rights for impairment whenever events or changes in circumstances indicate that the carrying amount of a product right may not be recoverable. If such product rights are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the product right exceeds the fair value of that product right.

Stock-Based Compensation The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is determined based on the difference, if any, on the grant date between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Accordingly, no compensation expense associated with the fair market value of stock option grants or shares sold to employees under the Employee Stock Purchase Plan has been recognized in the Company’s financial statements.

The fair value of each stock option grant issued under various stock option plans and shares sold to employees under the Employee Stock Purchase Plan are estimated on the date of grant or purchase using the Black-Scholes option-pricing model. The following weighted average assumptions were made in estimating fair value:

	For the Years Ended						For the Three Months Ended
	March 31,				December 31,		March 31,
	2004		2003		2001		2002		2001
									(unaudited)
Expected lives (Years)	5.7		6		6		6		6
Dividend Yield	1.27	%	0.00	%	0.00	%	0.00	%	0.00
Expected volatility	62.00	%	60.00	%	60.00	%	60.00	%	60.00	%
Risk-Free Interest Rate	3.06	%	5.00	%	5.00	%	5.00	%	5.00	%

F-7

Had compensation cost for the Company’s stock option plans and Employee Stock Purchase Plan been determined based on the fair value of options at the grant date, net income and earnings per share would have been as follows:

	For the Years Ended							For the Three Months Ended
	March 31,				December 31,			March 31,
	2004		2003		2001			2002		2001
										(unaudited)
Net income (loss),
As reported	$	8,547	$	6,516	$	81		$	10,134	$	(3,577	)
Deduct: Total stock-based
compensation expense
determined under the fair
value based method for all
awards, net of related tax
effects		603		456		523			124		89

Proforma net income (loss)	$	7,944	$	6,060	$	(442	)	$	10,010	$	(3,666	)

Earnings (loss) per share:
Basic – as reported	$	.63	$	.48	$	.01		$	.74	$	(.25	)
Basic – proforma	$	.59	$	.45	$	(.03	)	$	.73	$	(.26	)
Diluted – as reported	$	.59	$	.46	$	.01		$	.71	$	(.25	)
Diluted – proforma	$	.56	$	.43	$	(.03	)	$	.71	$	(.26	)

Foreign Currency Transactions Most foreign transactions are denominated in U.S. dollars, although some are conducted in functional local currencies. Gains and losses resulting from transactions denominated in foreign currencies are included in the consolidated statements of operations.

Advertising The Company capitalizes the production costs of advertising and expenses these costs in the period in which the advertising first runs.

Income Taxes Income tax expense (benefit) includes federal and state income taxes. The provision for income taxes is composed of current income tax expense (benefit) and change in the balance of the deferred tax assets and liabilities. 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. Deferred tax assets are recognized when management determines that it is more likely than not that the asset will be realized.

Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and potential common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and excludes potential common shares outstanding, as their effect is antidilutive to the calculation of net loss per share.

F-8

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).

Recent Accounting Pronouncements In November 2002, the Emerging Issues Task Force finalized its tentative consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, which provides guidance on the timing of revenue recognition for sales undertakings to deliver more than one product or service. The Company will adopt EITF 00-21 on transactions beginning fiscal 2005, as required. The Company does not anticipate that the adoption of this pronouncement will have a material impact on the Company’s consolidated financial statements.

In December 2003, the Financial Accouning Standards Board (“FASB”) published a revision to FASB Interpretation 46 (“FIN 46”) to clarify some of the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, and to exempt certain entities from its requirements. The FASB issued, FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve financial reporting of special purpose and other entities. In accordance with FIN 46, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entity’s assets, liabilities and results of operating activities must consolidate the entity in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. As of March 31, 2004, the Company is not involved in any variable interest entities.

(2)

Marketable Securities

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

	March 31,
	2004				2003
	Cost		Fair Value		Cost		Fair Value
Commercial paper	$	0	$	0	$	5,415	$	5,415
Municipal obligations		15,172		15,157		0		0
Corporate bonds		9,404		9,471		7,225		7,361
U.S. Government obligations		15,789		15,922		12,099		12,285

Total marketable securities	$	40,365	$	40,550	$	24,739	$	25,061

Maturities of marketable securities at March 31, 2004 are as follows (in thousands):

	Cost		Fair Value
Due within one year	$	19,806	$	19,884
Due after one year through three years		20,559		20,666

Total marketable securities	$	40,365	$	40,550

F-9

Gross unrealized gains on marketable securities available for sale totaled $201,000 and $324,000 at March 31, 2004 and 2003, respectively. Gross unrealized losses on marketable securities available for sale totaled $18,000 and $2,000 at March 31, 2004 and 2003, respectively.

Realized gains on sales of marketable securities were $0, $18,000 and $64,000 for the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. Realized gains on sales of marketable securities were $36,000 and $17,000 (unaudited) for the three months ended March 31, 2002 and 2001, respectively.

(3)

Advertising

At March 31, 2004 and 2003, the Company reported $409,000 and $668,000, respectively, of advertising costs as prepaid assets. Advertising expense was $25,211,000, $22,657,000 and $19,486,000 for the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. Advertising expense was $6,708,000 and $9,081,000 (unaudited) for the three months ended March 31, 2002 and 2001, respectively.

(4)

Details of Selected Balance Sheet Accounts

Details of selected balance sheet accounts are as follows (in thousands):

	March 31,
	2004			2003

Allowance for doubtful accounts:
Balance beginning of period	$	330		$	500
Plus provision for doubtful accounts		110			55
Less charge offs, net		60			225

Balance end of period	$	380		$	330

Inventories:
Finished goods	$	3,014		$	2,225
Raw materials and component parts		1,118			1,041

Total inventories	$	4,132		$	3,266

Property and equipment:
Warehouse and production equipment	$	770		$	760
Office equipment and information systems		4,111			3,680
Leasehold improvements		1,087			1,050

Less accumulated depreciation		(4,406	)		(3,885	)

Property and equipment, net	$	1,562		$	1,605

Product rights:
Product rights	$	3,614		$	3,416
Less accumulated amortization		(2,507	)		(2,123	)

Product rights, net	$	1,107		$	1,293

Accrued expenses:
Promotions and allowances	$	3,021		$	4,703
Royalties and commissions		791			778
Salaries, incentives and paid time off		2,466			1,829
Restructuring costs		0			26
Other		777			612

Total accrued expenses	$	7,055		$	7,948

F-10

(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 4,300,000 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 options 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 March 31, 2004.

Stock option activity under these plans is summarized as follows:

	Weighted-average Exercise Price Per Option

Balance at December 31, 2000	$	4.33	1,892,000		574,450
Granted		4.26	345,960		(345,960	)
Exercised		3.36	(51,800	)	0
Canceled		4.47	(102,970	)	102,970
Expired			0		(7,280	)

Balance at December 31, 2001	$	4.33	2,083,190		324,180
Granted		5.98	117,100		(117,100	)
Exercised		3.63	(19,696	)	0
Canceled		4.09	(4,560	)	4,560
Expired			0		(3,000	)

Balance at March 31, 2002	$	4.43	2,176,034		208,640
Granted		6.01	175,460		(175,460	)
Exercised		4.15	(205,900	)	0
Canceled		4.68	(61,090	)	61,090
Expired			0		(7,560	)

Balance at March 31, 2003	$	4.58	2,084,504		86,710
Amendment of 2000 Plan					650,000
Granted		11.00	362,020		(362,020	)
Exercised		4.09	(481,464	)	0
Canceled		6.20	(77,500	)	77,500
Expired			0		(600	)

Balance at March 31, 2004	$	5.87	1,887,560		451,590

F-11

Information on outstanding and currently exercisable options by price range as of March 31, 2004, is summarized as follows:

Price Range Per Option

$ 2.81	142,500	5.0	$ 2.81	142,500	$ 2.81
3.10 - 3.94	147,000	4.3	3.50	124,600	3.49
4.00 - 4.50	544,500	6.1	4.24	537,900	4.24
5.00 - 5.94	513,600	3.3	5.40	467,600	5.40
6.05 - 6.85	186,440	8.1	6.42	81,900	6.30
7.25	30,000	3.3	7.25	30,000	7.25
11.01 - 11.37	322,520	9.1	11.34	0	.00
12.04	1,000	9.6	12.04	0	.00

	1,887,560	5.8		1,384,500	4.60

At March 31, 2004, the weighted-average remaining contractual life of outstanding options was 5.8 years. At March 31, 2004 and 2003 and December 31, 2001, currently exercisable options aggregated 1,384,500, 1,630,456, and 1,409,570 shares of common stock, respectively and the weighted-average exercise price of those options was $4.60, $4.43 and $4.46, respectively.

The per share weighted-average fair value of stock options granted during the year ended March 31, 2004 and 2003 and December 31, 2001 is estimated as $5.71, $3.54 and $2.55, respectively on the date of grant using the Black-Scholes option pricing model with the following weight average assumptions: volatility of 62% in 2004, 60% in 2003 and 2001; risk-free interest rate of 3.19% in 2004, 5.00% in 2003 and 2001, and an expected life of 5.8 years in 2004 and 6 years in 2003 and 2001.

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 400,000 shares under the plan of which employees have purchased 267,297 shares as of March 31, 2004. Common shares sold to employees under the Purchase Plan in fiscal 2004, 2003 and 2001 were 23,413, 19,517 and 35,860, respectively. There was no common stock sold to employees during the three month periods ended March 31, 2002 and 2001.

The weighted-average fair value of each purchase right granted in fiscal 2004, 2003 and 2001 was $5.02, $2.26 and $2.25, respectively.

Warrants In connection with agreements to license certain intellectual property rights to potential products, licensors 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. These warrants vested over a 3 year period and are exercisable as of March 31, 2004. The warrants have a term of ten years, but will earlier terminate within 90 days of the termination of the license agreement. Warrants were issued during 1997 to purchase 25,000 shares at a price of $8.00 per share vesting in 2000 and with a life of 5 years. During 2004, these warrants to purchase 25,000 shares expired and were not exercised.

F-12

Preferred Stock At March 31, 2004, 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 as well as an additional 7,483,589 shares of undesignated preferred stock.

(6)

Income Taxes

Income tax expense (benefit) for the years ended March 31, 2004 and 2003 and December 31, 2001 and for the three months ended March 31, 2002 and 2001 is as follows (in thousands):

	For the Years Ended						For the Three Months Ended
	March 31,				December 31,		March 31,
	2004		2003		2001		2002			2001

										(unaudited)
Current income tax
expense (benefit)
Federal	$	2,349	$	224	$	0	$	0		$	0
State		58		115		0		0			0

		2,407		339		0		0			0

Deferred income tax
expense (benefit)
Federal		2,104		3,366		0		(8,388	)		0
State		415		257		0		(738	)		0

		2,519		3,623		0		(9,126	)		0

Total income tax
expense (benefit)	$	4,926	$	3,962	$	0	$	(9,126	)	$	0

The following table is a reconciliation of the statutory federal income tax expense (benefit) to the effective income tax expense (benefit) for the years ended March 31, 2004 and 2003; December 31, 2001 and for the three months ended March 31, 2002 and 2001 (in thousands):

	For the Years Ended								For the Three Months Ended
	March 31,					December 31,			March 31,
	2004			2003		2001			2002			2001

												(unaudited)
Computed tax
expense (benefit)	$	4,715		$	3,667	$	28		$	353		$	(1,252	)
State taxes, net of
federal benefit		308			242		0			(480	)		0
Change in deferred tax
valuation allowance		0			0		(46	)		(9,126	)		1,252
Other		(97	)		53		18			127			0

Actual tax
expense (benefit)	$	4,926		$	3,962	$	0		$	(9,126	)	$	0

F-13

The Company recognized a tax benefit of $9.1 million during the three months ended March 31, 2002 as a result of reinstating net deferred tax assets, including the benefit of net operating loss carryforwards.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for 2004 and 2003 are presented below (in thousands):

	March 31,
	2004			2003

Deferred tax assets:
Inventory items	$	337		$	383
Accounts receivable allowance		141			122
Product rights		437			304
Accrued expenses		1,443			2,108
Contract termination		647			770
Net operating loss and credit carryforwards		158			2,166

		3,163			5,853

Deferred tax liabilities:
Unrealized gains on marketable securities		(68	)		(119	)
Property and equipment		(12	)		(184	)

		(80	)		(303	)

Net deferred tax assets	$	3,083		$	5,550

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 of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences.

As of March 31, 2004, the Company has reported state operating loss carryforwards of $1.6 million and credits of $80,000. These state operating loss carryforwards begin to expire in 2014.

(7)

Sales

The Company had one significant customer who accounted for 26%, 25% and 22% of net sales in the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. The Company had one significant customer who accounted for approximately 22% and 21% (unaudited) of net sales for the three months ended March 31, 2002 and 2001, respectively. Accounts receivable from this customer as of March 31, 2004 and 2003 were $2,995,000 and $2,611,000, respectively.

F-14

Net sales by brand and geographic area are as follows (in thousands):

	For the Years Ended						For the Three Months Ended
	March 31,				December 31,		March 31,
	2004		2003		2001		2002		2001

									(unaudited)
Domestic
Breathe Right	$	64,126	$	57,855	$	53,816	$	13,591	$	16,551
FiberChoice		9,290		7,084		6,373		1,536		2,137
Other		588		319		36		68		39

Total domestic		74,004		65,258		60,225		15,195		18,727
International
Japan		4,430		5,360		8,055		1,996		2,644
UK		2,349		2,275		2,378		426		665
Italy		1,899		2,020		2,312		260		621
Canada		1,372		1,161		1,102		346		296
Other		2,926		3,001		2,170		912		515

Total international		12,976		13,817		16,017		3,940		4,741

Net sales	$	86,980	$	79,075	$	76,242	$	19,135	$	23,468

(8)

Employee Benefit Plan

The Company provides a defined contribution plan which covers all eligible employees. Generally, employees may contribute up to 50% of base compensation to the plan, not to exceed certain annual limits. The Company matches 25% of employee contributions up to 5% of base compensation each year, with certain limitations. The Company may also make additional discretionary contributions. Contribution expense related to the defined contribution plan was $251,000, $204,000 and $269,000 for the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. Contribution expense related to the defined contribution plan was $46,000 and $120,000 (unaudited) for the three months ended March 31, 2002 and 2001, respectively.

(9)

Special Charges

On June 26, 2001, the Company announced a plan to streamline and realign the Company’s resources to better match its strategic goals. The Company recorded a special charge of $930,000 for costs associated with this restructure plan. Approximately 20 jobs, or 25% of the workforce from throughout the Company, were eliminated. These cost-cutting actions were expected to result in annualized savings of approximately $2 to $2.5 million. Cost savings relating to this plan were realized beginning in July of 2001. During 2001, the Company utilized $608,000 of the $930,000 accrual, primarily for severance benefits. During the three months ended March 31, 2002, the Company utilized $116,000 for severance payments and during the year ended March 31, 2003, the Company utilized $180,000 for severance payments. As of March 31, 2004, the Company made all of the payments relating to this plan and therefore the balance of the accrued liability was $0.

(10)

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 $795,000 each year until patents for the products expire. Royalties are classified as a component of cost of goods sold. Royalty expense was approximately $2,612,000, $2,652,000 and $3,524,000 for the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. Royalty expense was approximately $724,000 and $1,040,000 (unaudited) for the three months ended March 31, 2002 and 2001, respectively.

F-15

(11)

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 March 31, 2004 are as follows (in thousands):

Year ending March 31,	Amount

2005	$	780
2006		780
2007		762
2008		741
2009		741
Later years		1,236

Future minimum lease payments	$	5,040

Total rental expense for operating leases was $780,000, $781,000 and $789,000 for the years ended March 31, 2004 and 2003 and December 31, 2001, respectively. Total rental expense for operating leases was $195,000 and $195,000 (unaudited) for the three months ended March 31, 2002 and 2001, respectively.

(12)

Net Income (Loss) Per Share

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

	For the Years Ended						For the Three Months Ended
	March 31,				December 31,		March 31,
	2004		2003		2001		2002		2001

									(unaudited)
Weighted average number of common shares outstanding		13,576		13,467		14,131		13,711		14,123
Potential common shares		912		577		300		487		0


Weighted average number of common and potential common shares outstanding		14,488		14,044		14,431		14,198		14,123

As of March 31, 2004, a total of 324,000 options to purchase shares of common stock with a range of exercise prices from $11.01 to $12.04 per share were outstanding but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares. These options expire during the period of 2004 to 2013.

F-16

(13)

Summary of Quarterly Financial Data (Unaudited)

The following is a condensed summary of actual quarterly operating results for fiscal 2004 and 2003 (in thousands, except per share amounts):

	Jun 30, 2003		Sep 30, 2003		Dec 31, 2003		Mar 31, 2004
Net sales	$	17,497	$	20,621	$	26,395	$	22,467
Cost of goods sold		5,470		6,454		8,396		6,584

Gross profit		12,027		14,167		17,999		15,883

Operating expenses:
Advertising and promotion		4,465		4,207		12,516		11,913
Selling, general and administrative		3,341		3,422		3,737		3,727

Total operating expenses		7,806		7,629		16,253		15,640

Operating income		4,221		6,538		1,746		243
Investment income		194		183		160		188

Income before income taxes		4,415		6,721		1,906		431
Income tax expense		1,634		2,486		716		90

Net income	$	2,781	$	4,235	$	1,190	$	341

Basic net income per share	$	.21	$	.31	$	.09	$	.02

Diluted net income per share	$	.20	$	.29	$	.08	$	.02


	Jun 30, 2002		Sep 30, 2002		Dec 31, 2002		Mar 31, 2003
Net sales	$	14,523	$	17,386	$	25,914	$	21,253
Cost of goods sold		5,319		5,912		8,119		6,640

Gross profit		9,204		11,474		17,795		14,613

Operating expenses:
Advertising and promotion		4,115		2,881		13,407		10,527
Selling, general and administrative		2,763		3,015		3,204		3,535

Total operating expenses		6,878		5,896		16,611		14,062

Operating income		2,326		5,578		1,184		551
Investment income		229		240		240		130

Income before income taxes		2,555		5,818		1,424		681
Income tax expense		1,000		2,300		550		112

Net income	$	1,555	$	3,518	$	874	$	569

Basic net income per share	$	.11	$	.26	$	.07	$	.04

Diluted net income per share	$	.11	$	.25	$	.06	$	.04

During the quarter ended December 31, 2003, the Company recognized $.03 per diluted share of net income that should have been recognized for the quarter ended March 31, 2004, related to a revenue recognition timing issue. This would have reduced the reported $.08 per diluted share of net income to $.05 per diluted share for the quarter ended December 31, 2003 and increased the reported $.02 per diluted share of net income to $.05 per diluted share for the quarter ended March 31, 2004. There was no impact on net income or diluted net income per share for the twelve months ended March 31, 2004.

F-17

GRAPHIC 2 cns_logo.gif GRAPHIC begin 644 cns_logo.gif M1TE&.#EA90!7`+,``%2'ND9YK/___S)DERE?R"'Y!```````+`````!E`%<```3_T$E"ZZQD#%PU MIQL8[KER9AY93T$L%E$R3`UV22*!&6@2A-.E MH#V-;T#D>K?9X&:LXM3.Z/1T1M9)1QVMU0HVCM)GU@\[!L)=+WB">2Z%-Q\Y M?D9%$S9+:("->GI79A1+)%5@%/,,PD,QD&BD/(;L]+RU"*;%BW2L("!``$)[H5K5TJ9 M/R7R'#W#=B+!P8L+%O81%J?CJQ/P_RBVT4@2@<&+!QE82^0M%4DUS4;"*3-1 MPP.4.!/`F&9"H,]P'W^0Q&5*08`&.),6&"HGE\^G79@Z/;*R)]2;2;,*[.FE MJZFN57_%7!0`:E1<1`)8S)JU@9$`<,O*+6LT;=VTO/ZW$L8 MKH*";!,;,"N0[MN!C[M\-&O8\5_!12H;2,Q9P(+"`1```(```6C`F>.67HW@ MP`'2I@O'KGSZ*>$#2#LG9L"Z-.S1P'V75CTLXN7W:R[ MVCLT@,`R%V]\X/P\./'=^VZ0`'Z"^POV$__ MM??GXYV7GO]A=Q707GL,')#=<.AM!\!_\HT&(7RN2?@@A*N-ER$":QU8W76] MP2>:?!D2MYI^_9%8(F%US868AP<:(%J%W_6'(7C<-:AC=Q-^)]J/U,'HH8U$ M2DC?@Q2F.%IJYP58WFQY[662D$(V0..(#>+(XW[VV:>@CB::MQ=65`II0(0] M7EBDF@<4P-\"P37H9&_LE2ED`4FZM@"1-JH(W9/'G?;`2792R4!X>G;999N* MYF>CHQ&&AV6)IG58:)D)S,@<=JR,"%Z2IU3'PP'A!\J;CK'G^A]UST8F&*JZ<-1`G`@8>E`#_.]H`!<(X6I*I&]GDDGQ>BN.R*>UG*;6)X+I#2EPCDEB": MF]9GK9NQR@JJ@`"4^FY2AP(@[T$-A'9K`[].BV:G-/K8''@(D#DPP:MU:,"Q M#Z!G0`()D$MCD>P:95E@[EY\T7$!=S9A00U\VP`#_7(:J\3LGGSLI0P8\"VA MF7HK,$X%`];[=>BIV]DB*P]=!9/Y`I`PWD#4#(^0J;WEV62;FSD,]NO&M< M)UDI979TAQ7G0HJG%3,Q@EX<*I[W_N@V'V/CI[:*>=:W,+(#1XS MO0A0=^_2#%0?=)H*TOKTY:=-23AKI3X;VNFJ/F&/Q\F.^>*T']BQ M:;\?]!E<;2<5=/07>8TO?OW2WJ2(]2>X)`\EU]&=XWQS*^'5"R<-:-9!.D:: MBRBK5CRRT;5@\S[RU&5HCCL/:21X0=&$KSLH$5V0&%8:9SFL1FQZW0:7Q<'> MK:U^%Z&9P1(0+@!(4$:E(5_G5H,5X:WG(D(CEZLHYYHP@>I74HI+_@P0FI-8 MK31D^HW%=#B:M?^`Z'P"\)K9M.0CBC'Q-4^+UL2V`QU4:>(.M6+8IP@1DCDFQ,AJ\I>3[I3*?P`."/D(Q$F($].$#@2 MO*:XE+BN5OT/D.?JSYZ>R9^(Y:@W'0*1:#ISK])8RE=9JN0Y)\;+%.GI`.3D M%SEC-RM"96V:!'/A>.JDSF&5$8.]9),?(=8W(G'IF4Z3(#PY1+3W="[_+E-# MV!4I:2%?OE!2T=*.2#TZ,3UQR3[IK-"+!!!'_AWD.9O)U((BY3`LF9%'P.JH M?]84S1&]CE`&Z%*OOI,XUL"I5AS5I267"!QH*E5-#U440VGENQRV[@#I[)+& M&/J?'IFSFR'Z3@%4-U:I=BD_:(55?AIE3K:]TCB$4I5$S4K7!TC5KGBUCUWI M*M4B><>9Y`PL1(\D'_:*8.`Y.M@]40H M914F,&1I4?>@R#T9PLI-:MV3`(VT5KY"C'9)`P!MF!2EY:P-3'M1J%D%JU8E M46NNM:UKVB-LEF M3:.<;1/C*_N6I^NELVVG]-5;?/XVEZ-1(_<&K1>'U?G.-/U1&45*28YNK\6@ M!F:2D'1I3%-,NMI"CU],%FI6@\:;9)8MHH$K7`_+IL&FF8JK,8?@S)B,U8H& CH%2W_&A(^TE,E-YU^Z"6LUTK>+./.O)^W51G"G/Y.Q$``#L_ ` end EX-10.25 3 cns042906_ex10-25.htm Exhibit 10.25 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 10.25

SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

          THIS AMENDMENT to the Executive Employment Agreement dated February 12, 1999 (the “Agreement”) between CNS, Inc. (the “Company”) and Daniel Cohen (the “Employee”), as amended June 29, 2001 (“First Amendment”), is made and entered into as of the 29th day of June 2003.

1.
The purpose of this Amendment is to extend the employment of the Employee after June 30, 2003 in connection with the Employee’s position and duties as Chairman of the Board of CNS under the terms of the Agreement, as amended by the First Amendment. This Amendment is intended to modify the Agreement and First Amendment to the extent set forth herein.

2.
Pursuant to Paragraph 3 of the First Amendment, the Agreement, as amended, and Employee’s employment is extended until June 30, 2004 and each of the dates set forth in Paragraph 3 of the First Amendment shall be modified to read “June 30, 2004.”

3.
The parties acknowledge that the Company has satisfied its obligations to Employee with respect to the severance payments set forth in Paragraph 5 of the First Amendment and that such paragraph shall be null and void and of no further force and effect after June 30, 2003.

4.
Paragraph 8 of the First Amendment shall be modified to read as follows:

“In the event that the Company terminates the Employee’s employment during the term of the Agreement other than for Good Cause (as defined in Section 7(b) of the Agreement) or in the event the Employee resigns for Good Reason (as defined in Section 8(b)(i) of the Agreement), whether prior to or following a Change in Control of the Company, in consideration for the Employee executing a standard release agreement covering all claims against the Company as defined in the Agreement, the Company will: (a) pay to the Employee Eleven Thousand Seven Hundred Dollars ($11,700) per month, payable in semi-monthly installments and subject to tax withholding as required by law, until June 30, 2004; and (b) pay the COBRA premium on the Company’s health plan on behalf of the Employee until the earliest of: (i) June 30, 2004; or (ii) the date Employee otherwise ceases to be eligible for COBRA continuation coverage. Such payments shall be in lieu of any salary continuation, severance or other similar payment due upon termination of employment by the Company under the Agreement (including after a Change in Control of the Company), any policy, practice or arrangement of the Company. Employee shall be entitled to any benefits thereafter under any of the Company’s benefit plans to which terminated employees are entitled in accordance with law.”

5.
The provisions of Section 8 of the Agreement, as modified by Paragraph 9 of the First Amendment (other than the definition in Section 8(b)(i) referred to in Paragraph 4 above), shall be void and of no further force and effect from and after the date of this Second Amendment.

6.
The date in Paragraph 10 of the First Amendment is modified to read “July 1, 2004.”

7.
Except as specifically modified herein, all of the terms and conditions set forth in the Agreement and the First Amendment shall continue in full force and effect.

          IN WITNESS WHEREOF, this Second Amendment is executed on behalf of the Company by an Executive Officer who has the authority and approval of the Board and by the Employee as of the day and date set forth above.

CNS, INC.

/s/   Daniel Cohen

By:

/s/   Marti Morfitt

Daniel Cohen

Its:
President and Chief Executive Officer

EX-10.26 4 cns042906_ex10-26.htm Exhibit 10.26 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 10.26

CNS, Inc.
7515 Smetana Lane
Eden Prairie, Minnesota 55345
Phone: (952) 229-1500 Fax (952) 229-1700
www.cns.com

September 18, 2003

Samuel E. Reinkensmeyer
4506 Drexel Avenue
Edina, MN 55424

Dear Sam:

I am pleased to confirm my offer of employment to you as Vice President of Finance and Chief Financial Officer reporting to me. If you accept this offer, your start date will be as mutually agreed between us, but not later than October 15, 2003.

Your compensation package will include the following components:

• Your base salary will be $190,000 annualized, paid over our regular semi-monthly pay periods.

• You will be eligible for annual revenue and profit based incentive bonus of up to 60% (15% at threshold, 30% at plan and 60% maximum) of your base salary. The parameters of the incentive bonus plan for senior management is presented by management for approval by the Board of Directors each year.

• Subject to the approval of the CNS, Inc. Compensation Committee, we will grant you an option to purchase 53,500 shares of CNS common stock at a price per share determined on your first day of employment (date of grant). These shares will vest in equal amounts over a five-year period beginning on your first anniversary date.

• Periodically, at the discretion of the Compensation Committee, you will be eligible to receive annual stock options that will vest over a three-year period.

Samuel E. Reinkensmeyer Offer Letter
Page Two

• CNS will pay you a one time hiring bonus of $65,000 less required withholding, to be paid with your first paycheck.

• You will be eligible to receive a monthly car allowance of $450.00.

• You will be eligible to participate in CNS, Inc.‘s benefit plans. A packet of benefit information will be sent to you under separate cover following your acceptance of this offer. CNS’ benefit plan includes 25 days of Paid Time Off (PTO) during the first year of employment. Eight of the 25 days will be added to your PTO bank immediately upon date of hire. The remaining 17 days accrue at a rate of 5.67 hours per pay period over the first twelve months.

• In the event your employment is terminated by CNS without Cause (as defined on Exhibit A) prior to a change in control of CNS, in exchange for a written release of all claims by you, CNS will pay you severance equal to your annual base salary payable over a period of twelve months from your termination date, subject to required withholding plus pay your COBRA premium over the same period. In the event your employment is terminated by CNS without Cause or you resign your employment with CNS for Good Reason (as defined on Exhibit A) within 24 months after a change in control of CNS, in exchange for a written release of all claims by you, CNS will pay you severance equal to two times your annual base salary payable over a period of twenty-four months from your termination date, subject to required withholding plus your COBRA premium over a period of 18 months from your termination date.

We will schedule a pre-employment druge and alcohol screen tests for you at the Airport Clinic. This employment offer is contingent upon successfully completing these tests. As a condition of your employment and as consideration for the compensation and benefits to be provided, you will, prior to your first day of employment, execute the Employment Agreement attached as Exhibit B, containing confidentiality, invention assignment and noncompetition provisions required of all new employees.

Samuel E. Reinkensmeyer Offer Letter
Page Three

Sam, we are very excited about the prospect of you joining CNS and ask that you confirm your acceptance of this offer by signing the enclosed copy of this letter and returning it to me at your earliest convenience. If you have any questions at all about the terms of the offer, please call me or Michelle Beuning so that we can discuss and resolve them as soon as possible. I know that you will find this position a challenging and rewarding opportunity and that you will be an important part of delivering the CNS vision!

Sincerely,

/s/   Marti Morfitt
Marti Morfitt
President & CEO

Accepted and agreed to this offer on the
23rd day of September, 2003.

/s/   Samuel E. Reinkensmeyer
Samuel E. Reinkensmeyer

EXHIBIT A

“Cause” shall mean one or more of the following: (i) your willful failure or refusal to perform your expected services to CNS consistent with your position; (ii) your commission of an intentional breach of fiduciary duty against CNS or a substantial act of fraud against or affecting CNS or any customer, supplier, client, agent, or executive thereof; (iii) your commission of any other willful or reckless act which is deemed by CNS’s Board to have a material adverse effect on CNS (it being understood that mere negligence in performance of duties is not Cause under this Agreement); (iv) your willful breach of any provision of this Agreement or any policy or directive of the Board or the CEO, including the CNS Code of Conduct; or (v) your commission of any act involving moral turpitude which is deemed by CNS’s Board to have a material adverse effect on CNS or your position with CNS; or (vi) your unsatisfactory performance after specific notice of performance deficiencies, description of expectations and opportunity to cure.

“Good Reason” shall mean: (i) CNS has materially breached any of the terms of this Agreement; (ii) you are assigned duties which are materially inconsistent with your position, duties, responsibilities and status as Chief Financial Officer; (iii) your base salary or bonus opportunity, is reduced; or (iv) as a result of the relocation of CNS’ principal offices, you would be required to relocate your principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area.

EX-10.27 5 cns042906_ex10-27.htm Exhibit 10.27 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 10.27

EMPLOYMENT AGREEMENT
BETWEEN
CNS, INC. AND
SAM REINKENSMEYER

THIS AGREEMENT (“Agreement”), made and entered into in the City of Eden Prairie, State of Minnesota, this 15^th day of October, 2003, by and between CNS, Inc., a Delaware corporation (“the Corporation”) and Sam Reinkensmeyer (“Employee”);

ARTICLE 1
EMPLOYMENT

1.0)        The Corporation hereby employs Employee, and Employee agrees to work for Corporation at such duties as are assigned to him/her from time to time by the directors and officers of the Corporation.

ARTICLE 2
TERM

2.0)        The Agreement shall be in effect hereinafter unless and until altered or terminated as hereinafter provided.

ARTICLE 3
DUTIES

3.0)        Employee agrees, unless otherwise specifically authorized by the Corporation, to devote his full time and effort to his duties for the profit, benefit and advantage of the business of the Corporation.

ARTICLE 4
NON-COMPETITION

4.0) The Corporation and the Employee acknowledge that:

01) The Corporation’s business is highly competitive;

02) The essence of such business consists of confidential information and trade secrets as described in Article 5, all of which are zealously protected and kept secret by the Corporation;

03) In the course of his/her employment, Employee will acquire the information described in Article 5 and that the Corporation would be adversely affected if such information subsequently, and in the event of the termination of the Employee’s employment, is used for the purposes of competing with the Corporation.

Page 1

04) For these reasons, both the Corporation and the Employee further acknowledge and agree that the restrictions contained herein are reasonable and necessary for the protection of their respective, legitimate interests.

4.1)        Employee agrees that from and after the date hereof during his/her employment with the Corporation for one (1) year thereafter, he/she will not, without the express written permission of the Corporation, directly or indirectly (a) own, manage, operate, control, lend money to, endorse the obligations of, or participate or be connected as an officer, consultant, director, 5% or more stockholder of a publicly held company, employee, partner, member, or otherwise, with any enterprise or individual engaged in the business of developing, manufacturing or marketing products to persons or companies that were customers of the Corporation during the term of this Agreement, or with any enterprise or individuals engaged in the business of developing, manufacturing or marketing products that have been, or are known by Employee as being planned to be developed by the Corporation and will not in any manner either directly or indirectly compete with the Corporation in such business (b) solicit or do business with (1) any persons or entities who are customers or clients of the Corporation at the time of the Employee’s termination of employment, or (2) any prospective or former customers of the Corporation with whom the Employee had contact during the [two years] preceding his/her termination of employment (c) individually or collectively or in conjunction with others, solicit, on his/her own behalf or on behalf of any other person, the services of any person who is an employee or agent of the Corporation, or directly or indirectly solicit any of the Corporation’s employees or agents to terminate their employment or agency with the Corporation. It is understood and acknowledged by both parties that, inasmuch as the Corporation’s products are marketed nationwide, that this covenant not to compete shall be enforced throughout the United States, in any other country for which the Corporation has developed or is in the process of developing a marketing plan for its products, even if such plan is not yet in effect,

4.2)        Employee further agrees that during and following the termination of his/her employment, he/she will do nothing to interfere with any of the Corporation’s business relationships or its goodwill or reputation.

4.3)        Employee, during the term of his/her employment by the Corporation, shall at all times keep the Corporation informed of any business activity and outside employment. The Employee shall not engage in any activity or employment which may be in conflict with the Corporation’s interests, as determined by the Corporation in its sole discretion.

ARTICLE 5
CONFIDENTIAL INFORMATION AND TRADE SECRETS

5.0)        Employee has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of the Corporation including, without limitation, confidential information with respect to the Corporation’s products, packages, improvements, designs. practices, sales or distribution methods and other confidential information pertaining to the Corporation’s business or financial affairs, which may or may not be patentable, which are developed by the Corporation at considerable time and expense, and which could be unfairly utilized in competition with the Corporation. Confidential information includes information

Page 2

relating to the Corporation, which is provided or disclosed to the Employee, which he/she develops in the course of performing his/her duties for the Corporation. The term “trade secret” shall be defined as follows:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.

Accordingly, Employee agrees that he/she shall not, during the period of his/her employment hereunder or thereafter, use for his/her own benefits confidential information or trade secrets, whether written or otherwise, and whether expressly labeled as “confidential” or “trade secret” or not, acquired during the term of his/her employment by the Corporation. Further, during the period of his/her employment hereunder and thereafter, the Employee shall not, without the written consent of the Board of Directors of the Corporation or a person duly authorized thereby, disclose to any person, other than an employee of the Corporation or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his/her duties, any confidential information or trade secrets obtained by him/her while in the employ of the Corporation.

5.1)        Upon termination of employment, Employee agrees to deliver to the Corporation all materials that include confidential information or trade secrets, such as customer lists (Customer Account Master), product formulations, instruction sheets drawings, manuals, letters, notes, notebooks, books, reports and copies thereof, and all of the materials of a confidential nature which belong to or related to the business of the Corporation.

5.2)        Employee agrees and acknowledges that confidential information and trade secrets are the sole and exclusive property of the Corporation, absolutely and forever.

ARTICLE 6
IMPROVEMENTS AND INVENTIONS

6.0)        Employee shall promptly and fully disclose to the Corporation, any and all ideas, improvements, discoveries, and inventions, whether or not they are believed to be patentable (including those which may be subject to copyright protection) (all of which are hereinafter referred to as “Inventions”), which Employee conceives or first actually reduces to practice, either solely or jointly with others, during the period of Employee’s employment or within two years after termination of employment, and which relate to the business now or hereafter carried on or contemplated by the Corporation or which results from any work performed by Employee for the Corporation.

6.1)        All such inventions shall be the sole and exclusive property of the Corporation, and during the term of his/her employment and thereafter, whenever requested to do so by the Corporation, Employee shall execute and assign any and all applications, assignments and other instruments which the Corporation shall deem necessary or convenient in order to apply for and obtain Letters Patent of the United States and/or of any foreign counties for such inventions and in order to assign and convey to the Corporation or its nominee the sole and exclusive right, title

Page 3

and interest in and to such inventions, and Employee will render aid and assistance in any interference or litigation pertaining thereto, all expenses reasonably incurred by employee at the request of the Corporation shall be borne by the Corporation.

6.2)        To the extent, if any, that Minnesota law is determined to apply to the enforceability of this Agreement, Minnesota Statue Section 181.78 provides that the Agreement does not apply, and written notification is hereby given to the Employee that this Agreement does not apply, to an invention for which no equipment, supplies, facility, or trade secret information of the Corporation was used and which was developed entirely on he Employee’s own time, and (1) which does not relate (a) directly to the business of the Corporation, or (b) to the Corporation’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the Employee for the Corporation.

ARTICLE 7
JUDICIAL CONSTRUCTION

7.0)        The Employee believes and acknowledges that the provisions contained in this Agreement, including the covenants contained in Article 4 and 5 of this Agreement, are fair and reasonable. Nonetheless, it is agreed that if a court finds any of these provisions to be invalid in whole or in part under the laws of any state, such finding shall not invalidate the covenants, nor the Agreement in its entirety but rather the covenants shall be construed and/or bluelined, reformed or rewritten by the court as if the most restrictive covenants permissible under applicable law were contained herein.

ARTICLE 8
RIGHT TO INJUNCTIVE RELIEF

8.0)        Employee acknowledges that a breach by the Employee of any of the terms of Articles 4 or 5 of this Agreement will render irreparable harm to the Corporation; and that the Corporation shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties, and to recover from the Employee all costs of litigation including, but not limited to, attorneys fees and court costs.

8.1)        The Corporation’s action in not enforcing a breach of any part of the Agreement shall not prevent it from enforcing it as to any other breach of the Agreement that it discovers.

ARTICLE 9
TERMINATION

9.0)        Either party shall have the right to terminate this Agreement with or without cause upon fifteen (15) days notice to the other, and the Corporation shall pay Employee until the date of termination, unless the Corporation terminates the Agreement because the Employee has violated either Article 4 or 5, in which ease no additional compensation shall be payable to Employee. Employee acknowledges that any employment and compensation can be terminated with or without cause at any time by the Company.

Page 4

ARTICLE 10
ASSIGNMENT

10.0)        The Corporation shall have the right to assign this Agreement to its successors or assigns, and all covenants or agreements hereunder shall inure to the benefit of and be enforceable by or against its successors or assigns.

10.1)        The terms “successors” and “assigns” shall include any Corporation which buys all or substantially all of the Corporation’s assets, or a controlling portion of its stock, or with which it merges or consolidates.

ARTICLE 11
LICENSES

11.0)        This Agreement does not grant the Employee any rights or licenses, express or implied, under any patents, copyrights or trade secrets.

ARTICLE 12
GOVERNING LAW

12.0)        This Agreement shall be construed and interpreted according to the laws of the State of Minnesota.

ARTICLE 13
ENTIRE AGREEMENT

13.0)        The Corporation and the Employee acknowledge that this Agreement contains the full and complete employment agreement between and among the parties, that there are no implied or express modifications of this employment agreement in an oral discussion or any writing, including without limitation in any employee handbook policy statement or other document of the Corporation. This Agreement supersedes any prior agreements or understandings, if any, between the Corporation and the Employee, whether written or oral. The parties further agree that no modifications of this Agreement may be made except by means of a written agreement of memorandum signed by the parties.

Page 5

IN WITNESS WHEREOF, the Corporation has hereunto signed its name and the Employee hereunder has signed his/her name, all as of the day and year first above written.

By:   /s/   Samuel E. Reinkensmeyer

   (employee)

CNS, Inc.

/s/   Michelle Beuning

(witness)

Page 6

EX-10.28 6 cns042906_ex10-28.htm Exhibit 10.28 to CNS, Inc. Form 10-K dated March 31, 2004

Exhibit 10.28

CNS, Inc.
7515 Smetana Lane
Eden Prairie, Minnesota 55345
Phone: (952) 229-1500 Fax (952) 229-1700
www.cns.com

October 10, 2003

Milton W. (Andy) Anderson
1460 Southridge
Eagan, MN 55121

Dear Andy:

This letter describes our agreement regarding your resignation as Vice-President, Product Development & Regulatory officer of CNS, Inc. (“CNS”) effective December 31, 2003.

We will provide you with the following benefits in connection with your departure from CNS:

1.
We will pay you Salary Continuation pursuant to the terms of Paragraph 7 of the Employment Agreement as follows: 24 semi-monthly paychecks of $5,482.92, subject to applicable withholding, beginning with the later of (a) our January 15, 2004 payday or (b) our first regular payday following expiration of the 15-day rescission period described on page 3 of this agreement and our receipt of Exhibit A, signed and dated by you after expiration of the rescission period. Exhibit A is your certification that you took no steps to exercise your right of rescission. In the event of a Change in Control, as that term is defined in the “Executive Employment Agreement” dated February 12, 1999, the above- referenced semimonthly paychecks will be accelerated and payable, in full, on demand by you. As an employee of CNS until December 31, 2003, you will continue to accrue, and may continue to use, paid time off; as part of your final paycheck after December 31, we will pay you any unused paid time off as of that date. As of September 30, 2003, your accrued unused paid time off was $19,737.12 or 312.0 hours.

Although not required under the terms of your Executive Employment Agreement, you will be eligible to receive a pro-rated bonus consistent with CNS business performance under the CNS Management Incentive Plan for 2004 based on your December 31, 2003 Resignation Date, the terms of the Plan and provided that the Plan objectives have been

Milton W. (Andy) Anderson Separation Letter
Page 2

met. Payment of any available bonus would occur at the normal payout time for all employees. We estimate the payout to be made in May 2004.

2.
As a condition of your severance, you agree to make yourself available to CNS on an as needed basis to provide consulting services not to exceed approximately 120 hours between January 1 and April 30, 2004 solely in connection with the development of the special project you are currently working on with Dan Cohen. CNS is not required to provide you with any minimum number of hours in connection with the special project. You will report to and be subject to the direction of Dan Cohen. For your consulting services in connection with the special project, CNS will pay you at a rate of $100.00 per hour, subject to verification of your hours, which payment shall be in addition to the payment of severance described in paragraph 1 above. CNS will also reimburse you or pay directly any pre-approved business expenses you incur in connection with your consulting services on the special project, subject to its existing policies on such expenses. For convenience, such payment will be considered as severance, subject to any required tax withholding, but you agree that such services will be rendered following your termination of employment, and you will not be entitled to any pension, welfare or other fringe benefits provided to active employees, but only to those benefits described in paragraph 3 below or to which you are otherwise entitled as a terminated employee. CNS may, but is not required to, engage you for additional consulting services not related to the special project described above in its sole discretion, and in that event, you will be compensated at a rate mutually agreeable to you and CNS.

3.
You will be eligible for COBRA continuation coverage under the CNS group health and dental plan beginning January 1, 2003, for which you would otherwise be responsible for 100% of the premium cost. As part of your severance, CNS will continue to pay the employer share, and you will continue to be responsible for the employee share, as applicable, of your CNS group health, dental and life insurance premiums through December 31, 2004 or, if earlier, the date on which you are eligible to participate in other group plans through your new employer, provided you make the appropriate timely written elections to continue your CNS group coverage’s. Your share of the premiums will be deducted from the Salary Continuation payments described in paragraph 1. You agree to notify CNS immediately if your eligibility under other group plans through your new employer occurs. If you are not covered under other such group plans as of December 31, 2004, you will have the right to continue your group coverage’s at your own expense for up to an additional six months, in accordance with applicable state and federal group insurance continuation laws and the terms of the plans. All rights which you may have under CNS’s group plans, are subject to the terms of the plans, applicable laws and the continuation of said plans for active CNS employees. Information and election forms concerning your group coverages will be mailed to you. During the period you are providing consulting services to CNS as described in paragraph 2, you will not be

Milton W. (Andy) Anderson Separation Letter
Page 3

considered as an employee for benefit plan purposes, but will only be entitled to your rights, if any, under all CNS benefit plans as a terminated employee in accordance with the terms of each such plan.

4.
We are providing you with the opportunity to voluntarily resign from your employment. If any prospective employer of yours wishes to contact CNS for employment information, you agree to direct that employer to make a written inquiry to Michelle Beuning, Director of Human Resources. Ms. Beuning will provide the prospective employer, in writing, with your job title, the scope of your responsibilities, your dates of employment, and the fact that you voluntarily resigned your employment.

5.
We will provide an executive outplacement package that we have selected with Right Management Consultants at our expense.

6.
To the extent required under applicable law, we will indemnify you and hold you harmless with respect to any action in which you are a named defendant that arises out of your CNS employment responsibilities prior to your resignation on December 31, 2003.

7.
We will remove all restrictive legends on any shares of CNS common stock held by you. In connection with the removal, you agree that for a period of 90 days from the date you cease to be employed by CNS, any shares that you sell will be sold in compliance with the applicable requirements of Rule 144 under the Securities Act of 1933.

8.
As of the date of this letter, you have 86,800 vested shares under your stock options that are exercisable according to the terms of the applicable Stock Option Plan and applicable Stock Option Agreement which will remain exercisable for the period described in each option agreement. Your stock options are set forth on Exhibit B.

9.
CNS will use its best efforts to see that its management will speak positively and with respect about you as we have in the past.

10.
CNS will maintain the confidentiality of the terms of this agreement, except to the extent persons responsible for the administration of the terms hereunder or the provision of any compensation and benefits hereunder need to know, for financial and securities compliance or as otherwise required by applicable law or regulation.

In consideration of the benefits to be afforded to you as outlined above, you agree to do the following things:

Milton W. (Andy) Anderson Separation Letter
Page 4

1.
You hereby release CNS, Inc., its past and present affiliates, and its and their past and present officers, directors, agents, shareholders, employees, attorneys, insurers and indemnitors (collectively, the “Releasees”) from any and all claims and causes of action, known or unknown, which you may have against any and all of them. Through this release, you extinguish all causes of action against the Releasees occurring up to the date on which you sign this agreement, including but not limited to any contract, compensation or benefit claims; intentional infliction of emotional distress, defamation or any other tort claims; and all claims arising from any federal, state or municipal law or ordinance, including the Employee Retirement Income Security Act, the Family and Medical Leave Act. This release extinguishes any potential claims of employment discrimination arising from your employment with and resignation from CNS, including specifically any claims under the Minnesota Human Rights Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, the Older Workers Benefit Protection Act, and the Age Discrimination in Employment Act. This release does not extinguish any claims that arise against CNS after you sign this agreement, to any benefits to which you are otherwise entitled under any CNS benefit plan, or to the right to indemnification under CNS bylaws or insurance. You certify that you (a) have not filed any claims, complaints or other actions against any Releasee and (b) are hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by you or any federal, state or local agency on your behalf based upon any event occurring up to the date on which you sign this agreement. You are advised by CNS to review your rights and responsibilities under this agreement with your own lawyer.

You have 21 days to review and consider this offer. If you sign this letter before 21 days have elapsed from the date on which you first receive it, then you will be voluntarily waiving your right to the full 21-day review period. You also have the right to rescind this agreement within 15 calendar days of the date upon which you sign it. You understand that if you desire to rescind this agreement, you must put the rescission in writing and deliver it to Michelle Beuning, CNS, Inc., 7615 Smetana Lane, P.O. Box 39802, Minneapolis, MN 55439-0802 by hand or by mail within 15 calendar days of the date on which you sign this agreement. If you deliver the rescission by mail, it must be postmarked within 15 calendar days of the date on which you sign this agreement and sent by certified mail, return receipt requested. If you rescind this agreement, all of CNS’s obligations to you, other than payment of accrued unused paid time off, will immediately cease, and CNS will owe you nothing hereunder.

2.
At our specific request and at mutually convenient times while you are receiving payments under this agreement, you agree to consult with me or my designee without additional compensation with respect to a limited amount of transitional CNS business matters that are unrelated to the special project described in paragraph 2 above or to any additional specific consulting assignments otherwise agreed upon between you and CNS

Milton W. (Andy) Anderson Separation Letter
Page 5

as described in paragraph 2 above. You also agree to cooperate with CNS in any current or future claims or lawsuits involving CNS where you have knowledge of the underlying facts, and CNS will pay or reimburse you for any pre-approved travel or similar expenses related to any such litigation and for such other expenses as agreed to by CNS. In addition, you agree that you will not voluntarily aid, assist, or cooperate with any claimants or plaintiffs or their attorneys or agents in any claims or lawsuits commenced in the future against CNS, provided, however, that nothing in this agreement will be construed to prevent you from testifying truthfully as required by valid legal or administrative process.

3.
You agree that you will continue to speak positively and with respect towards CNS as you have in the past.

4.
All knowledge and information not already available to the public which you have acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by you as strictly confidential and shall not be used by you directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively referred to as “Confidential Information”. Your obligations under this paragraph will not apply to any information that (a) is or becomes known to the general public under circumstances involving no breach by you of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS’ Board, or (d) you are obligated by law to disclose. Confidential Information also includes the terms of this agreement. You agree that you will not disclose its terms to anyone other than your family members, tax and legal advisors and as otherwise required by law.

5.
During the one-year period following your termination date, you shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for your own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period you shall not: avail yourself of any advantages or acquaintances you have made with any person who has, within the twelve (12) month period ended on the date of termination of your employment, been a customer of CNS or its affiliates, and which would, directly or

Milton W. (Andy) Anderson Separation Letter
Page 6

indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of your employment.

For purposes of this Agreement, the “Business of CNS” or “Business” means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip, FiberChoice, Flair strips and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during the 12 months prior to the date of termination of your employment.

6.
For one year following your termination date, you agree that you will not, directly or indirectly, solicit any current or prospective CNS customer, broker, vendor or distributor who is not, as of your termination date, a current customer, broker, vendor or distributor of your new employer, consulting business or any other enterprise in which you become involved after your resignation from CNS, for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are currently competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customers, brokers, vendors or distributors with whom CNS has had a business relationship at any time within the twelve (12) month period immediately preceding your resignation date. Prospective CNS customers, brokers, vendors and distributors are those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business relationship within six months following your resignation date. You also agree that during the same one-year period, you will not directly or indirectly solicit any CNS employee to terminate his or her employment with CNS. This employee nonsolicitation obligation shall apply to employees of CNS as of your resignation date.

If, in your opinion, the restrictions in this paragraph 6 or in paragraph 5 prevent you from obtaining employment, you may make a written request for modification of the restrictions with respect to a specific position that you are considering. The president of CNS will review and consider your request and if she determines, in her sole discretion, that the requested modification will not be adverse to CNS’s business interests, she will provide you with the modification, which must then be memorialized in writing and signed by both parties. In addition, if you have any questions with respect to the scope of your obligations hereunder, you agree to seek clarification from the president.

Milton W. (Andy) Anderson Separation Letter
Page 7

This agreement shall not in any way be construed as an admission of liability by CNS or as an admission that CNS has acted wrongfully with respect to you. CNS specifically denies and disclaims any such liability or wrongful acts. If any provision of this agreement is found to be illegal or unenforceable, such provision will be severed or modified to the extent necessary to make it enforceable, and as so severed or modified, the remainder of this agreement shall remain in full force and effect.

You understand that if you violate any obligation that you have to CNS under this agreement, all payments and benefits to you hereunder will immediately cease. In such event, your release of your claims shall remain fully in effect in consideration of the payments and benefits that you received prior to any such breach.

This agreement sets forth our entire agreement and fully supersedes any prior agreements, contracts or understandings between you and CNS. CNS asks that our records reflect that you conclude your employment on terms you understand and accept. Therefore, we ask you to declare that you have entered into this agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.

If this letter accurately reflects our understanding and agreement, please sign both copies and return the original to me. We appreciate all of your efforts and contributions to CNS over the past 19½ years and wish you success in your future career.

Sincerely,

CNS, Inc.

/s/   Larry Muma
Larry Muma
VP, Operations & Technical

Acknowledged and agreed to, with declarations
confirmed, this 24 day of October, 2003.

/s/   Milton W. (Andy) Anderson
Milton W. (Andy) Anderson

EX-10.29 7 cns042906_ex10-29.htm Exhibit 10.29 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 10.29

CNS, Inc.
7515 Smetana Lane
Eden Prairie, Minnesota 55345
Phone: (952) 229-1500 Fax (952) 229-1700
www.cns.com

January 26, 2004

John Kundtz
3932 Thomas Avenue So.
Minneapolis, MN 55410

Dear John:

This letter describes our agreement regarding your resignation as Vice-President, Marketing, Breathe Right Brand offficer of CNS, Inc. (“CNS”) effective February 27, 2004.

We will provide you with the following benefits in connection with your departure from CNS:

1.
We will pay you Salary Continuation pursuant to the terms of Paragraph 7 of your Employment Agreement as follows: 24 semi-monthly paychecks of $7,500.00, subject to applicable withholding, beginning with the later of (a) our March 15, 2004 payday or (b) our first regular payday following expiration of the 15-day rescission period described on page 3 of this agreement and our receipt of Exhibit A, signed and dated by you after expiration of the rescission period. Exhibit A is your certification that you took no steps to exercise your right of rescission. In the event of a Change in Control, as that term is defined in the “Executive Employment Agreement” dated July 22, 2002, the above- referenced semimonthly paychecks will be accelerated and payable, in full, on demand by you. As an employee of CNS until February 27, 2004, you will continue to accrue, and may continue to use, paid time off; as part of your final paycheck after February 27, 2004, we will pay you any unused paid time off as of that date. As of January 15, 2004, your accrued unused paid time off was $7,279.61 or 84.12 hours.

Although not required under the terms of your Executive Employment Agreement, you will be eligible to receive a pro-rated bonus consistent with CNS business performance under the CNS Management Incentive Plan for 2004 based on your February 27, 2004 Resignation Date, the terms of the Plan and provided that the Plan objectives have been met. Payment of any available bonus would occur at the normal payout time for all employees. We estimate the payout to be made in May 2004.

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2.
You will be eligible for COBRA continuation coverage under the CNS group health and dental plan beginning March 1, 2004, for which you would otherwise be responsible for 100% of the premium cost. As part of your severance, CNS will continue to pay the employer share, and you will continue to be responsible for the employee share, as applicable, of your CNS group health, dental and life insurance premiums through February 28, 2005 or, if earlier, the date on which you are eligible to participate in other group plans through your new employer, provided you make the appropriate timely written elections to continue your CNS group coverage. Your share of the premiums will be deducted from the Salary Continuation payments described in paragraph 1. You agree to notify CNS immediately if your eligibility under other group plans through your new employer occurs. If you are not covered under other such group plans as of February 28, 2005, you will have the right to continue your group coverage’s at your own expense for up to an additional six months, in accordance with applicable state and federal group insurance continuation laws and the terms of the plans. All rights which you may have under CNS’s group plans, are subject to the terms of the plans, applicable laws and the continuation of said plans for active CNS employees. Information and election forms concerning your group coverages will be mailed to you.

3.
We are providing you with the opportunity to voluntarily resign from your employment. If any prospective employer of yours wishes to contact CNS for employment information, you agree to direct that employer to make a written inquiry to Michelle Beuning, Director of Human Resources. Ms. Beuning will provide the prospective employer, in writing, with your job title, the scope of your responsibilities, your dates of employment, and the fact that you voluntarily resigned your employment.

4.
We will provide an executive outplacement package that we have selected with Right Management Consultants at our expense.

5.
To the extent required under applicable law, we will indemnify you and hold you harmless with respect to any action in which you are a named defendant that arises out of your CNS employment responsibilities prior to your resignation on February 28, 2004.

6.
We will remove all restrictive legends on any shares of CNS common stock held by you. In connection with the removal, you agree that for a period of 90 days from the date you cease to be employed by CNS, any shares that you sell will be sold in compliance with the applicable requirements of Rule 144 under the Securities Act of 1933.

7.
As of the date of this letter, you have 10,000 vested shares under your stock options that are exercisable according to the terms of the applicable Stock Option Plan and applicable Stock Option Agreement which will remain exercisable for the period described in each option agreement. Your stock options are set forth on Exhibit B.

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8.
CNS will use its best efforts to see that its management will speak positively and with respect about you as we have in the past.

9.
CNS will maintain the confidentiality of the terms of this agreement, except to the extent persons responsible for the administration of the terms hereunder or the provision of any compensation and benefits hereunder need to know, for financial and securities compliance or as otherwise required by applicable law or regulation.

In consideration of the benefits to be afforded to you as outlined above, you agree to do the following things:

1.
You hereby release CNS, Inc., its past and present affiliates, and its and their past and present officers, directors, agents, shareholders, employees, attorneys, insurers and indemnitors (collectively, the “Releasees”) from any and all claims and causes of action, known or unknown, which you may have against any and all of them. Through this release, you extinguish all causes of action against the Releasees occurring up to the date on which you sign this agreement, including but not limited to any contract, compensation or benefit claims; intentional infliction of emotional distress, defamation or any other tort claims; and all claims arising from any federal, state or municipal law or ordinance, including the Employee Retirement Income Security Act, the Family and Medical Leave Act. This release extinguishes any potential claims of employment discrimination arising from your employment with and resignation from CNS, including specifically any claims under the Minnesota Human Rights Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, the Older Workers Benefit Protection Act, and the Age Discrimination in Employment Act. This release does not extinguish any claims that arise against CNS after you sign this agreement, to any benefits to which you are otherwise entitled under any CNS benefit plan, or to the right to indemnification under CNS bylaws or insurance. You certify that you (a) have not filed any claims, complaints or other actions against any Releasee and (b) are hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by you or any federal, state or local agency on your behalf based upon any event occurring up to the date on which you sign this agreement. You are advised by CNS to review your rights and responsibilities under this agreement with your own lawyer.

You have 21 days to review and consider this offer. If you sign this letter before 21 days have elapsed from the date on which you first receive it, then you will be voluntarily waiving your right to the full 21-day review period. You also have the right to rescind this agreement within 15 calendar days of the date upon which you sign it. You

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understand that if you desire to rescind this agreement, you must put the rescission in writing and deliver it to Michelle Beuning, CNS, Inc., 7615 Smetana Lane, P.O. Box 39802, Minneapolis, MN 55439-0802 by hand or by mail within 15 calendar days of the date on which you sign this agreement. If you deliver the rescission by mail, it must be postmarked within 15 calendar days of the date on which you sign this agreement and sent by certified mail, return receipt requested. If you rescind this agreement, all of CNS’s obligations to you, other than payment of accrued unused paid time off, will immediately cease, and CNS will owe you nothing hereunder.

2.
At our specific request and at mutually convenient times while you are receiving payments under this agreement, you agree to consult with me or my designee without additional compensation with respect to a limited amount of transitional CNS business matters. You also agree to cooperate with CNS in any current or future claims or lawsuits involving CNS where you have knowledge of the underlying facts, and CNS will pay or reimburse you for any pre-approved travel or similar expenses related to any such litigation and for such other expenses as agreed to by CNS. In addition, you agree that you will not voluntarily aid, assist, or cooperate with any claimants or plaintiffs or their attorneys or agents in any claims or lawsuits commenced in the future against CNS, provided, however, that nothing in this agreement will be construed to prevent you from testifying truthfully as required by valid legal or administrative process.

3.
You agree that you will continue to speak positively and with respect towards CNS as you have in the past.

4.
All knowledge and information not already available to the public which you have acquired with respect to product development, improvements, modifications, discoveries, designs, methods, systems, computer software, programs, codes and documentation, research, designs, formulas, instructions, methods, inventions, trade secrets, services or other private or confidential matters of CNS (such as those concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.), or of any third party which CNS is obligated to keep confidential, shall be regarded by you as strictly confidential and shall not be used by you directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively referred to as “Confidential Information”. Your obligations under this paragraph will not apply to any information that (a) is or becomes known to the general public under circumstances involving no breach by you of the terms of this paragraph, (b) is generally disclosed to third parties by CNS as a continuing practice without restriction on such third parties, (c) is approved for release by written authorization of CNS’ Board, or (d) you are obligated by law to disclose. Confidential Information also includes the terms of this agreement. You agree that you will not disclose its terms to anyone other than your family members, tax and legal advisors and as otherwise required by law.

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5.
During the one-year period following your termination date, you shall not directly or indirectly engage in, enter into or participate in the business of CNS or in any business or commercial activity which does or is reasonably likely to compete with or adversely affect the Business or products of CNS, either as an individual for your own account, as a partner or a joint venturer, or as an officer, director, consultant or holder of more than five percent (5%) of the entity interest in, any other person, firm, partnership or corporation, or an employee, agent or salesman for any person. In addition, during such period you shall not: avail yourself of any advantages or acquaintances you have made with any person who has, within the twelve (12) month period ended on the date of termination of your employment, been a customer of CNS or its affiliates, and which would, directly or indirectly, materially divert business from or materially and adversely affect the Business of CNS; interfere with the contractual relations between CNS and any of its employees; or employ or cause to be employed in any capacity or retain or cause to be retained as a consultant any person who was employed in any capacity by CNS during the twelve (12) month period ended on the date of termination of your employment.

For purposes of this Agreement, the “Business of CNS” or “Business” means and includes the business of the manufacture, production, sale, marketing and distribution of the Breathe Right strip, FiberChoice, Flair strips and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during the 12 months prior to the date of termination of your employment.

6.
For one year following your termination date, you agree that you will not, directly or indirectly, solicit any current or prospective CNS customer, broker, vendor or distributor who is not, as of your termination date, a current customer, broker, vendor or distributor of your new employer, consulting business or any other enterprise in which you become involved after your resignation from CNS, for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are currently competitive with the products or services being provided by CNS, which are in the development stages of being competitive with the products or services being provided by CNS, or which would in any way cause said customer, broker, vendor or distributor to discontinue or reduce its business relationship with CNS. Current CNS customers, brokers, vendors or distributors include those customers, brokers, vendors or distributors with whom CNS has had a business relationship at any time within the twelve (12) month period immediately preceding your resignation date. Prospective CNS customers, brokers, vendors and distributors are those with whom (a) a CNS representative has been in direct personal contact and (b) CNS has a reasonable opportunity of entering into a business relationship within six months following your resignation date. You also agree that during the same one-year period, you will not directly or indirectly solicit any CNS

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employee to terminate his or her employment with CNS. This employee nonsolicitation obligation shall apply to employees of CNS as of your resignation date.

If, in your opinion, the restrictions in this paragraph 6 or in paragraph 5 prevent you from obtaining employment, you may make a written request for modification of the restrictions with respect to a specific position that you are considering. The president of CNS will review and consider your request and if she determines, in her sole discretion, that the requested modification will not be adverse to CNS’s business interests, she will provide you with the modification, which must then be memorialized in writing and signed by both parties. In addition, if you have any questions with respect to the scope of your obligations hereunder, you agree to seek clarification from the president.

This agreement shall not in any way be construed as an admission of liability by CNS or as an admission that CNS has acted wrongfully with respect to you. CNS specifically denies and disclaims any such liability or wrongful acts. If any provision of this agreement is found to be illegal or unenforceable, such provision will be severed or modified to the extent necessary to make it enforceable, and as so severed or modified, the remainder of this agreement shall remain in full force and effect.

You understand that if you violate any obligation that you have to CNS under this agreement, all payments and benefits to you hereunder will immediately cease. In such event, your release of your claims shall remain fully in effect in consideration of the payments and benefits that you received prior to any such breach.

This agreement sets forth our entire agreement and fully supersedes any prior agreements, contracts or understandings between you and CNS. CNS asks that our records reflect that you conclude your employment on terms you understand and accept. Therefore, we ask you to declare that you have entered into this agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.

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If this letter accurately reflects our understanding and agreement, please sign both copies and return the original to me. We appreciate all of your efforts and contributions to CNS over the past year and a half and wish you success in your future career.

Sincerely,

CNS, Inc.

/s/   Marti Morfitt
Marti Morfitt
President & CEO

Acknowledged and agreed to, with declarations
confirmed, this 27th day of January, 2004.

/s/   John Kundtz
John Kundtz

EX-10.30 8 cns042906_ex10-30.htm Exhibit 10.30 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 10.30

                THIS LEASE AGREEMENT is made by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership (“LANDLORD”) with its address at 10400 Viking Drive, Suite 130, Eden Prairie, Minnesota 55344, and CNS, INC., a corporation organized under the laws of __________________ (“TENANT”) with its address at 4400 West 78th Street, Bloomington, Minnesota 55435, and is dated as of the date on which this lease has been fully executed by Landlord and Tenant.

1. Summary of Terms and Certain Definitions.

(a) “PREMISES”:              Approximate rentable square feet: 73,000 (Section 2)

(b) “BUILDING”:  (§2)     Approximate rentable square feet: 93,000
                                       Address:

(c) “TERM”:  (§5              One hundred twenty (120)) months plus any partial month from the Commencement Date
                                      until the first day of the first full calendar month during the Term

(i) “COMMENCEMENT DATE”:   See Rider

(ii) “EXPIRATION DATE”:   See Section 5

(d) Minimum Rent (§6) & Operating Expenses (§7)

(i) “MINIMUM ANNUAL RENT”:   $682,550.04 (Six hundred eighty-two thousand five hundred fifty and 04/100 Dollars), payable in monthly installments of $56,879.17 (Fifty-six thousand eight hundred seventy-nine and 17/100 Dollars), increased as follows:

Lease Year
Annual
Monthly
Lease Year
Annual
Monthly

2 $ 696,201.00 $ 58,016.75 6 $ 753,590.40 $ 62,799.20

3 710,125.08 59,177.09 7 768,662.16 64,055.18

4 724,327.56 60,360.63 8 784,035.36 65,336.28

5 738,814.08 61,567.84 9 799,716.12 66,643.01

10 815,710.44 67,975.87

(ii) Estimated “ANNUAL OPERATING EXPENSES”:   $173,010.00 (One Hundred Seventy-three Thousand Ten and no/l00 Dollars), payable in monthly installments of $14,417.50 (Fourteen Thousand Four Hundred Seventeen and 50/100 Dollars), based on estimated annual operating expenses of S2.37 per rentable square feet for calendar year 2000, subject to adjustment (§7(a))

(e) “PROPORTIONATE SHARE” (§7(a)): 78.5% (Ratio of approximate rentable square feet in the Premises to approximate rentable square feet in the Building)

(f) “USE” (§4): general office, warehouse and assembly

(g) “SECURITY DEPOSIT” (§28): None

(h) CONTENTS:      This lease consists of the Index, pages 1 through 11 containing Sections 1 through 37
                             and the following, all of which are attached hereto and made a part of this lease:

Exhibits:

“A” – Plan showing Premises “E” – Drawings

“B” – Commencement Certificate Form “F” – Exclusions from Operating

“C” – Building Rules Expenses “G” – TI Plans

“D” – Estoppel Certificate Form

2.              Premises.   Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises as shown on preliminary floor plan attached hereto as Exhibit “A” within the Building to be constructed pursuant to the provisions of Section 29 hereof (the Building and the lot on which it is located, the “PROPERTY”), together with the nonexclusive right with Landlord and other occupants of the Building to use all areas and facilities provided by Landlord for the use of all tenants in the Property including any driveways, sidewalks and parking, loading and landscaped areas (the “COMMON AREAS”). The Premises will consist of approximately 73,000 rentable square feet (29,340 rentable square feet devoted to office use and 43,660 rentable square feet devoted to warehouse use). Upon substantial completion of the Premises and Building, (i) at the request of either party, Landlord and Tenant shall enter into an amendment to this Lease replacing Exhibit “A” with a drawing outlining the Premises as constructed, and (ii) Landlord shall cause Landlord’s architect to determine the as-built square footage of the Premises and Building, and, if the square footages, as measured, vary from the square footages set forth in Section 1 of this Lease, the parties shall enter into an appropriate amendment to this lease incorporating the actual square footage, with a corresponding pro rata adjustment to Minimum Annual Rent and Tenant’s Proportionate Share.

3. Acceptance of Premises.   See the provisions of Section 32 below.

4. Use; Compliance.

                (a)    Permitted Use.   Tenant shall occupy and use the Premises for and only for the Use specified in Section 1(f) above and in such a manner as is lawful and will not create any nuisance or otherwise interfere with any other tenant’s normal operations or the management of the Building. Landlord represents that, as of the Commencement Date, the Property will be zoned to permit the Use specified in Section 1(f) above. All Common Areas shall be subject to Landlord’s exclusive control and management at all times. Tenant shall not use or permit the use of any portion of the Property for outdoor storage or installations outside of the Premises nor for

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any use that would interfere with any other person’s use of any portion of the Property outside of the Premises.

                (b)    Compliance.   Landlord represents that, as of the date of this lease, there is no action required with respect to the Premises or Common Areas under any laws (including Title III of the ADA), ordinances, notices, orders, rules, regulations and requirements applicable to the Premises or to the Common Areas. From and after the Commencement Date, Tenant shall comply promptly, at its sole expense, (including making any alterations or improvements) with all laws (including the ADA), ordinances, notices, orders, rules, regulations and requirements regulating the Property during the Term which impose any duty upon Landlord or Tenant specifically with respect to Tenant’s use, occupancy or alteration of, or Tenant’s installations in or upon, the Property including the Premises, (as the same may be amended, the “LAWS AND REQUIREMENTS”) and the building rules attached as Exhibit “C”, as amended by Landlord from time to time (the “BUILDING RULES”). Notwithstanding the foregoing, Tenant shall not be required to comply with the Laws and Requirements with respect to the footings, foundations, structural steel columns and girders forming a part of the Property unless the need for such compliance arises out of Tenant’s specific use, occupancy or alteration of the Property, or by any act or omission of Tenant or any employees, agents, contractors, licensees or invitees (“AGENTS”) of Tenant. With respect to Tenant’s obligations as to the Property, other than the Premises, at Landlord’s option and at Tenant’s expense, Landlord may comply with any repair, replacement or other construction requirements of the Laws and Requirements and Tenant shall pay to Landlord all costs thereof as additional rent. Landlord agrees to enforce the Building Rules in a uniform and nondiscriminatory manner. No amendment to the Building Rules shall be effective until the date that is 30 days after the date that Landlord notifies Tenant of the amendment.

                (c)    Environmental.   Tenant shall comply, at its sole expense, with all Laws and Requirements as set forth above, all manufacturers’ instructions and all requirements of insurers relating to the treatment, production, storage, handling, transfer, processing, transporting, use, disposal and release of hazardous substances, hazardous mixtures, chemicals, pollutants, petroleum products, toxic or radioactive matter (the “RESTRICTED ACTIVITIES”). Tenant shall deliver to Landlord copies of all notices, filings, permits and any other material written communications relating to Tenant’s operations from or to Tenant and any entity regulating any Restricted Activities.

                (d)    Notice.   If at any time during or after the Term, Tenant becomes aware of any inquiry, investigation or proceeding regarding the Restricted Activities or becomes aware of any material claims, actions or investigations regarding the ADA, Tenant shall give Landlord written notice, within 5 days after first learning thereof, providing all available information and copies of any notices.

5. Term.   See Section 33 below.

6.              Minimum Annual Rent.   Tenant agrees to pay to Landlord the Minimum Annual Rent in equal monthly installments in the amount set forth in Section 1(d) (as increased at the beginning of each lease year as set forth in Section 1(d)), in advance, on the first day of each

3

calendar month during the Term, without notice, demand or setoff except as expressly provided for in this lease, at Landlord’s address designated at the beginning of this lease unless Landlord designates otherwise; provided that rent for the first full month shall be paid at the signing of this lease. If the Commencement Date falls on a day other than the first day of a calendar month, the rent shall be apportioned pro rata on a per diem basis for the period from the Commencement Date until the first day of the following calendar month and shall be paid on or before the Commencement Date. As used in this lease, the term “lease year” means the period from the Commencement Date through the succeeding 12 full calendar months (including for the first lease year any partial month from the Commencement Date until the first day of the first full calendar month) and each successive 12 month period thereafter during the Term.

7. Operation of Property; Payment of Expenses.

                (a)    Payment of Operating Expenses.   Tenant shall pay to Landlord the Annual Operating Expenses in equal monthly installments in the amount set forth in Section 1(d) (prorated for any partial month), from the Commencement Date and continuing throughout the Term on the first day of each calendar month during the Term, as additional rent, without notice, demand or setoff except as expressly provided for in this lease; provided that the monthly installment for the first full month shall be paid at the signing of this lease. Landlord shall apply such payments to the Operating Expenses owed to Landlord by Tenant pursuant to the following Sections 7(b)-(f). The amount of the Annual Operating Expenses set forth in Section 1(d) represents Tenant’s Proportionate Share of the estimated Operating Expenses during the first calendar year of the Term on an annualized basis; from time to time Landlord may adjust such estimated amount if the estimated Operating Expenses increase. By April 30th of each year (and as soon as practical after the expiration or termination of this lease or at any time in the event of a sale of the Property), Landlord shall provide Tenant with a statement of the actual amount of such expenses for the preceding calendar year or part thereof Landlord or Tenant shall pay to the other the amount of any deficiency or overpayment then due from one to the other or, at Tenant’s option, Landlord will credit Tenant’s account for any overpayment. Tenant’s obligation to pay the Annual Operating Expenses pursuant to this Section 7 shall survive the expiration or termination of this lease. The term “Operating Expenses” in this lease means all amounts owed to Landlord by Tenant pursuant to the following Sections 7(b)-(f). Any provision to the contrary in this lease notwithstanding, Operating Expenses shall not include any of the items listed on attached Exhibit “F”.

                (b)    Taxes and Other Impositions.   Tenant shall pay prior to delinquency all levies, taxes (including sales taxes and gross receipt taxes), assessments, liens, license and permit fees, which are applicable to the Term, and which are imposed by any authority or under any law, ordinance or regulation thereof, or pursuant to any recorded covenants or agreements, and the reasonable cost of contesting any of the foregoing (the “IMPOSITIONS”) upon or with respect to the Premises, or any improvements thereto, or directly upon this lease or the Rent (defined in Section 7(f)) or amounts payable by any subtenants or other occupants of the Premises, or against Landlord because of Landlord’s estate or interest herein. Additionally, Tenant shall pay as aforesaid its Proportionate Share of any Imposition which is not imposed upon the Premises as a separate entity but which is imposed upon all or part of the Property or upon the leases or rents relating to the Property.

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                                  (i)    Nothing herein contained shall be interpreted as requiring Tenant to pay any income, excess profits or corporate capital stock tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed in lieu of all or any part of any Imposition or an increase in any Imposition.

                                  (ii)    If it shall not be lawful for Tenant to reimburse Landlord for any of the Impositions, the Minimum Annual Rent shall be increased by the amount of the portion of such Imposition allocable to Tenant, unless prohibited by law.

                                  (iii)    If Landlord receives any rebate, refund or similar payment relating to any Impositions paid by or charged back to Tenant, Landlord shall promptly pay to Tenant Tenant’s Proportionate Share of such rebate or refund, net of any expenses incurred by Landlord in obtaining the same. Tenant may request that Landlord initiate an action to contest or challenge an Imposition, and Landlord agrees to consult with Tenant regarding such contest or challenge and to take such action as Landlord deems reasonable and appropriate under the circumstances as a result of such consultation. Tenant shall not initiate any action to contest any Impositions without Landlord’s prior written consent.

(c) Insurance.

                                  (i)    Property.   Landlord shall keep in effect, and Tenant shall pay to Landlord its Proportionate Share of the cost of, insurance against loss or damage to the Building or the Property by fire and such other casualties as may be included within fire, extended coverage and special form insurance covering the full replacement cost of the Building (but excluding coverage of Tenant’s personal property in, and any alterations by Tenant to, the Premises), and such other insurance as Landlord may reasonably deem appropriate or as may be required from time-to-time by any mortgagee. Landlord shall deliver to Tenant on or before the Commencement Date, a certificate of insurance evidencing such coverage and the waiver of subrogation described below.

                                  (ii)    Liability.   Tenant, at its own expense, shall keep in effect comprehensive general public liability insurance with respect to the Premises and the Property, including contractual liability insurance, with such limits of liability for bodily injury (including death) and property damage as reasonably may be required by Landlord from time-to-time, but not less than a combined single limit of $1,000,000 per occurrence and a general aggregate limit of not less than $3,000,000 (which aggregate limit shall apply separately to each of Tenant’s locations if more than the Premises); however, such limits shall not limit the liability of Tenant hereunder. The policy of comprehensive general public liability insurance also shall name Landlord and Landlord’s agent as insured parties with respect to the Premises, shall provide that it is primary with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, shall provide that it shall not be cancelable or reduced without at least 30 days prior written notice to Landlord and shall be issued in form satisfactory to Landlord. The insurer shall be a responsible insurance carrier which is authorized to issue such insurance and licensed to do business in the state in which the Property is located and which has at all times during the Term a rating of no less than A VII in the most current edition of Best’s Insurance

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Reports. Tenant shall deliver to Landlord on or before the Commencement Date, and subsequently renewals of, a certificate of insurance evidencing such coverage and the waiver of subrogation described below.

                                  (iii)    Waiver of Subrogation.   Landlord and Tenant shall have included in their respective property insurance policies waivers of their respective insurers’ right of subrogation against the other party. If such a waiver should be unobtainable or unenforceable, then such policies of insurance shall state expressly that such policies shall not be invalidated if, before a casualty, the insured waives the right of recovery against any party responsible for a casualty covered by the policy.

                                  (iv)    Increase of Premiums.   Tenant agrees not to do anything or fail to do anything which will increase the cost of Landlord’s insurance or which will prevent Landlord from procuring policies (including public liability) from companies and in a form satisfactory to Landlord. If any breach of the preceding sentence by Tenant causes the rate of fire or other insurance to be increased, Tenant shall pay the amount of such increase as additional rent promptly upon being billed.

                (d)    Repairs and Maintenance; Common Areas; Building Management. Except as specifically otherwise provided in this Section (d), Tenant at its sole expense shall maintain the Premises in good order and condition, promptly make all repairs necessary to maintain such condition, and repair any damage to the Premises caused by Tenant or its Agents. All repairs made by Tenant shall utilize materials and equipment which are comparable to those originally used in constructing the Building and Premises. When used in this Section (d), the term “repairs” shall include replacements and renewals when necessary.

                                  (i)    Landlord, at its sole expense, shall make all necessary repairs to the footings, foundations, structural steel columns and girders forming a part of the Premises. If Tenant becomes aware of the need for such repair, Tenant shall promptly notify Landlord thereof.

                                  (ii)    Landlord, at Tenant’s sole expense, shall maintain and repair the HVAC systems exclusively serving the Premises.

                                  (iii)    Landlord shall make all necessary repairs to the roof, exterior portions of the Premises and the Building, utility and communications lines, equipment and facilities in the Building, which serve more than one tenant, and to the Common Areas, the cost of which shall be an Operating Expense of which Tenant shall pay its Proportionate Share. If Tenant becomes aware of the need for such repair, Tenant shall promptly notify Landlord thereof Landlord shall operate and manage the Property and shall maintain all Common Areas and any paved areas appurtenant to the Property in a clean and orderly condition. Landlord reserves the right to make alterations to the Common Areas from time to time provided that (A) absent Tenant’s prior written consent, there shall be no material change in the nature and extent of the Common Areas and the benefits extended to the Premises by the Common Areas, and (B) any such alterations must be completed in a manner so as not to unreasonably interfere with Tenant’s use of the Common Areas or Tenant’s business activities within the Premises. Operating Expenses also

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shall include (A) all sums expended by Landlord for the supervision, maintenance, repair, replacement and operation of the Common Areas (including the costs of utility services), (B) any costs of building improvements made by Landlord to the Property that are required by any governmental authority or for the purpose of reducing Operating Expenses and (C) a management and administrative fee (not to exceed 4% of gross rents) applicable to the overall operation of the Property.

                                  (iv)    Notwithstanding anything herein to the contrary, repairs and replacements to the Property including the Premises made necessary by Tenant’s use, occupancy or alteration of, or Tenant’s installation in or upon the Property or by any act or omission of Tenant or its Agents shall be made at the sole expense of Tenant to the extent not covered by any applicable insurance proceeds paid to Landlord. Tenant shall not bear the expense of any repairs or replacements to the Property arising out of or caused by any other tenant’s use, occupancy or alteration of, or any other tenant’s installation in or upon, the Property or by any act or omission of any other tenant or any other tenant’s Agents.

                (e)    Utility Charges.   Tenant shall pay for water, sewer, gas, electricity, heat, power, telephone and other communication services and any other utilities supplied to or consumed in or on the Premises. Landlord shall not be responsible or liable for any interruption in utility service, nor shall such interruption affect the continuation or validity of this lease. Notwithstanding the foregoing, if any interruption in utility service is the result of Landlord’s negligence or willful misconduct, and such interruption prevents Tenant from conducting its business in and from the Premises, then all Rent hereunder shall abate from the date of such interruption until such utility service is restored.

                (f)    Net lease.   Except for the obligations of Landlord expressly set forth herein, this lease is a “triple net lease” and Landlord shall receive the Minimum Annual Rent as net income from the Premises, not diminished any expenses other than payments under any mortgages, and Landlord is not and shall not be required to render any services of any kind to Tenant. The term “RENT” as used in this lease means the Minimum Annual Rent, Annual Operating Expenses and any other additional rent or sums payable by Tenant to Landlord pursuant to this lease, all of which shall be deemed rent for purposes of Landlord’s rights and remedies with respect thereto. Tenant shall pay all Rent to Landlord within 30 days after Tenant is billed, unless otherwise provided in this lease, and interest shall accrue on all sums due but unpaid.

                (g)    Access to Books and Records.   Tenant shall be entitled at any reasonable time during regular business hours, but no more than once in each calendar year, after giving to Landlord at least five (5) business days prior written notice, to inspect in Landlord’s business office all Landlord’s records regarding Operating Expenses for the Building (which records shall be retained or made available in the Minneapolis/St. Paul metropolitan area) necessary to satisfy itself that all Operating Expenses have been correctly allocated to Tenant, for either or both of the two (2) calendar years immediately preceding the year during which such notice is given, and to obtain an audit thereof by an independent certified public accountant (selected by Tenant with Landlord’s written consent, which shall not be withheld unreasonably) to determine the accuracy of Landlord’s certification of the amount of additional rent charged Tenant. If it is determined that Tenant’s liability for additional rent for either such calendar year is less than ninety-five

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percent (95%) of that amount which Landlord previously certified to Tenant for such calendar year, Landlord shall pay to Tenant the cost of such audit (provided, however, that Landlord shall not be required to pay the cost of any audit based on a contingency fee or percentage of the amount recovered for Tenant) and regardless of such percentage Landlord shall refund promptly to Tenant the amount of the additional rent paid by Tenant for such calendar year which exceeds the amount for which Tenant actually is liable, as determined following such audit. If it is determined that Tenant’s liability for additional rent for either such calendar year is more than the amount which Landlord previously certified to Tenant for such calendar year, Tenant shall promptly pay to Landlord (net of the cost to Tenant of the audit) the amount of the additional rent underpaid by Tenant, as determined following such audit. Except as provided above, Tenant shall bear the total cost of any such audit. Tenant shall keep, and shall cause Tenant’s auditor to keep, the results of such audit confidential.

8.              Signs.   Except for signs which are located wholly within the interior of the Premises and not visible from the exterior of the Premises, no signs shall be placed on the Property without the prior written consent of Landlord. All signs installed by Tenant shall be maintained by Tenant in good condition and Tenant shall remove all such signs at the termination of this lease and shall repair any damage caused by such installation, existence or removal.

                The foregoing notwithstanding, Tenant shall have the right to procure, install and maintain, at Tenant’s sole cost and expense, the following identification signage on or about the Building:

(a) One building-mounted identification sign on the south face of the Building;

(b) Signage on one monument sign serving the Building; and

(c) Loading dock signage, signage identifying Tenant’s employee entrance and signage identifying Tenant on Tenant’s entrance door(s).

                The design, size and location of all Tenant signage shall be consistent with Landlord’s sign criteria and otherwise subject to Landlord’s approval, which approval shall not be unreasonably withheld. Tenant shall cause all Tenant signage to comply with all Laws and Requirements applicable thereto. Upon the expiration or termination of this Lease, Tenant shall remove the signage and shall repair any damage occasioned by such removal.

9. Alterations and Fixtures.

                (a)    Subject to Section 10, Tenant shall have the right to install its trade fixtures in the Premises, provided that no such installation or removal thereof shall materially and adversely affect any structural portion of the Property nor any utility lines, communications lines, equipment or facilities in the Building serving any tenant other than Tenant. At the expiration or termination of this lease and at the option of Landlord or Tenant, Tenant shall remove such installation(s) and, in the event of such removal, Tenant shall repair any damage caused by such installation or removal; if Tenant, with Landlord’s written consent, elects not to remove such

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installation(s) at the expiration or termination of this lease, all such installations shall remain on the Property and become the property of Landlord without payment by Landlord.

                (b)    Except for alterations that are non-structural, that do not materially and adversely affect any of the electrical, mechanical, HVAC, life-safety, plumbing, security or other systems serving the Building, and that do not exceed $25,000 in the aggregate with respect to any project, Tenant shall not make or permit to be made any alterations to the Premises without Landlord’s prior written consent, which consent shall not be unreasonably withheld or delayed. Tenant shall pay the costs of any required architectural/engineering reviews. In making any alterations, (i) Tenant shall deliver to Landlord the plans, specifications and necessary permits, together with certificates evidencing that Tenant’s contractors and subcontractors have adequate insurance coverage naming Landlord and Landlord’s agent as additional insureds, at least 10 days prior to commencement thereof, (ii) such alterations shall not impair the structural strength of the Building or any other improvements or reduce the value of the Property or affect any utility lines, communications lines, equipment or facilities in the Building serving any tenant other than Tenant, (iii) Tenant shall comply with Section 10 and (iv) the occupants of the Building and of any adjoining property shall not be materially disturbed thereby. All alterations to the Premises by Tenant shall be the property of Tenant until the expiration or termination of this lease; at that time all such alterations shall remain on the Property and become the property of Landlord without payment by Landlord unless Landlord gives written notice to Tenant to remove the same, in which event Tenant will remove such alterations and repair any resulting damage. At Tenant’s request prior to Tenant making any alterations, Landlord shall notify Tenant in writing, whether Tenant is required to remove such alterations at the expiration or termination of this lease.

10.              Mechanics’ Liens.   Tenant shall pay promptly any contractors and materialmen who supply labor, work or materials to Tenant at the Property and shall take all steps permitted by law in order to avoid the imposition of any mechanic’s lien upon all or any portion of the Property. Should any such lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall bond against or discharge the same within 10 days after Tenant has notice that the lien or claim is filed regardless of the validity of such lien or claim. Nothing in this lease is intended to authorize Tenant to do or cause any work to be done or materials to be supplied for the account of Landlord, all of the same to be solely for Tenant’s account and at Tenant’s risk and expense. Throughout this lease the term “mechanic’s lien” is used to include any lien, encumbrance or charge levied or imposed upon all or any portion of, interest in or income from the Property on account of any mechanic’s, laborer’s, materialman’s or construction lien or arising out of any debt or liability to or any claim of any contractor, mechanic, supplier, materialman or laborer and shall include any mechanic’s notice of intention to file a lien given to Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and any injunctive or equitable action brought by any person claiming to be entitled to any mechanic’s lien.

11.              Landlord’s Right of Entry.   Tenant shall permit Landlord and its Agents to enter the Premises at all reasonable times following reasonable notice (except in the event of an emergency), for the purpose of inspection, maintenance or making repairs, alterations or additions as well as to exhibit the Premises for the purpose of sale or mortgage and, during the

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last 12 months of the Term, to exhibit the Premises to any prospective tenant. Landlord will make reasonable efforts not to inconvenience Tenant in exercising the foregoing rights, but shall not be liable for any loss of occupation or quiet enjoyment thereby occasioned.

12. Damage by Fire or Other Casualty.

                (a)    If the Premises or Building shall be damaged or destroyed by fire or other casualty, Tenant promptly shall notify Landlord and Landlord, subject to the conditions set forth in this Section 12, shall repair such damage and restore the Premises to substantially the same condition in which they were immediately prior to such damage or destruction, but not including the repair, restoration or replacement of the fixtures or alterations installed by Tenant. Landlord shall notify Tenant in writing, within 30 days after the date of the casualty, if Landlord anticipates that the restoration will take more than 180 days from the date of the casualty to complete; in such event, either Landlord or Tenant may terminate this lease effective as of the date of casualty by giving written notice to the other within 10 days after Landlord’s notice. Further, if a casualty occurs during the last 12 months of the Term or any extension thereof, Landlord may cancel this lease unless Tenant has the right to extend the Term for at least 3 more years and does so within 30 days after the date of the casualty.

                (b)    Landlord shall maintain a 12 month rental coverage endorsement or other comparable form of coverage as part of its fire, extended coverage and special form insurance. Tenant will receive an abatement of its Minimum Annual Rent and Annual Operating Expenses to the extent the Premises are rendered untenantable.

13. Condemnation.

                (a)    Termination.   If (i) all of the Premises are taken by a condemnation or otherwise for any public or quasi-public use, (ii) any part of the Premises is so taken and the remainder thereof is insufficient for the reasonable operation of Tenant’s business or (iii) any of the Property is so taken, and, in Landlord’s opinion, it would be impractical or the condemnation proceeds are insufficient to restore the remainder of the Property, then this lease shall terminate and all unaccrued obligations hereunder shall cease as of the day before possession is taken by the condemnor.

                (b)    Partial Taking.   If there is a condemnation and this lease has not been terminated pursuant to this Section, (i) Landlord shall restore the Building and the improvements which are a part of the Premises to a condition and size as nearly comparable as reasonably possible to the condition and size thereof immediately prior to the date upon which the condemnor took possession and (ii) the obligations of Landlord and Tenant shall be unaffected by such condemnation except that there shall be an equitable abatement of the Minimum Annual Rent according to the rental value of the Premises before and after the date upon which the condemnor took possession and/or the date Landlord completes such restoration.

                (c)    Award.   In the event of a condemnation affecting Tenant, Tenant shall have the right to make a claim against the condemnor for moving expenses and business dislocation damages to the extent that such claim does not reduce the sums otherwise payable by the

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condemnor to Landlord. Except as aforesaid and except as set forth in (d) below, Tenant hereby assigns all claims against the condemnor to Landlord.

                (d)    Temporary Taking.   No temporary taking of the Premises shall terminate this lease or give Tenant any right to any rental abatement. Such a temporary taking will be treated as if Tenant had sublet the Premises to the condemnor and had assigned the proceeds of the subletting to Landlord to be applied on account of Tenant’s obligations hereunder. Any award for such a temporary taking during the Term shall be applied first, to Landlord’s costs of collection and, second, on account of sums owing by Tenant hereunder, and if such amounts applied on account of sums owing by Tenant hereunder should exceed the entire amount owing by Tenant for the remainder of the Term, the excess will be paid to Tenant.

14.              Non-Abatement of Rent.   Except as otherwise expressly provided as to damage by fire or other casualty in Section 12(b) and as to condemnation in Section 13(b) and except as otherwise specifically provided in this lease, there shall be no abatement or reduction of the Rent for any cause whatsoever, and this lease shall not terminate, and Tenant shall not be entitled to surrender the Premises.

15.              Indemnification.   Subject to Sections 7(c)(iii) and 16, Tenant will protect, indemnify and hold harmless Landlord and its Agents from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) in connection with loss of life, personal injury or damage to property in or about the Premises or arising out of the occupancy or use of the Premises by Tenant or its Agents or occasioned wholly or in part by any act or omission of Tenant or its Agents, whether prior to, during or after the Term, except to the extent such loss, injury or damage was caused by the negligence of Landlord or its Agents. In case any action or proceeding is brought against Landlord and/or its Agents by reason of the foregoing, Tenant, at its expense, shall resist and defend such action or proceeding, or cause the same to be resisted and defended by counsel (reasonably acceptable to Landlord and its Agents) designated by the insurer whose policy covers such occurrence or by counsel designated by Tenant and approved by Landlord and its Agents. Tenant’s obligations pursuant to this Section 15 shall survive the expiration or termination of this lease.

                Subject to Sections 7(c)(iii) and 16, Landlord will protect, indemnify and hold harmless Tenant and its Agents from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) in connection with loss of life, personal injury or damage to property caused to any person in or about the Premises occasioned wholly or in part by the negligence of Landlord or its Agents, except to the extent such loss, injury or damage was caused by the negligence of Tenant or its Agents. In case any action or proceeding is brought against Tenant and/or its Agents by reason of the foregoing, Landlord, at its expense, shall resist and defend such action or proceeding, or cause the same to be resisted and defended by counsel (reasonably acceptable to Tenant and its Agents) designated by the insurer whose policy covers such occurrence or by counsel designated by Landlord and approved by Tenant and its Agents. Landlord’s obligations pursuant to this Section shall survive the expiration or termination of this lease.

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16.              Waiver of Claims.   Landlord and Tenant each hereby waives all claims for recovery against the other for any loss or damage which may be inflicted upon the property of such party even if such loss or damage shall be brought about by the fault or negligence of the other party or its Agents; provided, however, that such waiver by Landlord shall not be effective with respect to any liability of Tenant described in Sections 4(c) and 7(d)(iv).

17.              Quiet Enjoyment.   Landlord covenants that Tenant, upon performing all of its covenants, agreements and conditions of this lease, shall have quiet and peaceful possession of the Premises as against anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this lease.

18. Assignment and Subletting.

                (a)    Limitation.   Tenant shall not transfer this lease, voluntarily or by operation of law, without the prior written consent of Landlord which shall not be withheld unreasonably. However, Landlord’s consent shall not be required in the event of any transfer by Tenant to an affiliate of Tenant which is at least as creditworthy as Tenant as of the date of this lease and provided Tenant delivers to Landlord the instrument described in Section (c)(iii) below, together with a certification of such creditworthiness by Tenant and such affiliate. Any transfer not in conformity with this Section 18 shall be void at the option of Landlord, and Landlord may exercise any or all of its rights under Section 23. A consent to one transfer shall not be deemed to be a consent to any subsequent transfer. “Transfer” shall include any sublease, assignment, license or concession agreement, change in ownership or control of Tenant, mortgage or hypothecation of this lease or Tenant’s interest therein or in all or a portion of the Premises.

                (b)    Offer to Landlord.   Tenant acknowledges that the terms of this lease, including the Minimum Annual Rent, have been based on the understanding that Tenant physically shall occupy the Premises for the entire Term. Therefore, upon Tenant’s request to transfer all or a portion of the Premises, at the option of Landlord, Tenant and Landlord shall execute an amendment to this lease removing such space from the Premises, Tenant shall be relieved of any liability with respect to such space and Landlord shall have the right to lease such space to any party, including Tenant’s proposed transferee. The provisions of this subsection 18(b) notwithstanding, if Landlord so elects to recapture all or a portion of the Premises, Tenant shall have the right to withdraw Tenant’s request for Landlord’s consent to the transfer, provided that Tenant withdraw such request in a written notice to Landlord given not less than 5 business days following Landlord’s election.

                (c)    Conditions.   Notwithstanding the above, the following shall apply to any transfer, with or without Landlord’s consent:

                                  (i)    As of the date of any transfer, Tenant shall not be in default under this lease nor shall any act or omission have occurred which would constitute a default with the giving of notice and/or the passage of time.

                                  (ii)    No transfer shall relieve Tenant of its obligation to pay the Rent and to perform all its other obligations hereunder. The acceptance of Rent by Landlord from any person

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shall not be deemed to be a waiver by Landlord of any provision of this lease or to be a consent to any transfer.

                                  (iii)    Each transfer shall be by a written instrument in form and substance satisfactory to Landlord which shall (A) include an assumption of liability by any transferee of all Tenant’s obligations and the transferee’s ratification of and agreement to be bound by all the provisions of this tease, (B) afford Landlord the right of direct action against the transferee pursuant to the same remedies as are available to Landlord against Tenant and (C) be executed by Tenant and the transferee.

                                  (iv)    Tenant shall pay, within 10 days of receipt of an invoice, Landlord’s reasonable attorneys’ fees and costs in connection with the review, processing and documentation of any transfer for which Landlord’s consent is requested.

19. Subordination; Mortgagee’s Rights.

                (a)    This lease shall be subordinate to any first mortgage or other primary encumbrance hereafter affecting the Premises. Although the subordination is self-operative, within 10 days after written request, Tenant shall execute and deliver any further commercially reasonable and customary instruments of attornment and nondisturbance that may be desired by any such mortgagee or Landlord. The foregoing notwithstanding, so long as Tenant is not in default under this lease, this lease shall remain in full force and effect and the mortgagee and any purchaser at a foreclosure sale thereof shall not disturb Tenant’s possession hereunder. However, any mortgagee may at any time subordinate its mortgage to this lease, without Tenant’s consent, by giving written notice to Tenant, and thereupon this lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery; provided, however, that such subordination shall not affect any mortgagee’s right to condemnation awards, casualty insurance proceeds, intervening liens or any right which shall arise between the recording of such mortgage and the execution of this lease.

                (b)    It is understood and agreed that any mortgagee shall not be liable to Tenant for any funds paid by Tenant to Landlord unless such funds actually have been transferred to such mortgagee by Landlord.

                (c)    Notwithstanding the provisions of Sections 12 and 13 above, Landlord’s obligation to restore the Premises after a casualty or condemnation shall be subject to such commercially reasonable procedures and controls as may be imposed by Landlord’s mortgagee, including, but not limited to, such mortgagee’s rights, if any, to approve restoration plans and such mortgagee’s rights, if any, to require that casualty or condemnation proceeds be disbursed pursuant to standard construction loan disbursing procedures.

20.              Recording; Tenant’s Certificate.   Tenant shall not record this lease or a memorandum thereof without Landlord’s prior written consent. Within 10 days after Landlord’s written request from time to time:

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                (a)    Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying the Commencement Date and Expiration Date of this lease, that this lease is in full force and effect and has not been modified and otherwise as set forth in the form of estoppel certificate attached as Exhibit “D” or with such modifications as may be necessary to reflect accurately the stated facts and/or such other certifications as may be requested by a mortgagee or purchaser. Tenant understands that its failure to execute such documents may cause Landlord serious financial damage by causing the failure of a financing or sale transaction.

                (b)    Tenant shall furnish to Landlord, Landlord’s mortgagee, prospective mortgagee or purchaser reasonably requested financial information.

21. Surrender; Abandoned Property.

                (a)    Subject to the terms of Sections 9(b), 12(a) and 13(b), at the expiration or termination of this lease, Tenant promptly shall yield up in the same condition, order and repair in which they are required to be kept throughout the Term, the Premises and all improvements thereto, and all fixtures and equipment servicing the Building, ordinary wear and tear excepted.

                (b)    Upon or prior to the expiration or termination of this lease, Tenant shall remove any personal property from the Property. Any personal property remaining thereafter shall be deemed conclusively to have been abandoned, and Landlord, at Tenant’s expense, may remove, store, and, unless Tenant retrieves such Property from Landlord (and reimburses Landlord for Landlord’s cost of removal and storage) within 10 days following the expiration or termination of this lease, sell or otherwise dispose of such property in such manner as Landlord may see fit and/or Landlord may retain such property as its property. If any part thereof shall be sold, then Landlord may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of moving and storage and any Rent due under this lease.

                (c)    If Tenant, or any person claiming through Tenant, shall continue to occupy the Premises after the expiration or termination of this lease or any renewal thereof, such occupancy shall be deemed to be under a month-to- month tenancy under the same terms and conditions set forth in this lease, except that the monthly installment of the Minimum Annual Rent during such continued occupancy shall be 150% of the amount applicable to the last month of the Term. Anything to the contrary notwithstanding, any holding over by Tenant without Landlord’s prior written consent shall constitute a default hereunder and shall be subject to all the remedies available to Landlord.

22.          Curing Tenant’s Defaults.   If Tenant shall be in default in the performance of any of its obligations hereunder, Landlord, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect to cure such default on behalf of Tenant after 30 days’ written notice (except in the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord in curing such default, including interest thereon from the respective dates of Landlord’s incurring such costs, which sums and costs together with interest shall be deemed additional rent.

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23. Defaults — Remedies.

                (a)    Defaults.   It shall be an event of default:

                                  (i)    If Tenant does not pay in full when due any and all Rent;

                                  (ii)    If Tenant fails to observe and perform or otherwise breaches any other provision of this lease;

                                  (iii)    [Intentionally Deleted];

                                  (iv)    If Tenant becomes insolvent or bankrupt in any sense or makes a general assignment for the benefit of creditors or offers a settlement to creditors, or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver for any of Tenant’s assets is commenced, or if any of the real or personal property of Tenant shall be levied upon; provided, however, that any proceeding brought by anyone other than Landlord or Tenant under any bankruptcy, insolvency, receivership or similar law shall not constitute a default until such proceeding has continued unstayed for more than 60 consecutive days.

                (b)    Remedies.   Then, and in any such event, Landlord shall have the following rights:

                                  (i)    To charge a late payment fee equal to the greater of $100 or 5% of any amount owed to Landlord pursuant to this lease which is not paid within 5 days after the due date.

                                  (ii)    To enter and repossess the Premises, by breaking open locked doors if necessary, and remove all persons and all or any property therefrom, by action at law or otherwise, without being liable for prosecution or damages therefor, and Landlord may, at Landlord’s option, make alterations and repairs in order to relet the Premises and relet all or any part(s) of the Premises for Tenant’s account. Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting. In the event of reletting without termination of this lease, Landlord may at any time thereafter elect to terminate this lease for such previous breach.

                                  (iii)    To accelerate the whole or any part of the Rent for the balance of the Term, and declare the same to be immediately due and payable.

                                  (iv)    To terminate this lease and the Term without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken.

                (c)    Grace Period.   Notwithstanding anything hereinabove stated, neither party will exercise any available right because of any default of the other, except those remedies contained in subsection (b)(i) of this Section, unless such party shall have first given 10 days written notice

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thereof to the defaulting party, and the defaulting party shall have failed to cure the default within such period; provided, however, that:

                                  (i)    No such notice shall be required if Tenant fails to comply with the provisions of Sections 10 or 20(a), in the case of emergency as set forth in Section 22 or in the event of any default enumerated in subsections (a)(iii) and (iv) of this Section.

                                  (ii)    Landlord shall not be required to give such 10 days notice more than 2 times during any 12 month period.

                                  (iii)    If the default consists of something other than the failure to pay money which cannot reasonably be cured within 30 days, neither party will exercise any right if the defaulting party begins to cure the default within the 30 days and continues actively and diligently in good faith to completely cure said default.

                                  (iv)    Tenant agrees that any notice given by Landlord pursuant to this Section which is served in compliance with Section 27 shall be adequate notice for the purpose of Landlord’s exercise of any available remedies.

                (d)    Non-Waiver; Non-Exclusive.   No waiver by Landlord of any breach by Tenant shall be a waiver of any subsequent breach, nor shall any forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent breach. Efforts by Landlord to mitigate the damages caused by Tenant’s default shall not constitute a waiver of Landlord’s right to recover damages hereunder. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the total amount due Landlord under this lease shall be deemed to be other than on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of Rent due, or Landlord’s right to pursue any other available remedy.

                (e)    Costs and Attorneys’ Fees.   If either party commences an action against the other party arising out of or in connection with this lease, the prevailing party shall be entitled to have and recover from the losing party attorneys’ fees, costs of suit, investigation expenses and discovery costs, including costs of appeal.

                (f)    Curing Landlord’s Defaults.   If (i) Landlord shall be in default of any of its maintenance and repair obligations under the Lease or shall fail to provide any of the services to be provided by Landlord under this Lease, and (ii) such default materially interferes with Tenant’s use and occupancy of the Premises for the conduct of Tenant’s business therein, and (iii) Tenant gives Landlord written notice specifying the nature of the default and specifying that Tenant intends to exercise its self-help rights under this subsection, and (iv) Landlord fails to cure such default within 30 days (or within a period of 72 hours if an emergency or shorter reasonable period if Landlord fails to timely remove snow) after Landlord receives Tenant’s

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notice (or within such reasonable additional time as may be necessary to cure such default provided Landlord commences such cure within said period and thereafter diligently prosecutes such cure to completion), then Tenant may, without any obligation to do so, cure such default on behalf of Landlord. Landlord shall reimburse Tenant within 30 days of demand for any reasonable out-of-pocket sums paid or costs incurred by Tenant in curing such default (“Tenant’s Cost of Cure”), which demand shall be accompanied by invoices or other reasonable documentation evidencing amounts incurred by Tenant. To the extent Tenant’s Cost of Cure include items properly includable in Operating Expenses, Landlord may include in Operating Expenses such amounts reimbursed by Landlord.

24. Representations of Tenant.   Tenant represents to Landlord and agrees that:

                (a)    The word “Tenant” as used herein includes the Tenant named above as well as its successors and assigns, each of which shall be under the same obligations and liabilities and each of which shall have the same rights, privileges and powers as it would have possessed had it originally signed this lease as Tenant. Each and every of the persons named above as Tenant shall be bound jointly and severally by the terms, covenants and agreements contained herein. However, no such rights, privileges or powers shall inure to the benefit of any assignee of Tenant immediate or remote, unless Tenant has complied with the terms of Section 18 and the assignment to such assignee is permitted or has been approved in writing by Landlord. Any notice required or permitted by the terms of this lease may be given by or to any one of the persons named above as Tenant, and shall have the same force and effect as if given by or to all thereof.

                (b)    If Tenant is a corporation, partnership or any other form of business association or entity, Tenant is duly formed and in good standing, and has full corporate or partnership power and authority, as the case may be, to enter into this lease and has taken all corporate or partnership action, as the case may be, necessary to carry out the transaction contemplated herein, so that when executed, this lease constitutes a valid and binding obligation enforceable in accordance with its terms. Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of this lease at the time of such execution.

25.              Liability of Landlord.   The word “Landlord” as used herein includes the Landlord named above as well as its successors and assigns, each of which shall have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this lease as Landlord. Any such person or entity, whether or not named herein, shall have no liability hereunder after it ceases to hold title to the Premises except for obligations already accrued (and, as to any unapplied portion of Tenant’s Security Deposit, Landlord shall be relieved of all liability therefor upon transfer of such portion to its successor in interest) and Tenant shall look solely to Landlord’s successor in interest for the performance of the covenants and obligations of the Landlord hereunder which thereafter shall accrue. Neither Landlord nor any principal of Landlord nor any owner of the Property, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this lease or the Premises, and if Landlord is in breach or default with respect to Landlord’s obligations under this lease or otherwise, Tenant shall look solely to the equity of Landlord in the Property for the satisfaction

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of Tenant’s claims. Notwithstanding the foregoing, no mortgagee or ground lessor succeeding to the interest of Landlord hereunder (either in terms of ownership or possessory rights) shall be (a) liable for any previous act or omission of a prior landlord, (b) subject to any rental offsets or defenses against a prior landlord or (c) bound by any amendment of this lease made without its written consent, or by payment by Tenant of Minimum Annual Rent in advance in excess of one monthly installment.

26. Interpretation; Definitions.

                (a)    Captions.   The captions in this lease are for convenience only and are not a part of this lease and do not in any way define, limit, describe or amplify the terms and provisions of this lease or the scope or intent thereof.

                (b)    Entire Agreement.   This lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Property. No rights, easements or licenses are acquired in the Property or any land adjacent to the Property by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. This lease shall not be modified in any manner except by an instrument in writing executed by the parties. The masculine (or neuter) pronoun and the singular number shall include the masculine, feminine and neuter genders and the singular and plural number. The word “including” followed by any specific item(s) is deemed to refer to examples rather than to be words of limitation. Both parties having participated fully and equally in the negotiation and preparation of this lease, this lease shall not be more strictly construed, nor any ambiguities in this lease resolved, against either Landlord or Tenant.

                (c)    Covenants.   Each covenant, agreement, obligation, term, condition or other provision herein contained shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this lease unless otherwise expressly provided. All of the terms and conditions set forth in this lease shall apply throughout the Term unless otherwise expressly set forth herein.

                (d)    Interest.   Wherever interest is required to be paid hereunder, such interest shall be at the highest rate permitted under law but not in excess of 15% per annum.

                (e)    Severability; Governing Law.   If any provisions of this lease shall be declared unenforceable in any respect, such unenforceability shall not affect any other provision of this lease, and each such provision shall be deemed to be modified, if possible, in such a manner as to render it enforceable and to preserve to the extent possible the intent of the parties as set forth herein. This lease shall be construed and enforced in accordance with the laws of the state in which the Property is located.

                (f)    “Mortgage” and “Mortgagee.”   The word “mortgage” as used herein includes any lien or encumbrance on the Premises or the Property or on any part of or interest in or appurtenance to any of the foregoing, including without limitation any ground rent or ground lease if Landlord’s interest is or becomes a leasehold estate. The word “mortgagee” as used

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herein includes the holder of any mortgage, including any ground lessor if Landlord’s interest is or becomes a leasehold estate. Wherever any right is given to a mortgagee, that right may be exercised on behalf of such mortgagee by any representative or servicing agent of such mortgagee.

                (g)    “Person.”   The word “person” is used herein to include a natural person, a partnership, a corporation, an association and any other form of business association or entity.

                (h)    Proportionate Share.   At any time or times, upon request of Landlord or of any tenant of the Building, the method for allocating Tenant’s Proportionate Share of any Impositions, cost, charge, rent, expense or payment then or thereafter payable shall be redetermined by an independent qualified expert. The cost of such redetermination shall be borne by the tenants of the Building in the same proportion as that determined by such expert for reallocation of said relevant sum; except that if such redetermination is requested by a tenant, the cost thereof shall be borne entirely by such tenant if the proportionate share of said relevant sum allocable to such tenant as the result of such redetermination shall not vary by at least 5% from the amount which would have been allocable to such tenant in accordance with the percentage based on square foot area. Except as otherwise expressly provided in this lease, Landlord shall not increase or decrease the physical size of the Building without Tenant’s prior written consent.

27.              Notices.   Any notice or other communication under this lease shall be in writing and addressed to Landlord or Tenant at their respective addresses specified at the beginning of this lease, except that after the Commencement Date Tenant’s address shall be at the Premises, (or to such other address as either may designate by notice to the other) with a copy to any mortgagee or other party designated by Landlord. Each notice or other communication shall be deemed given if sent by prepaid overnight delivery service or by certified mail, return receipt requested, postage prepaid or in any other manner, with delivery in any case evidenced by a receipt, and shall be deemed received on the day of actual receipt by the intended recipient or on the business day delivery is refused. The giving of notice by Landlord’s attorneys, representatives and agents under this Section shall be deemed to be the acts of Landlord; however, the foregoing provisions governing the date on which a notice is deemed to have been received shall mean and refer to the date on which a party to this lease, and not its counsel or other recipient to which a copy of the notice may be sent, is deemed to have received the notice.

28.              Security Deposit.   [Intentionally Deleted].

29.              Premises.   The Premises will consist of 73,000 rentable square feet (29,340 rentable square feet devoted to office use and 43,660 rentable square feet devoted to warehouse use) in the single story Building to be constructed by Landlord as provided in Section 30 below, as depicted on the floor plan attached to this lease as Exhibit “A”.

30.              Building Construction.   The base Building shell shall be completed by Landlord substantially in accordance with the drawings attached hereto as Exhibit “E”. All construction shall be done in a good and workmanlike manner and shall comply in all material respects with all applicable laws codes, regulations, rules and requirements of the governmental authorities having jurisdiction, as applied, enforced and interpreted as of the date the building permit is

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issued, including, but not limited to, all requirements of Title III of the ADA as applicable to commercial facilities. This lease, and the obligations of Landlord and Tenant hereunder, is contingent upon Landlord obtaining all necessary municipal and other governmental approvals and permits for the development and construction of the base Building for the uses contemplated herein and of the planned development of which the base Building is a part. Landlord will use all reasonable efforts to obtain such approvals. If Landlord has not obtained the building permit for the construction of the base Building on or before April 20, 2000, either Landlord or Tenant can terminate this lease by giving written notice of termination to the other on or before April 30, 2000.

31.              Tenant Improvements; Tenant Improvement Allowance.

31.1 Initial Tenant Improvements.   The initial tenant improvements (the “Initial Tenant Improvements”) shall be constructed either by Landlord or Tenant, based on Tenant’s election described in Section 31.3 below, in accordance with the Tenant Improvement Plans, as defined in Section 31.2 below. Regardless of whether constructed under contract with Landlord or with Tenant, the contracting party shall cause the construction to be done in a good and workmanlike manner in compliance with all applicable Laws and Requirements.

31.2 Tenant Improvement Plans.   Landlord and Tenant have approved the space plans for the Initial Tenant Improvements attached hereto as, or listed on attached, Exhibit G (the “Preliminary Plans”). Tenant will provide Landlord, on or before the date that is 120 days after the date of this Lease, complete construction drawings and specifications for the Initial Tenant Improvements. The construction drawings and specifications shall be consistent with the Preliminary Plans. Within 10 business days after its receipt of the construction drawings and specifications, Landlord shall notify Tenant of its approval or disapproval thereof (which approval shall not be unreasonably withheld), and if Landlord disapproves thereof, the revisions that Landlord requires in order to obtain such approval. It is agreed that Landlord will not object to construction drawings and specifications to the extent that they conform to the Preliminary Plans. As promptly as reasonably possible thereafter, but no later than 10 business days after Landlord’s response, Tenant shall submit to Landlord modified construction drawings incorporating appropriate revisions. Upon approval of the final construction drawings and specifications, Landlord’s and Tenant’s authorized representatives shall each evidence such approval by initialing the top of each sheet of the approved construction drawings and specifications. The approved construction drawings and specifications are herein termed the “Tenant Improvement Plans”. Once approved, neither party will change any of the Tenant Improvement Plans without Tenant’s consent, which consent shall not be unreasonably withheld, conditioned or delayed.

31.3 Construction.   On or before April 15, 2000, time being of the essence, Tenant may elect by written notice to Landlord, to perform through a general contractor selected by Tenant the construction of the Initial Tenant Improvements. If Tenant

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timely elects to construct the Initial Tenant Improvements, the Initial Tenant Improvements shall be constructed pursuant to the approved Tenant Improvement Plans, shall be constructed by a general contractor approved by Landlord, which approval shall not be unreasonably withheld, and shall otherwise be constructed in accordance with the provisions of Sections 9 and 10 of this lease. Tenant shall deliver to Landlord copies of all certificates of occupancy, permits and licenses required to be issued by any authority in connection with Tenant’s construction. If Tenant fails to timely make such election, Landlord, through a general contractor selected by Landlord, shall perform the construction of the Initial Tenant Improvements in accordance with the provisions of this Section 31.

31.4 Tenant Improvement Allowance.   Landlord shall provide Tenant a leasehold improvement allowance of up to $876,000 (based on $12.00 per rentable square foot) (the “Allowance”) toward the cost of the Initial Tenant Improvements (including the cost of architectural, engineering and construction drawings, of obtaining necessary permits and of constructing the interior improvements other than trade fixtures, equipment, furniture or other removable personal property of Tenant). If Tenant contracts for the construction of the Initial Tenant Improvements, the Allowance shall be disbursed to Tenant by Landlord promptly after submission by Tenant to Landlord of evidence of the costs and expenses of the Initial Tenant Improvements, evidence of payment thereof by Tenant, lien waivers from all persons supplying labor or materials to the initial leasehold improvements, and any other information or documentation that Landlord may reasonably request. If the costs and expenses of the Initial Tenant Improvements, whether constructed by Landlord or by Tenant, exceed the Allowance (as the same may have been increased pursuant to the following paragraph), Tenant shall be solely responsible for payment of any excess.

At Tenant’s request (which request must be made on or prior to April 1, 2000), Landlord will increase the Allowance by an amount not to exceed $146,000 (based on $2.00 per rentable square foot) (the “Increase”). In such event, the Minimum Annual Rent will be increased by an amount equal to the Increase multiplied by .1654. For example, if the Increase is the full $146,000, the Minimum Annual Rent will increase by $24,148.40 (or $.3308 per rentable square foot).

32. Completion Dates: Access; Acceptance.

32.1 If Tenant Constructs Initial Tenant Improvements.   If Tenant elects to construct the Initial Tenant Improvements, Landlord shall cause the base Building to be Substantially Completed (as defined below) on or before September 1, 2000, subject to extension for any delays caused by Tenant or delays resulting from matters outside of Landlord’s reasonable control. “Substantial Completion” shall be deemed to occur on the date that (i) the base Building shell (including HVAC, plumbing, electrical and other mechanical systems to be constructed by Landlord pursuant to Section 30.1 above) are sufficiently complete to allow access to the

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Premises by Tenant for the installation of the Initial Tenant Improvements, and (ii) a temporary or permanent certificate of occupancy with respect to the Base Building has been issued by the City of Eden Prairie. On or about the time of Substantial Completion of the base building, Landlord, Tenant and Landlord’s general contractor shall jointly inspect the Premises and agree in writing on a final punchlist of Landlord’s work that is unfinished or defective. Tenant’s acceptance of delivery of the Premises to Tenant for the construction of the Initial Tenant Improvements shall constitute acceptance of the Premises, subject only to the punchlist items. Landlord shall cause Landlord’s general contractor to complete all items on the approved punchlist within 30 days, subject only to delays outside of Landlord’s reasonable control.

Tenant shall at all reasonable times following Substantial Completion of the Base Building until the Commencement Date have access to the Premises, at Tenant’s own risk, expense and responsibility, for purposes of installing the Initial Tenant Improvements, furniture, trade fixtures and equipment. Moreover, Tenant shall, upon Tenant’s request, be afforded limited access to the Premises prior to the Substantial Completion of the Base Building for the purpose of installing cables or other equipment, including, but not limited to, racking and a conveyor system, that properly requires installation before the completion of the Base Building and for the purpose of constructing the mezzanine over the office area; Landlord shall have the right to control such access so that it does not interfere with the timely completion of the Base Building. In connection with all access by Tenant prior to the Commencement Date, Tenant shall abide by the terms and conditions of this Lease including carrying the insurance specified by the Lease, as if the term of this Lease had already commenced, except that Tenant shall have no obligation to pay the Minimum Annual Rent or Annual Operating Expenses until the Commencement Date. Tenant shall, however, pay the charges for all utilities furnished to the Premises during Tenant’s early-access period and after the substantial completion of the Base Building, as reasonably estimated by Landlord.

32.2 If Landlord Constructs Initial Tenant Improvements. If Landlord constructs the Initial Tenant Improvements, Landlord shall cause Landlord’s Work (meaning the construction of the base Building and the Initial Tenant Improvements) to be Substantially Completed (as defined below) on or before October 15, 2000, subject to extension for any delays caused by Tenant or resulting from matters outside of Landlord’s reasonable control. “Substantial Completion” shall be deemed to occur on the date that (i) Landlord’s Work is completed but for minor unfinished items that do not materially interfere with Tenant’s scheduled installation of its trade fixtures, equipment or furnishings or with Tenant’s scheduled occupancy of the Premises, and (ii) a temporary or permanent certificate of occupancy has been issued by the City of Eden Prairie.

On or about the time of Substantial Completion of Landlord’s Work, Landlord, Tenant and Landlord’s general contractor shall jointly inspect the Premises and agree in writing on a final punchlist of Landlord’s Work that is unfinished or

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defective. Tenant’s taking of possession of the Premises shall constitute acceptance of the Premises, subject only to the punchlist items. Landlord shall cause Landlord’s general contractor to complete all items on the approved punchlist within 30 days, subject only to delays outside of Landlord’s reasonable control.

Tenant shall at all reasonable times following Substantial Completion of Landlord’s Work until the Commencement Date have access to the Premises, at Tenant’s own risk, expense and responsibility, for purposes of installing Tenant’s furniture, trade fixtures and equipment. Moreover, Tenant shall, upon Tenant’s request, be afforded limited access to the Premises prior to the Substantial Completion of Landlord’s Work for the purpose of installing cables or other equipment that properly requires installation before the completion of Landlord’s Work; Landlord shall have the right to control such access so that it does not interfere with the performance of Landlord’s Work. In connection with all access by Tenant prior to the Commencement Date, Tenant shall abide by the terms and conditions of this Lease including carrying the insurance specified by the Lease, as if the term of this Lease had already commenced, except that Tenant shall have no obligation to pay the Minimum Annual Rent or Annual Operating Expenses until the Commencement Date. Tenant shall, however, pay the charges for all utilities furnished to the Premises during Tenant’s early-access period and after substantial completion of Landlord’s Work, as reasonably estimated by Landlord.

33.              Term.   The Term of this Lease shall commence on the Commencement Date (as defined below) and shall end at 11:59 p.m. on the last day of the Term (the “EXPIRATION DATE”), without the necessity of notice from either party, unless sooner terminated in accordance with the terms hereof. At Landlord’s request, Tenant shall confirm the Commencement Date and Expiration Date by executing a lease commencement certificate in the form attached as Exhibit “B”.

If Tenant elects pursuant to Section 31.3 above to contract for the construction of the Initial Tenant Improvements, then the Commencement Date shall be the later of (i) the date that is 90 days following the date that the base Building is Substantially Completed and access to the Premises is delivered by Landlord to Tenant for Tenant’s construction of the Initial Tenant Improvements as provided in Section 32.1 above, and (ii) December 1, 2000.

If Landlord contracts for the construction of the Initial Tenant Improvements, then the Commencement Date shall be the later of (i) the date that is 45 days following the date that Landlord’s Work (as defined in Section 32.2 above) is Substantially Completed and access to the Premises is delivered by Landlord to Tenant for the installation of Tenant’s trade fixtures, furniture and equipment, and (ii) December 1, 2000.

34.              Extension Option.   Tenant shall have the right and option to extend the Term of this Lease for two (2) additional extension terms of five (5) years each. Each such option must be exercised, if at all, by giving Landlord prior written notice, at least one year in advance (the “Exercise Deadline”) of the expiration date of the then current lease Term, of Tenant’s election

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to extend the lease Term; it being agreed that time is of the essence and that this option is personal to Tenant and is non-transferable to any assignee or sub lessee (regardless of whether any such assignment or sublease was made with or without Landlord’s consent) or other party. Except as follows, and subject to the following conditions, each extension Term shall be under the same terms and conditions as provided in the Lease:

                (a)    Tenant’s extension option shall be void at Landlord’s option if there exists any event of default by Tenant under this Lease beyond any applicable notice and cure period at the time Tenant exercises an extension option or as of the commencement date of an extension term;

                (b)    there shall be no further options to extend the term beyond the second extension term;

                (c)    Tenant shall accept the Premises in their “as is” condition, without any obligation on the part of Landlord to provide any tenant improvements or tenant improvement allowance; and

                (d)    The Minimum Annual Rent for the extension term will be the “Market Rent” for the Premises as determined and defined pursuant to the provisions of this Section.

                The Market Rent shall be determined as follows: Within 10 business days after Landlord receives timely notice from Tenant exercising Tenant’s extension option, Landlord will give notice to Tenant of its determination of the Market Rent of the Premises, and Landlord’s determination will constitute the Market Rent unless Tenant objects by giving Landlord written notice of objection within 10 business days after Tenant’s receipt of Landlord’s determination. If Tenant so objects, and the parties are unable to agree upon the Market Rent within 30 days after the Tenant’s objection, then by written notice to Landlord within 2 business days thereafter Tenant may request arbitration of the Market Rent under this paragraph. If Tenant does not timely give such notice requesting arbitration, Tenant’s exercise of the extension option will be deemed rescinded, and Tenant’s extension option shall be null and void. If arbitration is timely requested by Tenant, the Market Rent will be determined by appraisal within 90 days after Tenant’s request by a board of appraisers consisting of three reputable real estate professionals experienced in the leasing of commercial office/industrial space (each an “Expert”). One Expert will be appointed by Tenant, and the second Expert will be appointed by Landlord. Landlord and Tenant will each appoint their respective Experts within 30 days following Tenant’s arbitration request. The third Expert will be appointed by the first two Experts. If the first two Experts are unable to agree on a third Expert within 10 business days after the appointment of the second Expert, or if either party refuses or neglects to appoint an Expert as herein provided, then the third Expert or the second Expert, whose appointment was not made as provided above, may be appointed by any judge of the Hennepin County District Court. Any Expert appointed by a judge of the Hennepin County District Court shall be a reputable real estate appraiser experienced in appraising the rental value of commercial office space, and shall be a member of the American Institute of Real Estate Appraisers with the designation of “MAI.” The Experts shall be instructed to reach their respective determinations within 45 days of the appointment of the third Expert. If determinations of at least two of the Experts are identical in amount, that amount will be determined to be the Market Rent. If the determinations of all three Experts are

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different in amount, the highest appraised value will be averaged with the middle value (that average being referred to as “Sum A”). The lowest appraised value will be averaged with the middle value (that average being referred to as “Sum B”), and the Market Rent will be determined as follows: (i) if neither Sum A nor Sum B differs from the middle appraised value by more than 10% of the middle appraised value, then the Market Rent will be the average of the three appraisals, (ii) if either Sum A or Sum B (but not both) differs from the middle appraised value by more than 10% of the middle appraised value, then the Market Rent will be the average of the middle appraised value and the appraised value closer in amount to the middle appraised value, and (iii) if both Sum A and Sum B differ from the middle appraised value by more than 10% of the middle appraised value, then the Market Rent will be equal to the middle appraised value. Written notice of the Market Rent as duly determined in accordance with this Section shall be promptly given to Landlord and Tenant and will be binding and conclusive on them. Each party will bear its own expenses in connection with the board proceeding (including the Expert appointed by it), and the fees of the third Expert will be borne equally. If, for any reason, the Market Rent has not been determined at the time of the commencement of the extension term, then the Market Rent will be the amount set forth in Landlord’s determination, and if the determination of the Experts as provided above indicates that a lesser or greater amount should have been paid than that which was actually paid, a proper adjustment will be made in a payment from Landlord to Tenant, or Tenant to Landlord, as the case may be.

                For purposes of this Section, “Market Rent” means the net annual rent that a willing tenant would pay, and a willing lessor would accept, in arms-length, bona fide negotiations, if the premises at issue were leased to a single tenant for the period in question under a lease pursuant to which such tenant would not receive any rental concession, such as rental abatements or “free rent” periods or rental assumption, inducements or any leasehold improvement allowance, and otherwise taking into account any other pertinent factors, including, but not limited to, the net effective annual rates per rentable square foot for leases of comparable space in comparable buildings recently or then being entered into in the southwest suburban Minneapolis area (“Comparable Rates”). In determining the Market Rent and using Comparable Rates in connection with such determination, the following factors (and any other factors then known to be pertinent) shall be considered: the size of the Premises; the length of the term; permitted use; quality of services provided; location and/or floor level; definition of rentable area; existing leasehold improvements; leasehold improvements to be provided by the lessor, whether directly or by allowance; the quality, age and location of the building; financial strength of the applicable tenant; rental concessions (such as rental abatements or “free rent” periods and rent assumptions); inducements; the respective obligations of the lessor and the tenant, the manner in which the rents are then subject to escalation and the time the particular rate under consideration became or will become effective. In the event a Comparable Rate used for comparison is a “gross” rate (i.e., the rate includes an allowance for operating expenses or taxes), then such Comparable Rate shall be appropriately adjusted to the end that such rate is net of operating expenses and taxes to the same extent as provided in this Lease, and in the event a Comparable Rate is a “net” rate (i.e. the rate does not include an allowance for operating expenses or taxes), any difference between operating expenses and taxes payable under this Lease and under the lease as to which the Comparable Rate applies shall be taken into account.

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Upon the timely exercise of an extension option, at the request of either party the parties hereto will enter into an appropriate amendment to the Lease incorporating the terms of the Lease extension.

35.              Parking.   Landlord shall provide, and Tenant shall be entitled to the use of, not less than 4.5 unreserved parking spaces for each 1,000 rentable square feet of the Premises. Such parking shall be nonexelusive, undesignated and unreserved parking provided as part of the Building’s common area parking facilities, except that Landlord will allow Tenant to designate up to 10 of said parking spaces for the parking of Tenant’s visitors and guests (the location and the signage of such visitor parking being subject to Landlord’s reasonable approval).

36. Expansion Rights.

36.1 Expansion Option.   Tenant may elect by written notice to Landlord given on or before April 1, 2000 to expand the Premises by approximately 20,000 rentable square feet (the “Expansion Space”) so as to include in the Premises 100% of the rentable area of the Building. In such event, all of the terms and conditions of this lease applicable to the original Premises (including, but not limited to, the Tenant Improvement Allowance of $12.00 per rentable square foot (subject to increase under the terms and conditions of the second paragraph of Section 31.4)) shall apply to the Expansion Space; and the Minimum Annual Rent for each lease year as set forth in Section 1(d) shall be increased by an amount equal to the scheduled Minimum Annual Rent per rentable square foot for the original Premises multiplied by the rentable square feet in the Expansion Space. If Tenant timely exercises this expansion option, at the request of either party, the parties shall enter into an amendment to this lease adding the Expansion Space to the Premises and incorporating into the schedule of Minimum Annual Rent the rental increase resulting from the increase in the rentable square footage of the Premises. The Tenant Improvement Allowance for the Expansion Space may be used for leasehold improvements constructed in the original Premises as well as for leasehold improvements constructed in the Expansion Space, but it shall not be used for trade fixtures, equipment, furniture or other removable personal property of Tenant.

36.2 First Notice.   Tenant acknowledges that Tenant has no rights in and to the Expansion Space other than the rights specified in Section 36.1 above. If, however, Tenant fails to exercise its rights to expand into the Expansion Space as provided above, Landlord will, as a courtesy to Tenant, endeavor to provide Tenant notice at such time Landlord believes that Landlord is close to entering into an initial lease or commitment to lease the Expansion Space to a third party. Such notice may be given by telephone or other informal means. This provision is not intended to provide Tenant any rights of first offer, first refusal or other rights with respect to the Expansion Space, and Landlord shall have no liability to Tenant if Landlord fails to provide the notice contemplated in this Section 36.2. The provisions of this Section 36.2 shall only apply to the initial leasing of the

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Expansion Space, and shall not apply to any subsequent leasing or re-leasing thereof.

37. Landlord’s Environmental Representations.

37.1 Landlord has provided Tenant a copy of the following environmental assessments and reports regarding the Property:

• Phase I Environmental Site Assessment prepared by LAW ENGINEERING AND ENVTRONMENTAL SERVICES, INC. Dated January 9, 1998, Project 5200-7-1363-02b-916.

• Phase I Environmental Site Assessment prepared by LAW ENGINEERING AND ENWERONMENTAL SERVICES, INC. Dated January 9, 1998, Project 5200-7-1363-02c-916.

Landlord represents to Tenant that the foregoing is a complete list of all studies and reports in Landlord’s possession or under Landlord’s control with respect to hazardous substances or Restricted Activities (as defined in Section 4 of the lease) on or about the Property. Landlord will provide Tenant a copy of any additional or updated environmental assessments obtained by Landlord in connection with its acquisition or development of the Property. Landlord has received no notice from any governmental authority regarding of any inquiry, investigation or proceeding regarding hazardous substances or Restricted Activities on or about the Property.

37.2 Landlord represents that the base Building will be constructed in compliance, in all material respects, with all applicable environmental Laws and Requirements as applied, enforced and interpreted as of the date the building permit is issued.

37.3 Landlord will protect, indemnify and hold harmless Tenant from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) arising out of the breach by Landlord of Landlord’s representations in this Section 37. Landlord, at its expense, shall resist and defend such action or proceeding, or cause the same to be resisted and defended by counsel (reasonably acceptable to Tenant) designated by Landlord and approved by Tenant. Landlord’s obligations pursuant to this Section shall survive the expiration or termination of this lease.

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        IN WITNESS WHEREOF, and in consideration of the mutual entry into this lease and for other good and valuable consideration, and intending to be legally bound, Landlord and Tenant have executed this lease.

Date signed:   December 21, 1999 Landlord:
LIBERTY PROPERTY LIMITED PARTNERSHIP

By:   Liberty Property Trust, Sole General Partner

By:   /s/   Robert L. Kiel

Its:   Sr Vice President – Reg Dir

Tenant:

Date signed:   December 21, 1999 CNS, INC.

By:   /s/   Marti Morfitt

Its:   President and Chief Operating Officer

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EX-23.1 9 cns042906_ex23-1.htm Exhibit 23.1 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
CNS, Inc.:

        We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-109110, 333-68310, 333-42108, 333-60017, 33-59719, 33-42971, 33-29454, 33-19043, 33-15044 and 33-14052) of CNS, Inc. of our report dated April 26, 2004, relating to the Consolidated Balance Sheets of CNS, Inc. and subsidiaries as of March 31, 2004 and 2003, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, and Cash Flows for each of the years ended March 31, 2004 and 2003 and December 31, 2001 and for the three months ended March 31, 2002 and 2001 (unaudited), which report is included in the March 31, 2004, annual report on Form 10-K of CNS, Inc.

/s/   KPMG LLP

Minneapolis, Minnesota
June 11, 2004

EX-31.1 10 cns042906_ex31-1.htm Exhibit 31.1 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 31.1

CERTIFICATIONS

I, Marti Morfitt, certify that:

1. I have reviewed this Form 10-K of CNS, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date   June 11, 2004 /s/   Marti Morfitt

Chief Executive Officer

EX-31.2 11 cns042906_ex31-2.htm Exhibit 31.2 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 31.2

CERTIFICATIONS

I, Samuel Reinkensmeyer, certify that:

1. I have reviewed this Form 10-K of CNS, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date   June 11, 2004 /s/   Samuel Reinkensmeyer

Vice President of Finance and Chief Financial Officer

EX-32 12 cns042906_ex32.htm Exhibit 32 to CNS, Inc. Form 10-K dated March 31, 2004
Exhibit 32

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1)    The accompanying Annual Report on Form 10-K for the period ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   June 11, 2004 /s/   Marti Morfitt

Marti Morfitt, President & Chief Executive Officer

Date:   June 11, 2004

/s/   Samuel Reinkensmeyer

Samuel E. Reinkensmeyer
Vice President of Finance, Chief
Financial Officer and Treasurer

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


	CNS, INC.
/s/ Daniel Cohen	By:	/s/ Marti Morfitt

Daniel Cohen
	Its:	President and Chief Executive Officer

By:	/s/ Samuel E. Reinkensmeyer

	(employee)
		CNS, Inc.

		/s/ Michelle Beuning

		(witness)

	Annual		Monthly			Annual		Monthly
2	$	696,201.00	$	58,016.75	6	$	753,590.40	$	62,799.20
3		710,125.08		59,177.09	7		768,662.16		64,055.18
4		724,327.56		60,360.63	8		784,035.36		65,336.28
5		738,814.08		61,567.84	9		799,716.12		66,643.01
					10		815,710.44		67,975.87

Exhibits:
“A” – Plan showing Premises		“E” – Drawings
“B” – Commencement Certificate Form		“F” – Exclusions from Operating
“C” – Building Rules Expenses		“G” – TI Plans
“D” – Estoppel Certificate Form

Date signed: December 21, 1999	Landlord: LIBERTY PROPERTY LIMITED PARTNERSHIP
	By:	Liberty Property Trust, Sole General Partner

		By:	/s/ Robert L. Kiel

			Its: Sr Vice President – Reg Dir


	Tenant:
Date signed: December 21, 1999	CNS, INC.

	By:	/s/ Marti Morfitt

		Its: President and Chief Operating Officer

Date June 11, 2004		/s/ Samuel Reinkensmeyer

		Vice President of Finance and Chief Financial Officer

Date: June 11, 2004		/s/ Marti Morfitt

		Marti Morfitt, President & Chief Executive Officer
Date: June 11, 2004		/s/ Samuel Reinkensmeyer

		Samuel E. Reinkensmeyer Vice President of Finance, Chief Financial Officer and Treasurer

OR

COMMISSION FILE NUMBER: 0-16612

TABLE OF CONTENTS

PART I

General

Management

Products

Markets

Growth Strategies

Manufacturing and Operations

Competition

Government Regulation

Patents, Trademarks and Proprietary Rights

Employees

EXECUTIVE OFFICERS OF THE COMPANY

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Shareholders

Dividends

Information Regarding Equity Compensation Plans

Securities Authorized for Issuance under Equity Compensation Plans

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

History

Growth Strategy and Financial Focus

Accounting Policies

Operating Results

Net sales

Gross profit rate

Advertising and promotion expense

Selling, general and administrative expense

Special charges

Investment income

Income tax expense (benefit)

Operating and Net Income

Seasonality

Liquidity and Capital Resources

Recent Accounting Pronouncements

Forward-Looking Statements

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

(a) Evaluation of Disclosure Controls and Procedures.

(b) Changes in Internal Control Over Financial Reporting.

PART III

Directors

Executive Officers

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(Power of Attorney and Signatures)

SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

EXHIBIT A

CNS, Inc.

CNS, Inc.

CERTIFICATIONS

CERTIFICATIONS

CERTIFICATION