-----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, MtjpB7/7rajtpYnhFy4qVS0eeGfj6aSHXjri6a6HhdyQHXpocuJC8Dtix4REhtE/ Cmo1Bma/sawi+1xpmrrrnA== 0000897101-06-001186.txt : 20060601 0000897101-06-001186.hdr.sgml : 20060601 20060601141258 ACCESSION NUMBER: 0000897101-06-001186 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060601 DATE AS OF CHANGE: 20060601 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: 06879584 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 cns062185_10k.htm FORM 10-K FOR THE FISCAL YEAR ENDED 3-31-2006 CNS, Inc. Form 10-K Dated March 31, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)

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

For the fiscal year ended March 31, 2006

o 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

of incorporation or organization)

(I.R.S. Employer

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 o

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

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer:

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of March 31, 2006, the aggregate market value of the Company’s Common Stock held by non-affiliates is $343,759,724 computed by reference to the closing sales price of the Company’s Common Stock of $26.07 on September 30, 2005, the last business day of the Company’s most recently completed second fiscal quarter.

As of May 19, 2006, the Company had outstanding 13,982,718 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 15, 2006 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I

Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments

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

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information

PART III

Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services

PART IV

Item 15.	Exhibits and Financial Statement Schedules

SIGNATURES
EXHIBIT INDEX
FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS		F-1

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PART I

Item 1.

BUSINESS

Overview

We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products focused on better breathing, and FiberChoice® branded products focused on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands, patented technologies, well-established distribution networks domestically and internationally, a flexible and low-cost operating model and an experienced management team.

Our principal product, the Breathe Right® nasal strip, improves breathing by dilating the nasal passages. Nasal strips provide temporary relief from nasal congestion and stuffiness resulting from a variety of health conditions, and also reduce or eliminate snoring. Breathe Right nasal strips provide consumers a “drug free” better breathing solution.

The Breathe Right brand has been extended by the launch of products such as Breathe Right® Snore Relief™ throat spray in fiscal 2003 and Breathe Right® Snore Relief™ throat rinse scheduled for launch in July 2006. Both products provide drug free, over the counter solutions to manage snoring. Clinical studies have shown that 85% of people with common snoring problems experience a reduction or elimination of their symptoms by using these products in combination with Breathe Right nasal strips.

Breathe Right® Vapor Shot!™ personal vaporizer and Breathe Right® saline nasal spray are being phased out during fiscal 2007 as a result of low sales volume.

We entered the bulk fiber category in March 2000 with the launch of the FiberChoice brand. The original FiberChoice product is an orange flavored chewable fiber tablet that offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber. In March 2005, CNS extended the FiberChoice line to include sugar-free chewable fiber tablets in assorted fruit flavors and a low-sugar, hard candy fiber drop. The hard candy fiber drop product is being phased out during fiscal 2007 as the result of lower than anticipated consumer demand.

The FiberChoice brand was further extended in fiscal 2006 with the launch of FiberChoice® plus Calcium and FiberChoice® Weight Management chewable tablets. Both products provide the benefits of the original fiber tablets while delivering the added benefits of calcium or weight management ingredients in the same convenient chewable form.

In addition, we are exploring opportunities to acquire established consumer health care brands, product lines and new technologies that complement our better breathing and digestive health brand platforms.

History

CNS was founded in 1982. From 1982 until 1995, the Company designed, manufactured and marketed computer-based diagnostic devices for sleep disorders. In 1992, CNS obtained the exclusive license to manufacture and sell nasal strips, and in 1993 received FDA clearance to market the nasal strip as a product that improves nasal breathing. In 1994, CNS launched the Breathe Right nasal strip in the United States and in 1995 divested itself of the assets related to its sleep disorders business in order to focus on further developing the Breathe Right nasal strip product. In 1998, CNS strengthened its management team to add consumer healthcare products experience, and since that time continued to develop the Breathe Right brand both domestically and internationally. In 2000, CNS added its second branded product line with the

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launch of FiberChoice chewable fiber tablets. In fiscal 2006, we purchased the patents and patents pending relating to the FiberChoice chewable fiber products.

Competitive Strengths

•

Development of Strong Brands within Attractive Niche Categories. Our core competency is sales and marketing of consumer healthcare products. We have strategically chosen to focus on niche product categories with unique and high margin product offerings that address recurring consumer needs, and support these products with ongoing advertising and promotion campaigns. Our goal is to develop strong consumer demand based on brand awareness and product loyalty, allowing us to achieve long term growth in sales and profitability.

•

Proven Ability to Develop Technologies and Products. We focus our product development efforts on identifying underserved consumer needs and then designing products that directly address those unmet needs. The Breathe Right nasal strip and the FiberChoice chewable fiber tablet were both developed by licensing or acquiring the patented technologies from inventors and creating new consumer brands. Both Breathe Right and FiberChoice brands have been expanded through new product launches.

•

Efficient Operating Model. We focus our internal resources on marketing, sales and product development. We directly manage the production planning and quality control aspects of manufacturing, but outsource manufacturing to well-established, low-cost third-party suppliers. This approach allows us to benefit from manufacturing expertise and economies of scale, and maintain a highly flexible and variable cost structure, with low overhead and low capital investment. We internally manage all aspects of customer service and distribution of our products, delivering a high standard of service to our customers.

•

Experienced Management Team. We have an experienced management team, with a proven track record of developing branded consumer healthcare products and building shareholder value. Although we maintain a lean staff of approximately 65 full-time equivalent employees, we believe we have the skill and experience of larger companies in our industry. We organize our management structure into five strategic teams focused on growth: Breathe Right brand teams, for domestic and international markets, the FiberChoice brand team and new product development teams for both the Breathe Right and FiberChoice brands.

Growth Strategies

Investing in Advertising and Promotion.

Breathe Right Brand. Our marketing efforts for Breathe Right products are targeted against two key consumer healthcare conditions: nasal congestion and snoring. The majority of advertising and promotion investment is spent on television advertising, which communicates the unique Breathe Right brand benefits of instant, drug-free relief from nasal congestion and snoring. We also use other promotion programs, such as sampling, coupons, in-store advertising and public relations activities. Marketing communications promote trial, as well as repeat purchases of Breathe Right brand products by increasing consumer awareness and developing product loyalty.

FiberChoice Brand. Our marketing efforts for FiberChoice products are targeted toward the growing awareness of the need for increased consumption of dietary fiber, and the important health benefits associated with consuming higher levels of dietary fiber. In addition to communicating the importance of increased consumption of dietary fiber, recent new product launches are focused on the growing demand for additional dietary supplements including calcium and weight management ingredients. The majority of advertising and promotion investment is spent on television advertising, which

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communicates the challenge that active people face in meeting the recommended daily fiber consumption and other dietary needs.

The advertising message also highlights the unique benefits offered by FiberChoice products including convenience, efficacy and good taste. Marketing communications are focused on building awareness, which is still at an early stage, and developing strong brand loyalty.

Developing New Products. The Breathe Right and FiberChoice brand names are two of our most valuable assets and we intend to continue leveraging these assets by future introduction of new products. Our goal is to continue to develop a pipeline of potential new products under both the Breathe Right and FiberChoice brands, linked to their respective brand equities of better breathing and digestive health.

Developing Domestic Distribution. Breathe Right and FiberChoice products are sold to mass merchandise stores, drug stores, grocery stores, warehouse clubs, military base stores and on-line retailers in the United States. We sell our products through a dedicated direct sales force that concentrates on serving key retail accounts as well as through national brokerage organizations which serve our smaller customers.

Our customers generally merchandise our products in the over-the-counter drug section of their stores. Breathe Right nasal strips are typically positioned in the cough, cold and allergy sections of stores because they provide benefits similar to those obtained from other decongestant products. FiberChoice products are positioned in the bulk fiber laxative sections of stores.

Our retail customers include national chains of mass merchants, drug stores and grocery stores such as Wal-Mart, Target, Eckerd, Walgreen’s, RiteAid, CVS, Kroger and Albertson’s and warehouse clubs such as Sam’s Club and Costco, as well as regional and independent stores in these retail channels. In fiscal 2006, Wal-Mart Corporation accounted for approximately 31% of sales.

Expanding Company Presence in International Markets. The Company believes that there is significant market potential for its products outside the United States and is actively developing the Breathe Right brand in selected international markets, most importantly Japan, Europe and Canada. We have established a broad-ranging international distribution system for Breathe Right nasal strips that consists of distributors, sales representatives and suppliers that repackage bulk nasal strips into final consumer packaging. Distributors are appointed largely on an exclusive basis, with territories consisting of one or more countries, and it is expected that this pattern of operation will continue. We retain control over the brand, packaging and advertising in all international markets.

Development of a Third Brand Platform. We are exploring opportunities to acquire or develop a third branded consumer healthcare platform or acquire complementary products which would fit under the Breathe Right or FiberChoice brands. We expect that a potential acquisition would expand our product line within consumer healthcare product categories, leveraging our core competency in sales and marketing, as well as increasing efficiency of our distribution system. There can be no assurances that such an opportunity will be realized.

Products & Markets

Breathe Right Nasal Strips. The Breathe Right nasal strip is a non-prescription, single-use disposable device that improves breathing by dilating the nasal passages. The Company has 510(k) clearance from the United States Food and Drug Administration (“FDA”) to market the Breathe Right nasal strip for improvement of nasal breathing, temporary relief of nasal congestion, elimination or reduction of snoring and temporary relief of breathing difficulties due to a deviated nasal septum. See Item 1, “Government Regulation.”

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The Breathe Right nasal strip includes two embedded flexible “spring-like” pieces which gently lift nasal passages open while a special adhesive holds the strip comfortably in place. The product improves nasal breathing during use and is drug-free, thereby avoiding the side effects associated with many competing products. The Breathe Right nasal strip is offered in two sizes (small/medium and large), and three varieties (tan, clear, and mentholated). Mentholated nasal strips contain a soothing mentholated aroma for additional relief from nasal congestion. Clear nasal strips have been positioned as an alternative for consumers who wish to use the product frequently, but suffer from dry or sensitive skin.

Other Breathe Right Products. Breathe Right Snore Relief throat spray and Breathe Right Snore Relief Throat Rinse are drug-free products that address the snoring condition in a complimentary way relative to nasal strips. Clinical studies have shown that 85 percent of people with common snoring problems experience a reduction or elimination of their symptoms by using one of these products in combination with Breathe Right nasal strips.

Breathe Right Markets & Competition. Our marketing efforts capitalize on the multiple benefits of Breathe Right products, providing solutions to consumers within the following market segments:

• Nasal Congestion Market. Annually most Americans suffer from nasal congestion as a result of the common cold, while nasal congestion as a result of allergies affects approximately 35 million Americans. We believe that Breathe Right nasal strips are often used as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral decongestants). This broad cold/flu/allergy market represents significant potential for the Breathe Right brand.

• Snoring Market. Snoring is a large potential market given estimates that approximately 37 million Americans snore regularly, while another 50 million Americans snore occasionally. We believe that the percentage of international consumers that suffer from snoring is broadly equivalent to the United States. Based on results from clinical trials, Breathe Right products were effective in reducing or eliminating snoring for approximately 85 percent of participants.

• Improved Breathing for Consumers with Deviated Septa. Approximately 12 million people in the United States suffer from a deviated septum, a bend in the cartilage or bone that divides the nostrils. Breathe Right nasal strips were cleared by the Food and Drug Administration in 1996 to provide temporary relief from breathing difficulties associated with a deviated septum.

• Athletic Market. We believe that Breathe Right nasal strips make nasal breathing more comfortable and may improve endurance during athletic activity, particularly when a mouth guard is used. An exercise physiology study published in peer-reviewed medical literature in 1997 concluded that Breathe Right nasal strips provided physiologic advantages in ventilation and heart rate during mid-level exercise.

Competition in Breathe Right Markets. The market for decongestant products is highly competitive, and many of the competitors have significantly greater financial and operating resources than CNS. Our competition in the consumer market for decongestant products and other cold, allergy and sinus relief products consists primarily of pharmaceutical products sold over the counter, nasal sprays and other external nasal dilators. Competition in the snoring remedies market consists primarily of nasal dilators, throat sprays and herbal products, including supplements and homeopathic remedies.

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Although we have historically achieved approximately 90% to 95% share of the external nasal dilator market, Schering Plough Corp. entered the market in September 1998 with an external nasal dilation device. In May 2003, Aso Corporation acquired the brand, including the sales and distribution of Schering Plough’s nasal strip device. Other companies have also entered the nasal dilation market with private label products.

We believe the patents owned and licensed by the Company on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States and most major international markets. We intend to aggressively enforce our patent rights covering the Breathe Right nasal strip and have engaged in litigation to protect its patent rights. However, there can be no assurance that potential competitors will not be able to develop nasal dilation products which circumvent our patents.

FiberChoice Daily Fiber Supplement. FiberChoice is a line of daily fiber supplements that offer consumers an effective, convenient, good-tasting way to supplement their daily intake of dietary fiber. Two FiberChoice chewable tablets contain four grams of fiber and provide more than twice the amount of fiber per dose compared to other convenient fiber supplements. The active ingredient in FiberChoice tablets is inulin, a natural fiber source, which is a prebiotic that helps promote the growth of healthy bacteria in the intestinal tract. FiberChoice products can be taken without water and have been clinically proven to be as effective as powder alternatives. In addition to providing consumers with a convenient source of dietary fiber, the FiberChoice product line has been expanded to meet consumer demand for a fiber supplement fortified with calcium or weight management ingredients.

Approximately 10 million U.S. households annually purchase bulk fiber products, primarily to promote regularity and improve digestive health. The bulk fiber category represents approximately $340 million in U.S. retail sales. We believe this is an attractive product category due to the aging of the U.S. population.

Competition in FiberChoice Markets. The market for dietary fiber supplements is highly competitive and dominated by large companies with better established brands and greater resources than CNS. Competitors include Metamucil® manufactured by Procter and Gamble, Citrucel® manufactured by GlaxoSmithKline, Benefiber® manufactured by Norvartis and FiberCon® manufactured by Wyeth. The technology of the FiberChoice chewable fiber tablet is currently protected by one owned U.S. patent with other U.S. and international patents pending.

Manufacturing and Operations

We outsource all manufacturing to outside suppliers. Each supplier manufactures a portion of our product line to our detailed specifications using raw materials specified by CNS. All suppliers have entered into confidentiality agreements with CNS to protect our intellectual property rights. Our quality control and operations personnel regularly inspect these manufacturers to observe processes and procedures to ensure compliance with FDA Good Manufacturing Practice Standards. Finished goods are also inspected to ensure that they meet quality requirements. We work closely with raw material vendors and our manufacturers to reduce scrap and waste, improve efficiency and improve yields to reduce the manufacturing costs of the product. We have received certification that CNS has established and maintains a quality system which meets the requirements of ISO 9001:2000/EN 46001.

All of our manufacturing supply agreements are documented by contracts, with terms ranging from 2 to 5 years. Prices under these agreements are generally established annually and subject to periodic adjustments for changes in actual raw material costs. All of our products are ordered on a purchase order basis and result in no long-term obligations or commitments.

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To ensure consistent quality and supply, we have multi-year contracts with the suppliers that provide most of the major components for nasal strips. During fiscal 2005, we entered into a multi-year contract with 3M that provides for consistent supply, adherence to specifications and pricing for raw materials used in the manufacturing of nasal strips. Although similar materials are currently available from other suppliers, we have historically utilized 3M components for manufacturing nasal strips. Although we believe that this relationship will not be disrupted, the inability to obtain sufficient quantities of these components or the need to develop alternative sources in a timely and cost-effective manner could adversely affect our operations until new sources of these components become available.

We consolidate all domestic finished goods inventories into our leased warehouse adjacent to our offices in Eden Prairie, MN. We retain control of all aspects of customer service, including arranging logistics for shipment of our product to domestic customers and international distributors.

Government Regulation

As a manufacturer and marketer of medical devices, we are subject to regulation by governmental entities including the FDA and the corresponding agencies of the states and foreign countries in which we sell our products. We must comply with a variety of regulations, including the FDA’s Good Manufacturing Practice regulations, and we are 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. We believe that CNS is currently in compliance with applicable FDA regulations.

FDA regulations classify medical devices into three categories that determine the degree of regulatory control to which the manufacturer of the device is subject. In general, Class I devices involve compliance with labeling and record keeping requirements and are subject to other general controls. Class II devices are subject to performance standards in addition to general controls. Class III devices are those devices, usually invasive, for which pre-market approval (as distinct from pre-market notification) is required before commercial marketing to assure product safety and effectiveness. Nasal dilators, such as our Breathe Right nasal 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. We have received 510(k) pre-market notification approvals to market the Breathe Right nasal strip as a device that can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing difficulties due to a deviated nasal septum.

Our FiberChoice product is considered to be a dietary supplement and is regulated under the Federal Food, Drug, and Cosmetic Act as amended by the Dietary Supplement Health and Education Act “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 our FiberChoice product line. However, at this time, the impact of any proposed regulation on our product lines is not certain.

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Sales of our products outside the United States are subject to regulatory requirements that vary widely from country to country. We have selected a third party to act as an “Authorized Representative” in the European Union. We believe that we have the necessary documentation to support affixing the “CE” mark, an international symbol of quality and compliance with applicable European medical device directives, to our Breathe Right® nasal strips in Europe. We will pursue additional approvals in other jurisdictions as needed.

No assurance can be given that the FDA or state or foreign regulatory agencies will give approvals or clearances for additional applications for the Breathe Right nasal strip or for any of our other products. Moreover, after clearance is given, we are required to advise the FDA and other regulatory agencies of modifications to our products. These agencies have the power to withdraw the clearance or require us to change the device or its manufacturing process or labeling, to supply additional proof of its safety and effectiveness or to recall, repair, replace or refund the cost of the medical device if it is shown to be hazardous or defective. The process of obtaining clearance to market products is costly and time-consuming and can delay the marketing and sale of our products. Furthermore, federal, state and foreign regulations regarding the manufacture and sale of medical devices and other products are subject to future change. We cannot predict what impact, if any, such changes might have on our business.

We are also subject to substantial federal, state and local regulation regarding occupational health and safety, environmental protection, hazardous substance control, waste management and disposal, among others.

Patents, Trademarks and Proprietary Rights

We have registered trademarks, own several patents and pending patent applications, and have a number of patents through licenses which are used in connection with our business. Some of these patents and licenses cover significant product formulations, methods and designs for our current and possible future products. We believe our trademarks are important as protection for CNS’ image in the marketplace. Our success is and will continue to be dependent upon the existence of and ability to protect our trademarks, patents and licensed patents and we intend to take such steps as are necessary to protect our intellectual property rights.

There can be no assurance that our technology and proprietary rights will not be challenged on the grounds that our products infringe on patents, copyrights or other proprietary information owned or claimed by others, or that others will not successfully utilize part or all of our technology without compensation to CNS. Nor can there be any assurance that others will not attempt to challenge the validity or enforceability of our patents and licensed patents on the basis of prior art or introduce competitive products. In addition to seeking patent protection for its products, we also intend to protect our proprietary technologies and proprietary information as trade secrets.

Through license agreements CNS has acquired the exclusive worldwide rights to manufacture and sell nasal strips. Specifically, we have the exclusive right pursuant to those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensors’ patents issued in any country, including those that issue on pending applications. We are obligated to pay royalties to the licensors based on sales of the products typically including certain minimum royalty amounts in order to maintain our exclusive rights.

The original licensor of nasal strip technology has filed patent applications with the U.S. Patent and Trademark Office seeking patent protection for different aspects of the nasal strip technology. Seven of these patent applications have resulted in issued patents in the United States, including one with claims that cover the single-body construction of the nasal strip. The licensor of nasal strip technology also has one patent application which is currently pending. In addition, that licensor has obtained patent protection on the nasal strip in several foreign countries and has various applications pending which seek further patent

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protection in these and a number of additional countries. The licensor of the mentholated vapor strip technology has filed several patent applications with the U.S. Patent and Trademark Office as well as international patent offices resulting in both issued and pending applications. In addition to the patents and patent applications pending in the U.S. mentioned above, we have filed corresponding patent applications seeking protection in several foreign countries to protect our intellectual property rights related to the nasal strip.

We have one owned U.S. patent and other U.S. and international patents pending seeking patent protection for various aspects of the chewable fiber product.

Although we believe that our owned and licensed patents will limit the ability of others to introduce competitive products in the United States, there can be no assurance that the patents on the nasal strip and the chewable fiber tablet will effectively prevent the development of competitive products or that we will have sufficient resources to pursue enforcement of any patents issued. We do, however, intend to aggressively enforce our patents. In order to enforce any patents issued, we may have to engage in litigation which may result in substantial expense and counterclaims against CNS. Any adverse outcome of such litigation could have a negative impact on our business.

We have engaged in litigation to enforce our patent rights relating to the Breathe Right nasal strip. In 1999, CNS brought a suit in federal district court to enforce one of the licensed nasal strip patents containing the broadest claims and providing the most comprehensive protection. In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of our 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. We have joined the licensor, Creative Integration & Design, Inc., in the exercise of our rights to contest the action of the Patent Office and have provided reasons that we believe establish that the claims should not have been rejected. CNS and its licensor are also seeking to amend certain claims to provide us with additional protection under the patent. 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 our patent protection, we believe that our current portfolio of both pending patent applications and newly issued patents will enable CNS to maintain significant patent protection for our nasal strip products.

On February 18, 2004, CNS, 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. On April 13, 2006, CNS, together with Creative Integration & Design, Inc. sued JMS Labs Limited, LLC in the United States District Court for the District of Minnesota for infringement of one nasal dilator patent owned by Creative Integration & Design, Inc. and exclusively licensed to the Company. See “Item 3. Legal Proceedings.”

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

Employees

At April 28, 2006, we had 58 full-time employees and 12 part-time employees, of whom 17 were engaged in operations, 23 in general administration, and 30 in marketing and sales. There are no unions representing CNS’ employees. Relations with its employees are believed to be positive and there are no pending or threatened labor employment disputes or work interruptions.

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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 (54)	Chairman of the Board and Director

Marti Morfitt (48)	President, Chief Executive Officer and Director

Samuel Reinkensmeyer (45)	Vice President of Finance, Chief Financial Officer and Secretary

John J. Keppeler (44)	Vice President of Worldwide Sales

Linda Kollofski (53)	Vice President of Domestic Marketing

Larry R. Muma (55)	Vice President of Operations

Susan Horvath (47)	Vice President and Team Leader of International

Nicole Strait (35)	Vice President of Human Resources

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

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

Samuel Reinkensmeyer has served as the Company’s Vice President of Finance and Chief Financial Officer since October 2003 and Secretary since May 2006. From March 2000 until joining the Company, Mr. Reinkensmeyer was employed by ValueVision Media Inc., a television and Internet retailer which owns and operates ShopNBC and ShopNBC.com serving most recently as its Senior Vice President of Finance and Investor Relations. From August 1988 to February 2000, he served in various financial positions at The Pillsbury Company, most recently as Finance Director, Pillsbury North America. Previously, Mr. Reinkensmeyer worked for Citicorp and PriceWaterhouse.

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

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

Larry R. Muma has served as the Company’s Vice President of Operations since January of 2001. From May of 2000 to December of 2000, Mr. Muma served as Director of Supply Chain for Novartis, Inc., a worldwide manufacturer and distributor of health care and pharmaceutical products. From February of 1992 to April of 2000, Mr. Muma served in various operations positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, serving from February 1994 to April of 1999 as Vice President of Operations for Pillsbury North America and most recently from April of 1999 to April of 2000 as Vice President of Operations Frozen Division. Mr. Muma worked for PepsiCo from 1976 to 1992, serving most recently as its Vice President of International Technical Services.

Susan Horvath has served as the Company’s Vice President and Team Leader of International since April of 2005. From September 1999 to April 2005, Ms. Horvath has served in a variety of roles with the Company, including Director of Financial Planning and Analysis from September 2002 to April 2005. Prior to joining CNS in 1999, Ms. Horvath was the senior finance manager for the advertising and sales promotion department of The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products. Previously Ms. Horvath worked for Coopers and Lybrand.

Nicole Strait has served as the Company’s Vice President of Human Resources since March of 2005. Prior to joining the Company, from November 2002 to March 2005, Ms. Strait was with The J.M. Smucker Company/International Multifoods Corporation, a manufacturer and distributor of food products, most recently employed as its Director, Human Resources. From May 2000 to October 2002, Ms. Strait held various human resources positions with SimonDelivers.com, Inc., a Minneapolis-based online grocery shopping and grocery delivery company. From January 1996 to May 2000, Ms. Strait served in various human resources positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products. Previously, Ms. Strait worked for Cargill.

Item 1A.

RISK FACTORS

Forward-Looking Statements

We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, and written or oral presentations made by our authorized officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. We do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.

In addition to other matters identified or described by us from time to time in filings with the Securities and Exchange Commission, there are several important factors that could cause our future results to differ materially from historical results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors include the following:

We depend upon sales of our Breathe Right nasal strip for the majority of our revenues.

Sales from our Breathe Right nasal strips accounted for 76.4%, 79.7% and 77.0% of our revenues during the fiscal years ended March 31, 2006, 2005 and 2004, respectively. As a result, our success is substantially dependent upon the success of our Breathe Right nasal strip products. If we are unable to successfully create sustained demand for our Breathe Right nasal strip products and introduce new Breathe Right nasal strip products to generate additional sales, our business, financial condition and results of operations will be materially and adversely affected. Effective marketing and

advertising drive sales of Breathe Right nasal strips and therefore, our success will also depend significantly on our ability to effectively market our Breathe Right nasal strips to consumers. Further, higher than expected manufacturing, marketing and distribution costs, mild cold and flu seasons, lower than expected customer acceptance of new products and competitive forces may require us to alter our pricing or marketing structure in a manner that could have a material and adverse effect on us or otherwise adversely affect our sales of Breathe Right nasal strip products.

Our business is subject to seasonality that may cause our quarterly operating results to fluctuate materially and cause the market price of our common stock to decline.

Sales of our Breathe Right products are seasonal in nature with consumer demand generally higher during the cold and flu season and dependent upon the severity of the cold/flu season. The cold and flu season corresponds with the third and four quarters of each of our fiscal years. Therefore, we will typically experience periods of increased revenues during the third and fourth quarter. Additionally, because consumer demand for our Breathe Right nasal strip is tied to the severity of the cold/flu season, our revenues from sales of our Breathe Right products will be adversely affected by a mild cold/flu season. However, because the length and severity of the season is difficult to anticipate, we cannot estimate the fluctuation of our sales from quarter to quarter in a fiscal year or the impact of the cold/flu season year to year. If our operating results are below financial analysts’ or investors’ expectations due to seasonality factors, the market price of our common stock may decline.

Our future growth will depend in part upon our ability to develop and achieve sales of new products.

One element of our growth strategy is focused on successful development of new products, including new products under the Breathe Right and FiberChoice brand names. We may develop new products internally or through acquisition of products or product rights from other companies. We cannot assure you that we will successfully develop any new products. Further, in developing new products, we will incur additional research and development and marketing expenses and, if acquired from another company, additional expense associated with acquisition and integration of these products into our existing business. Our success in this area will depend upon cost effective development of new products. Revenues, if any, which we generate from new products may not be sufficient to recoup the expenses we will incur in the

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development of new products. Consumers may be slow to accept our new products, if at all, and therefore, we cannot assure you that we will generate sales from any new products we develop. If we cannot successfully develop new products and achieve sales of our new products, our financial performance and results of operations will be adversely affected.

If our domestic or international intellectual property rights are not adequately protected, others may offer products similar to ours which could depress our product selling prices and gross profit margins or result in loss of market share.

We believe that protecting our proprietary technology is important to our success and competitive positioning. In addition to common law intellectual property rights, we rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights to keep any advantages we may have over our competitors.

Others may independently develop the same or similar technologies incorporated into our products, including technologies relating to external nasal dilator products, even if these technologies are the subject of our patents, patent applications or licenses. We have a license to the exclusive worldwide rights to manufacture and sell nasal strips in its various versions. We own the patents and pending patents relating to the chewable fiber tablet. Although we believe that our owned and licensed patents will limit the ability of others to introduce competitive products in the United States, there can be no assurance that the patents on the nasal strip or the chewable fiber tablet, or any additional patents on these or other products that may be issued in the future, if any, will effectively prevent the development or sale of competitive products or that we will have sufficient resources to pursue enforcement of any patents issued.

Additionally, we have engaged in litigation to enforce our patent rights relating to our nasal strip technologies. In 1999, we brought suit in federal district court to enforce our rights under U.S. Patent No. 5,533,499 (the “ ‘499 Patent”), one of the licensed nasal strip patents containing the broadest claims relating to the nasal strip. In the course of this suit, the defendant requested reexamination in the U.S. Patent and Trademark Office (the “Patent Office”) of the claims of the ‘499 Patent and on January 21, 2005, we received a determination from the Patent Office that the ‘499 Patent has significant allowable claims. We are seeking, with the licensor of the ‘499 Patent, to amend certain claims of the ‘499 Patent to provide us with additional protection under the ‘499 Patent. We believe that the allowable claims of the ‘499 Patent, if and when reissued, will enable us to maintain significant patent protection for our nasal strip products.

In February 2004, we, together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to us. The two patents at issue are U.S. Patent No. 6,318,362 (the “ ‘362 Patent”) and U.S. Patent No. 3,533,503 (the “ ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a declaration that the ‘362 Patent and ‘503 Patent are invalid and not infringed and asks for its attorneys’ fees and costs. In the course of this suit, Silver Eagle requested reexamination of the ‘362 Patent and the ‘503 Patent. In response to the reexamination by the Patent Office, on November 29, 2004, the Court issued an order staying our suit against Silver Eagle pending the reexamination. While the Patent Office has indicated that it has completed its reexamination process with respect to the ‘362 Patent, with the claims of this Patent not being altered or amended in any way, the Patent Office has not formally reissued the ‘362 Patent. An adverse ruling from the Patent Office would narrow the protection available for nasal dilators, limit the breadth of our patent protection and may increase the likelihood that competitors will introduce competitive external nasal dilator products.

On April 13, 2006, we, together with Creative Integration & Design, Inc., sued JMS Labs Limited, LLC (“JMS”) in the United States District Court for the District of Minnesota for infringement of the ‘362 Patent. The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs.

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Further, our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. While we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.

Additional costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation, or the effect of an adverse determination in any of this type of litigation, could have a material adverse effect on our business, financial condition and results of operations. Further, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as the United States or at all. Our failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.

Our markets are highly competitive and many of our competitors have substantial resources. Competition may result in price reductions, lower gross profits and loss of market share.

We face significant competition in developing and selling our nasal decongestant products and dietary fiber supplement products in both the U.S. and in foreign markets. Our Breathe Right nasal strip, Breathe Right Snore Relief throat spray and Breathe Right Snore Relief Throat Rinse compete in the consumer market with decongestant products and other cold, allergy and sinus relief products consisting primarily of pharmaceutical products sold over the counter, nasal sprays and other external nasal dilators, throat sprays, herbs, supplements and homeopathic remedies. Additionally, we compete with prescription nasal decongestants. We compete with these other products on the basis of numerous factors including brand recognition, product quality, efficacy, price and product availability at the retail store. If consumers perceive any product that competes with ours as more effective, more reliable, less expensive or having other advantages, the demand for our products could decrease.

Although we are currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in September 1998 with an external nasal dilation device. In May 2003, Aso Corp. announced it was acquiring the marketing, sales and distribution of Schering Plough’s nasal strip device. Other companies have also entered the nasal dilation market with private label products.

Our FiberChoice product competes with Metamucil® manufactured by Proctor and Gamble, Citrucel® manufactured by GlaxoSmithKline, Benefiber® manufactured by Norvartis and FiberCon® manufactured by Wyeth.

We cannot assure you that we will be able to compete successfully against our current or future competitors. Many of our competitors are significantly larger than we are and have greater financial, technical, research, marketing, sales, distribution and other resources than we do. Additionally, large, well-known, well-financed companies may enter into our markets. Increased competition from other companies may force us to reduce the prices of our products, decrease our gross profit margins, increase discounts to distributors and result in loss of our market share and could require increased spending by us on research and development and sales and marketing.

We rely on third-party manufacturers for our products. Our Breathe Right nasal strip is manufactured by a single-source manufacturer. The raw materials for our Breathe Right nasal strip are being supplied by a single-source supplier. Any failure of these parties to deliver our products or raw materials would cause delays, increase our costs or prevent us from completing customer orders.

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Our Breathe Right nasal strips are manufactured for us by a single manufacturer using a unique raw material supplied by a single supplier, 3M Company. Other raw materials for the nasal strip are available from multiple suppliers. Our other Breathe Right brand products and our FiberChoice products are manufactured for us by a limited number of manufacturers using raw materials supplied by multiple suppliers. If 3M Company is unable to ship the critical raw materials for our Breathe Right nasal strip, our manufacturers would be unable to manufacture our products, and therefore CNS would be unable to ship products to our customers and distributors. If the price of raw materials increases for any reason, or if our suppliers are unable or unwilling to deliver raw materials, we may have to find an alternative source, which could result in interruptions, increased costs, delays, loss of sales and quality control problems. Further, if our manufacturers were unable to manufacture our products for any reason, our customers and distributors would experience delays in receipt of orders of our product. The termination or interruption of any of these relationships, or the failure of these manufacturers or suppliers to supply products or materials consistent with our requirements as to quality, quantity and timeliness, likely would cause shortages of our products, delays in fulfilling orders for our products and harm our reputation and our business by causing delays, loss of sales, increases in costs and lower gross profit margin.

Our sales will decline and our business will be materially harmed if there is any loss of any significant retailer or any reduction, delay or cancellation of orders from any significant retailer.

Our retail customers include national chains of mass merchants, drug stores and grocery stores, warehouse clubs and regional and independent stores in the retail channels. For the fiscal years ended March 31, 2006, 2005 and 2004, Wal-Mart Corporation accounted for approximately 31%, 31% and 32% of our sales, respectively. The loss of this customer or any other large retailer would have a negative impact on our operating results. While we would attempt to replace the lost sales through other retail outlets, we cannot be certain that we would be able to replace any lost sales. Because we typically do not enter into long-term contracts with our customers but rather fulfill demand for our products upon individual sales orders, our customers could cease buying our products from us at any time and for any reason. The loss of any major retailer would disrupt distribution of our products and result in a loss of revenue. If a significant number of our customers cease purchasing products from us, our business would be materially and adversely harmed. Further, any significant reduction or delay in the historical level of orders from our customers, cancellation of orders from any significant retailer or any significant decrease in our retail display space in any of these customers’ stores would have a negative impact on our operating results.

We sell a significant portion of our products internationally, which exposes us to risks associated with foreign operations.

We sell a significant amount of our products to customers outside the United States, particularly in Europe and Asia. International sales accounted for 15%, 14%, and 15% of our revenue for the fiscal years ended March 31, 2006, 2005 and 2004, respectively. We expect that shipments to international customers, including customers in Europe and Asia, will continue to account for a significant portion of our net sales. Sales outside the United States involve the following risks, among others:

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foreign governments may impose tariffs, quotas and taxes;

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the demand for our products will depend, in part, on local economic health;

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expense in developing advertising and marketing campaigns targeted to consumers in foreign countries;

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political and economic instability may reduce demand for our products;

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potentially limited intellectual property protection in certain countries may limit our recourse against infringing products or cause us to refrain from selling our products in certain markets;

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regulatory restrictions may require additional qualification or testing, resulting in further cost and delay in reaching the related markets;

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we may face difficulties in managing our international distributors, customers or service partners;

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the burden and cost of complying with a variety of foreign laws;

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we may be exposed to fluctuations in foreign currency exchange rates;

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our contracts with foreign distributors and resellers cannot fully protect us against political and economic instability;

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we may face difficulties in collecting receivables; and

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we may not be able to control our international distributors’ efforts on our behalf.

While most of our sales are made in U.S. dollars, some are conducted in the local currencies of foreign countries. These foreign currencies are translated into U.S. dollars for the balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the fiscal year. Gains and losses resulting from transactions denominated in foreign currencies are included in our consolidated statements of operations. Currency fluctuations may adversely affect our financial performance and also may increase the relative price of our product in foreign markets and thereby could also cause our products to become less affordable or less price competitive than those of foreign manufacturers. These risks associated with foreign operations may have a material adverse effect on our revenue from, or costs associated with, international sales.

Our business and our products are subject to governmental regulation, which could have a significant negative effect upon our business.

Nasal dilators, such as our Breathe Right nasal strips, have been classified by the Food and Drug Administration (“FDA”) as Class I medical devices. Our Breathe Right nasal strip products are subject to extensive regulation regarding manufacturing, packaging, labeling, distribution, importation, sale and storage by various federal agencies, including the FDA, the Federal Trade Commission (the “FTC”), the Consumer Product Safety Commission, the Environmental Protection Agency and by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed and sold.

Our FiberChoice dietary fiber supplement is in a category of products commonly referred to for regulatory purposes as “dietary supplements.” Under the Dietary Supplement Health and Education Act (“DSHEA”), dietary supplements are not subject to pre-market approval by the FDA. However, the manufacturing, packaging, labeling, advertising, distribution and sale of dietary supplement products is subject to regulation by federal, state and local governmental agencies, including the FDA and the FTC. Among other matters, regulation by the FDA and FTC is concerned with product safety and claims made with respect to a product’s ability to provide health-related benefits.

Our third-party manufacturers are also subject to governmental regulation in the manufacture of our products, including compliance with rules regarding packaging, labeling and manufacturing practices and equivalent state and foreign regulations. Our manufacturers are subject to periodic inspection to determine if they are complying with the rules regarding packaging, labeling and manufacturing.

Furthermore, we also are subject to a variety of other regulations in various foreign markets, including regulations pertaining to import/export regulations. To the extent we decide to commence or expand operations in additional countries, government regulations in those countries may prevent or delay entry into or expansion of operations in those markets. In addition, our ability to sustain satisfactory levels of sales in our markets is dependent in significant part on our ability to introduce additional products into the markets. However, government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products.

Our failure or the failure of our manufacturers to comply with local, state, federal or foreign regulations could lead to the imposition of significant civil and criminal fines, product recalls, detentions, seizures, injunctions and criminal prosecutions, suspension of product sales or manufacturing, changes in product design or formulation, or changes in product labeling, packaging or advertising or require us to take

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other corrective action, any of which would materially adversely affect our business. Further, violation of these regulations or the assertion of a violation of these regulations could have a material adverse effect on our reputation and the reputation of our products, which could materially damage our business.

Further, the regulatory environment in which we operate is continually changing. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could adversely affect our business. These changes could also prove beneficial to our competitors and thus, adversely affect our business. In addition, regulations of the FDA and state and foreign laws and regulations depend heavily on administrative interpretations. We cannot assure you that future interpretations made by the FDA, or other regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations. It is not possible to assess the likelihood that the laws affecting our products and business will change, or to predict whether such changes, if they occur, will have a material effect on us.

Our business of the manufacturing, marketing, and sale of our products involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.

Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of our products. Like other participants in these markets, we may from time to time be involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If product liability claims become substantial, our brands could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.

As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. We cannot predict, however, whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain product liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us in excess of our insurance coverage or our inability to maintain insurance in the future could have a material adverse effect on our business, results of operations, liquidity and financial condition.

If we are required to, or voluntarily, recall our products, our brands and our business could be materially harmed.

The U.S. Food and Drug Administration and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of product functionality, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources, harm our brands and reputation with our customers and damage our business.

Fluctuations in our future operating results may negatively affect the market price of our common stock.

We have experienced fluctuations in our quarterly operating results and we expect those fluctuations to continue due to a variety of factors. Some of the factors that influence our quarterly operating results include:

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seasonality of demand for our products;

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severity of the cold and flu season;

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timing of the cold and flu season in the United States, Europe and Asia;

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the number and mix of products sold in the quarter;

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the availability and cost of materials;

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timing, costs and benefits of new product introductions;

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customer order size and shipment timing;

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promotions by ourselves or competitors, and the timing of the advertising and promotion expense;

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the impact to the marketplace of competitive products and pricing; and

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the timing and level of operating expenses.

Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the future. If our operating results are below financial analysts’ or investors’ expectations, the market price of our common stock may fall abruptly and significantly.

We are dependent on key personnel.

Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel, in particular Marti Morfitt, our Chief Executive Officer. The loss of Ms. Morfitt’s services could impair our ability to effectively manage our company and to carry out our business plan. We have an employment agreement with Ms. Morfitt that provides that Ms. Morfitt will serve as our Chief Executive Officer and that either party may terminate Ms. Morfitt’s employment at any time with or without cause. However, if we terminate Ms. Morfitt’s employment without cause, we would be required to make specified payments to her as described in her employment agreement. The other members of our management team also have significant experience in our industry. The loss of any member of our senior management could likewise impair our ability to effectively manage our company and carry out our business plan. We do not carry key person life insurance on any of our executive officers. In addition, competition for skilled employees in our industry is intense. Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and materially harm our business and financial condition.

Our stock price may be volatile and a stockholder’s investment could decline in value.

Our stock price has fluctuated in the past and may continue to fluctuate significantly, making it difficult for an investor to resell shares or to resell shares at an attractive price. The market prices for securities of companies with relatively small capitalization, like us, have historically been highly volatile. Future events concerning us or our competitors could cause such volatility, including:

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actual or anticipated variations in our operating results;

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new innovations in existing products or new products introduced by us or our competitors;

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developments concerning proprietary rights;

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changes in senior management;

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investor perception of us and our industry;

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general economic and market conditions including market uncertainty;

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national or global political events; and

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public confidence in the securities markets and regulation by or of the securities markets.

In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology companies in particular, which are often unrelated to the operating performance of these companies. In addition to fluctuations unrelated to our financial performance, our failure to meet expectations of financial analysts and investors will likely cause a decline in the price of our common stock.

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Future sales of shares of our common stock in the public market may negatively affect our stock price.

Future sales of our common stock, or the perception that these sales could occur, could have a significant negative effect on the market price of our common stock. In addition, upon exercise of outstanding options and warrants, the number of shares outstanding of our common stock could increase substantially. This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our common stock. Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price of our common stock and the liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.

Provisions of Delaware law, our bylaws and other agreements may deter a change of control of us and may have a possible negative effect on our stock price.

Certain provisions of Delaware law, our bylaws and other agreements may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us, including:

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the provisions of Delaware law relating to business combinations and control share acquisitions;

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the provisions of our bylaws regarding the business properly brought before stockholders;

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the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series; and

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the provisions of our stock option plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control” and provisions of agreements with our executive officers requiring payments if their employment is terminated and there is a “change in control.”

These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our stockholders. This may have a negative effect on the price of our common stock.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

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, CNS, Inc. (the “Company”), together with Creative Integration & Design, Inc., sued Silver Eagle Labs, Inc. (“Silver Eagle”) in the United States District Court for the District of Minnesota for infringement of two nasal dilator patents owned by Creative Integration & Design, Inc. and exclusively licensed to the Company. The two patents at issue are U.S. Patent No. 6,318,362 (the “ ‘362 Patent”) and U.S. Patent No. 3,533,503 (the “ ‘503 Patent”). The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs. Silver Eagle has counterclaimed for a

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declaration that the ‘362 Patent and ‘503 Patent are invalid and therefore not infringed and asks for its attorneys’ fees and costs.

On November 24, 2004, the Company announced that the U.S. Patent and Trademark Office (the “Patent Office”) will reexamine the ‘362 Patent and the ‘503 Patent. In response to this action by the Patent Office, on November 29, 2004, the Court issued an order staying the Company’s suit against Silver Eagle pending the reexamination. The Company believes that when the ‘362 and ‘503 Patents emerge from reexamination, the Company will maintain significant patent protection under those patents and will recommence enforcement of those patents in the litigation described above.

On April 13, 2006, the Company, together with Creative Integration & Design, Inc., sued JMS Labs Limited, LLC (“JMS”) in the United States District Court for the District of Minnesota for infringement of the ‘362 Patent. The suit seeks injunctive relief, damages, enhanced damages for willful infringement, attorneys’ fees and costs.

As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2006, the Patent Office has not granted a Reexamination Certificate for either the ‘362 Patent or the ‘503 Patent. The Patent Office has indicated that the reexamination process with respect to the ‘362 Patent has been terminated, with the claims of the Patent not being altered or amended in any way. The Company has not received information that the Patent Office has completed its reexamination process with respect to the ‘503 Patent.

Another of the Company’s patents covering its nasal strip technology, U.S. Patent No. 5,533,499 (the “ ‘499 Patent”), is also subject to reexamination by the Patent Office. On January 21, 2005, the Company received a determination from Patent Office that the ‘499 Patent has significant allowable claims. With some formal amendments, the Company expects the Patent Office will confirm these claims as allowable. As of the date of filing of this Annual Report on Form 10-K for the year ended March 31, 2006, the Company has not received final notice from the Patent Office of the claims of the ‘499 Patent it has confirmed as allowable.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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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, 2006 and 2005.

Fiscal Year Ended March 31, 2006	High	Low
Quarter Ended March 31, 2006	25.56	20.50
Quarter Ended December 31, 2005	28.69	21.91
Quarter Ended September 30, 2005	30.36	22.98
Quarter Ended June 30, 2005	23.10	14.93

Fiscal Year Ended March 31, 2005	High	Low
Quarter Ended March 31, 2005	18.08	12.43
Quarter Ended December 31, 2004	13.25	10.95
Quarter Ended September 30, 2004	11.30	9.86
Quarter Ended June 30, 2004	11.04	9.31

On May 19, 2006, the last sale price of the common stock was $22.81 per share.

Shareholders

As of May 19, 2006, there were approximately 600 owners of record of the Company’s common stock.

Dividends

The Company paid four quarterly dividends of $.06 per share of common stock during fiscal 2006. Four quarterly dividends of $.05 per share of common stock were paid during fiscal 2005. 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.

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Issuer Purchases of Equity Securities

The following table provides certain information regarding purchases made by CNS, Inc. of its common stock in the quarter ended March 31, 2006:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)(2)
January 1 – January 31, 2006	30,000	$22.86	30,000	960,400
February 1 – February 28, 2006	90,000	$21.32	90,000	870,400
March 1 – March 31, 2006	100,000	$20.85	100,000	770,400
Total	220,000	$21.31	220,000	770,400

(1)

On February 11, 2002, the Company announced that its Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 1,000,000 shares of the Company’s common stock from time to time in open market transactions or in privately negotiated transactions.

(2)

On August 2, 2005, the Board of Directors authorized the Company to repurchase an additional 1,000,000 shares of the Company’s common stock under the previous program that was authorized in February 2002.

Information Regarding Equity Compensation Plans

The following table sets forth information regarding the Company’s equity compensation plans in effect as of March 31, 2006. 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 approved by stockholders:	1,310,839	$9.04	1,253,461

Equity compensation plans not approved by shareholders:	0	0	0

Totals	1,310,839	$9.04	1,253,461

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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 the 1994, 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, 2001 through March 31, 2006 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, an independent registered public accounting firm.

FINANCIAL HIGHLIGHTS

(In thousands, except per share amounts)

	Years ended
		March 31, 2006		March 31, 2005		March 31, 2004		March 31, 2003		Dec. 31, 2001
Net sales	$	112,644	$	93,732	$	86,980	$	79,075	$	76,242
Operating income (loss)		25,600		20,051		12,748		9,639		(1,225)
Net income		17,243		13,702		8,547		6,516		81
Diluted net income per share	$	1.15	$	0.93	$	0.59	$	0.46	$	0.01

Working capital	$	64,090	$	67,650	$	54,900	$	45,266	$	32,712
Total assets		90,474		87,215		73,534		65,375		50,618
Stockholders’ equity		75,263		71,151		58,644		49,054		36,612

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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 audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. In this discussion, our three fiscal years ended March 31, 2006, 2005 and 2004 are referred to as fiscal years 2006, 2005 and 2004, respectively.

Growth Strategy and Financial Focus

We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products focused on better breathing, and FiberChoice® branded products focused on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands, patented technologies, established domestic and international distribution networks, a flexible and low-cost operating model and an experienced management team.

Our financial goals are to achieve sustainable long-term growth in consumer demand for our products, which should leverage our efficient operating model to generate further growth in operating profit and operating cash flow:

•

Sustainable Growth in Consumer Demand. During the three fiscal years ended March 31, 2006, consolidated net sales have grown from $87.0 million to $112.6 million. During this same three year period, net sales of domestic Breathe Right products have grown from $64.1 million to $74.6 million, net sales of FiberChoice products have grown from $9.3 million to $20.8 million, and net sales of international Breathe Right products have increased from $13.0 million to $17.0 million.

•

Operating Profit. During the past three fiscal years, we have grown operating profit at a rate which exceeds the growth rate of net sales. This has been achieved through the increased efficiency of our advertising and promotional campaigns and improvement in our gross profit rate, resulting from continued reductions in cost of goods sold and stronger growth of higher margin items within our product mix.

•

Operating Cash Flow. We are also focused on growing 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. We are adept at managing an efficient operating model which requires limited capital expenditures to support our current business.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United Sates of America. In connection with the preparation of the consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a quarterly basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

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Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult and subjective judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

•

Revenue Recognition, Sales Returns and Other Allowances, and Allowance for Doubtful Accounts. Revenue 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 trade promotions, estimated future product returns, certain promotional costs and other allowances in the same period as the related sales are recorded. We must make estimates of potential future product returns and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances. We have established reserves of $1.3 million for future sales returns and $311,000 for other allowances as of March 31, 2006. Similarly, we must make estimates of the uncollectability of accounts receivable. We specifically analyze customer account balances, historical bad debts, current economic trends and changes in the timing of customer payments. The balance of accounts receivable was $17.7 million, net of the allowance for doubtful accounts of $100,000, as of March 31, 2006.

•

Inventory Valuation. Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. We analyze the cost and the market value of inventory items and establish the appropriate valuation reserves. We have established a reserve for excess or obsolete inventory of $532,000 as of March 31, 2006. We believe 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, we are required to estimate income taxes, both state and federal. This process involves 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. We 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, we believe that it is more likely than not that CNS will realize the benefits of these deductible differences.

•

Trade and Consumer Promotions. Our judgment is involved in recognizing the amount and timing of trade and consumer promotional costs. 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. We have established a liability for trade and consumer promotions of $1.2 million as of March 31, 2006.

Selected Consolidated Statements of Earnings Data and Executive Summary

For the fiscal year ended March 31, 2006, (“fiscal 2006”) net sales increased by 20.2% versus the prior year to $112.6 million. The increase in net sales reflects strong growth for both Breathe Right and FiberChoice brands. Breathe Right domestic net sales grew by 9.1%; FiberChoice net sales increased 70.2% and international Breathe Right net sales increased by 31.9%. Domestic Breathe Right experienced strong

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growth in nasal strips and Snore Relief™ throat spray partially offset by declining sales of Vapor Shot!™ and saline spray, which are being phased out. Net sales of FiberChoice branded products continued to grow as the result of growing consumer demand driven by expanded advertising programs and the introduction of two additional fiber products. International net sales growth resulted from strong sales to Canada and the UK, as well as resumption of normalized sales to Japan. In the first eight months of fiscal 2005, no revenues were recorded in Japan due to high inventory levels in that market.

Operating income for fiscal 2006 was $25.6 million, up 27.7% versus the prior year. Growth in operating income was driven by 20.2% revenue growth combined with improvements in advertising and promotion efficiencies and improvement in selling, general and administrative expense as a percentage of sales partly relating to a decrease in litigation costs involving patent defense. Operating income for fiscal 2005 reflects a one-time reduction in cost of goods sold of $1.1 million, related to the refund of import duties paid in prior fiscal years.

Our financial position remains strong, with cash and marketable securities of $52.6 million and no debt on our balance sheet as of March 31, 2006.

We believe the percentage relationship between net sales and major expense lines in the statement of operations and the percentage change in the dollar amounts of each of the items presented below is important in evaluating the performance of our business operations. We operate as one business segment and believe the information presented in our Management’s Discussion and Analysis of Results of Operations and Financial Condition provides an understanding of our business, operations and financial condition.

					% Increase (Decrease)
		% of Net Sales			In Dollar Amounts
		Fiscal Year			2006 vs.	2005 vs.
		2006	2005	2004	2005	2004

Net sales		100.0%	100.0%	100.0%	20.2%	7.8%
Gross profit		70.5%	71.5%	69.1%	18.5%	11.6%
Operating expenses:
	Advertising and promotion	31.0%	31.7%	37.0%	17.7%	(7.7%)
	Selling, general and administrative	16.8%	18.4%	17.4%	9.4%	14.1%

Total operating expenses		47.8%	50.1%	54.4%	14.6%	(0.7%)

Operating income		22.7%	21.4%	14.7%	27.7%	57.3%

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Net sales

The following is a breakdown of net sales by brand and geographic area (dollars in thousands):

		Fiscal Year						% Change
		2006		2005		2004		2006 vs. 2005	2005 vs. 2004
Domestic
	Breathe Right	$	74,633	$	68,423	$	64,126	9.1%	6.7%
	FiberChoice		20,844		12,245		9,290	70.2%	31.8%
	Other		200		197		588	1.5%	(66.5%)

Total domestic			95,677		80,865		74,004	18.3 %	9.3%

International
	Japan		5,000		2,404		4,430	108.0%	(45.7%)
	Canada		3,195		1,826		1,372	75.0%	33.1%
	Italy		2,892		3,371		1,899	(14.2%)	77.5%
	UK		2,930		2,223		2,349	31.8%	(5.4%)
	Other		2,950		3,043		2,926	(3.1%)	4.0%

Total international			16,967		12,867		12,976	31.9%	(.8%)

Net sales		$	112,644	$	93,732	$	86,980	20.2 %	7.8%

Operating results

Net sales grew by 20.2% in fiscal 2006 and 7.8% in fiscal 2005. Domestic sales of Breathe Right branded products grew by 9.1% in fiscal 2006 due primarily to stronger consumer demand for nasal strips and Snore Relief throat spray partially offset by declining sales Breathe Right Vapor Shot! and saline spray. FiberChoice sales grew by 70.2% in fiscal 2006 and 31.8% in fiscal 2005. The fiscal 2006 growth in FiberChoice sales resulted from continued growth in consumer demand driven by strong levels of advertising and promotion and the launch of two new FiberChoice products during the March 2006 quarter, FiberChoice® plus Calcium and FiberChoice® Weight Management.

International sales increased in fiscal 2006 by 31.9% to $17.0 million. International net sales growth resulted from strong sales to Canada and the UK, as well as resumption of normalized sales to Japan. In the first eight months of fiscal 2005, no revenues were recorded in Japan due to high inventory levels in that market.

During fiscal 2004, we decided to exit our 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.

Gross profit rate

Gross profit 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 of promotional activity, and the cost of materials and manufacturing. The gross profit rate for fiscal 2006 was 70.5%. Excluding a one-time reduction to cost of goods sold related to an import duty refund of $1.1 million, the fiscal 2005 gross margin rate was 70.3%. The continued improvement in gross margin rates in 2006 and 2005 resulted primarily from lower cost of sales including increasing efficiency in procuring and distributing our product lines.

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Advertising and promotion expense

Advertising and promotion expense expressed as a percentage of revenue declined to 31.0% in fiscal 2006, down 0.7 percentage points compared to fiscal 2005, which was down 5.3 percentage points compared to fiscal 2004. This reduction in expense as a percentage of net sales is the result of economies of scale driven by growth of our brands, as well as continuing efforts by our marketing team to develop more efficient and effective methods of stimulating consumer demand.

Selling, general and administrative expense

Selling, general and administrative expenses were $18.9 million for 2006, representing an increase of 9.4% compared to the prior year. Selling, general and administrative expense increased in fiscal 2006 due to higher levels of new product development expense for both the Breathe Right and FiberChoice brands, as well as increased employee costs. Selling, general and administrative expense as a percentage of net sales was 16.8%, 18.4% and 17.4% for the fiscal years 2006, 2005 and 2004, respectively. The increased expense rate for fiscal 2005 is the result of increased legal expenses associated with defending our intellectual property assets.

Operating income

Increases in sales, continued improvements in gross profit rates and continued improvement in the efficiency of advertising and promotions provided significant improvement in operating income. Operating income for fiscal 2006 was $25.6 million, up 27.7% compared to fiscal 2005 operating income of $20.1 million which increased 57.3% compared to fiscal 2004 operating income of $12.7 million. Operating income as a percentage of net sales is 22.7%, 21.4% and 14.7% for fiscal 2006, 2005 and 2004, respectively.

Investment income

Investment income increased to $1.2 million for fiscal 2006 compared to $935,000 for fiscal 2005 as the result of an increase in market interest rates for municipal obligations. The Company continues to shift the investment portfolio to tax-exempt securities in order to maximize after tax yields. The following table compares the average bond equivalent yield of various marketable securities held as of March 31, 2006 and 2005 (in thousands):

	March 31,
	2006				2005
		Fair Value	Ave. Yield			Fair Value	Ave. Yield

Municipal obligations	$	46,438	3.89	%	$	41,358	2.86	%
Corporate bonds		1,001	2.52			6,064	2.03
U.S. Government obligations		1,000	2.42			8,514	1.82
Total marketable securities	$	48,439	3.82	%	$	55,936	2.66	%

The average remaining days to effective maturity of the Company’s portfolio of marketable securities has decreased to 215 days as of March 31, 2006 compared to 303 days as of March 31, 2005.

Income tax expense

Income tax expense was $9.6 million for fiscal 2006 compared to $7.3 million for fiscal 2005. The effective tax rate for fiscal 2006 was 35.7% compared to an effective tax rate in fiscal 2005 of 34.7%. The 1.0 percentage point increase in the effective tax rate is primarily the result of a favorable resolution of refund claims in fiscal 2005 and a decrease in the benefit relating to foreign export incentives partially offset by an increase in investment income related to tax exempt securities. Refer to the following effective tax rate reconciliation table:

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	For the Years Ended
	March 31,
	2006		2005

Federal Statutory rate	35.0	%	35.0	%
State rate, net of federal benefit	2.1		2.0
Tax exempt investment earnings	(1.5)		(0.9)
Export incentive	(.1)		(0.5)
Other	.2		(0.9)
Effective tax rate	35.7	%	34.7	%

Seasonality

CNS 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 the timing of advertising and promotion campaigns and seasonality of sales, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. Significant portions of the Breathe Right product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of these items are higher during the fall and winter seasons, corresponding with our third and fourth quarters.

Liquidity and capital resources

As of March 31, 2006, we have cash and marketable securities of $52.6 million and no debt on our balance sheet. In addition, we have generated strong and improving cash from operations during the past three fiscal years, and barring an unforeseen decline in our revenues or operating margins, we expect future cash flows from operations to continue to be strong and growing. The existing cash and marketable securities balances may be used to acquire complementary consumer healthcare businesses, pay dividends to our shareholders and/or buy back additional shares of CNS common stock. In summary, we believe that our existing funds will be sufficient to support our planned operations for the foreseeable future.

Operating activities. We generated cash from operating activities of $15.8 million during fiscal 2006 compared to $14.7 million and $8.6 million during fiscal 2005 and 2004, respectively. The improved net cash provided by operations is primarily due to the increases in operating income described above partially offset by increases in accounts receivable and inventories required to support our sales growth.

Investing activities. During fiscal 2006, we continued to invest excess cash in short term marketable securities in order to improve our investment return. Sales and maturities of marketable securities exceeded purchases by $7.6 million for fiscal 2006. The proceeds from the investment portfolio along with cash provided by operations were used to purchase product rights, repurchase CNS common stock and pay cash dividends. For 2006, marketable securities purchased consisted of tax exempt municipal securities which provide a higher after tax yield.

We purchased $8.0 million, $557,000 and $310,000 of product rights during fiscal 2006, 2005 and 2004, respectively. In fiscal 2006, we purchased the patents and pending patents relating to the FiberChoice chewable fiber tablet from Onesta Nutrition, Inc. for $7.8 million. The previous licensing agreement with Onesta Nutrition, Inc. was terminated as part of the purchase transaction.

Financing activities. We paid cash dividends of $3.4 million, $2.8 million and $1.6 million during fiscal 2006, 2005 and 2004, respectively. In making the decision to initiate a cash dividend, the Company’s Board of Directors considered, among other things, the favorable tax treatment of corporate dividends.

We purchased 655,105 shares of our common stock for $13.9 million during fiscal 2006. The average price of common stock purchased was $21.26 per share. We purchased 106,000 shares of our common stock for $1.4 million during fiscal 2005. We did not repurchase any shares of our common stock in fiscal 2004. These treasury shares will be used to meet future obligations under our employee stock purchase plan and stock option plans, and for possible future acquisitions. CNS is authorized to repurchase an additional 770,400 shares of its common stock as of March 31, 2006.

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CNS received $1.9 million, $1.9 million and $1.8 million during fiscal 2006, 2005 and 2004, respectively, from the exercise of stock options and issuance of stock under the employee stock purchase plan.

Significant agreements and lease obligations. We have 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):

		Payments Due by Period Fiscal Year
		2007		2008		2009		2010		2011		Thereafter

Operating leases	$	788	$	788	$	788	$	745	$	494	$	0
Minimum royalties		550		550		550		550		550
Purchase obligations		16,804		22		0		0		0		0

Total	$	18,142	$	1,360	$	1,338	$	1,295	$	1,044

We have agreements that exclusively license intellectual property rights for certain products. Royalties due under these agreements are based on various percentages of 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.

We have entered into operating leases for office space and office equipment. Leases expire at various dates beginning in 2010 through 2011.

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.

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Recent accounting pronouncements

In December 2004, the FASB issued SFAS 123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95”, which requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The provisions of the interpretation are effective for the Company’s consolidated financial statements for periods beginning April 1, 2006.

The Company anticipates using the modified prospective application, which applies to new awards granted, unvested awards as of the date of adoption and to awards modified, repurchased or cancelled after the date of adoption. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services through stock–based payment transactions. SFAS 123R requires measurement of the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award as of the date of grant.

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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, 2006 was 215 days.

The table below provides information about the Company’s cash and cash equivalents and marketable securities as of March 31, 2006 (in thousands):

	Cost	Fair Value
Due within one year	$38,279	$38,147
Due after one year through three years	10,390	10,292
	$48,669	$48,439

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Balance Sheets of the Company as of March 31, 2006 and 2005, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, and Cash Flows for each of the years ended March 31, 2006, 2005 and 2004, the Notes to the Consolidated Financial Statements and the Reports 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

Disclosure Control and Procedures

The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel Reinkensmeyer, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that as of such date, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

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

The report of the Company’s management on internal control over financial reporting is provided under Item 15 of this Report, as is the attestation report of KPMG LLP, the Company’s independent accountant.

Item 9B.

OTHER INFORMATION

None.

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PART III

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

Daniel E. Cohen, 54, 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, 48, has served as the Company’s President and Chief Executive Officer since June 2001 and its President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has served as a director of the Company since 1998. From September 1982 to February 1998, Ms. Morfitt served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May 1997 to February 1998 as Vice-President, Meals, and from February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems, and as a director of Intrawest Corporation, a Vancouver-based developer and operator of ski and golf resorts.

Karen T. Beckwith, 45, has served as a director 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 President and Chief Executive Officer of the Trade Management Group division. 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. Ms. Beckwith is a director of Associated Banc-Corp.

Patrick Delaney, 63, has served as a director since 1983. 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 writer and serves on the board of a number of privately-held companies.

Andrew J. Greenshields, 68, has served as a director since 1986. Mr. Greenshields has been President of Pathfinder Ventures, Inc., Minneapolis, Minnesota, since 1980. He is also a general partner of Spell Capital Partners, LP, which is a Minneapolis-based financial limited partnership. Mr. Greenshields is also a director of Aetrium, Inc., a manufacturer of semi-conductor handling equipment.

H. Robert Hawthorne, 61, has served as a director 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.

Richard W. Perkins, 75, has been a director 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

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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. Mr. Perkins is also a director of several private companies.

Morris J. Siegel, 56, has served as a director 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 of Annie’s HomeGrown Foods, Inc., which manufactures, markets and sells premium all natural and organic foods, and is a subsidiary of Solera Capital LLC; a director of Camelbak Corp., an outdoor sporting goods company; and Avid Health Corp., a manufacturer of vitamins.

____________

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 15, 2006 (the “2006 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 2006 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 2006 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 2006 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 2006 Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Report:

		Form 10-K Page Reference

1.	Financial Statements.

	Report of Independent Registered Public Accounting Firm	F-1

	Consolidated Statements of Operations for the Years Ended March 31, 2006, 2005 and 2004	F-2

	Consolidated Balance Sheets as of March 31, 2006 and 2005	F-3

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended March 31, 2006, 2005 and 2004	F-4

	Consolidated Statements of Cash Flows for the Years Ended March 31, 2006, 2005, and 2004	F-5

	Notes to Consolidated Financial Statements	F-6

2.	Financial Statement Schedules.

	See Schedule II of Valuation and Qualifying Accounts on the page following Exhibit Index.

3.	Exhibits.

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

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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: May 31, 2006	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 May 31, 2006 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, Chief Financial Officer and Secretary (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

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/s/ Patrick Delaney
Patrick Delaney Director


/s/ H. Robert Hawthorne
H. Robert Hawthorne 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

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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).

3.2	Company’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

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 Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 1, 2006).

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. 333-129457)).

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 June 21, 1999 between the Company and Peter Cronk and Kristen Cronk (incorporated by reference to Exhibit 10.11 of the Annual Report on Form 10-K for the year ended December 31, 1999 (“1999 10-K”)).

10.10**	Amended and Restated Supply Agreement between the Company and WebTec Converting, LLC dated as of August 1, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

10.11	Medical Specialties Material Purchase Agreement between the Company and Minnesota Mining and Manufacturing Company dated November 22, 2004.

10.12*	Employment Agreement between the Company and John J. Keppeler dated February 12, 1999 (incorporated by referenced to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-K for the year ended December 31, 1998).

10.13*	Employment Agreement between the Company and Larry R. Muma dated January 2, 2001 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000).

10.14*	Employment Agreement between the Company and Linda Kollofski dated October 29, 2002 (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003).

10.16*	Employment Agreement between the Company and Samuel E. Reinkensmeyer dated May 3, 2006.

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10.17	Lease Agreement between the Company and Liberty Property Limited Partnership dated December 19, 2004 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2004)

10.18*	Employment Agreement between the Company and Marti Morfitt dated July 20, 2004 (incorporated by reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).

10.19*	Employment Agreement between the Company and Nicole C. Strait dated May 3, 2006.

10.20*	Employment Agreement between the Company and Susan Horvath dated May 3, 2006.

10.21*	Amended and Restated Employment Agreement between the Company and Daniel E. Cohen dated as of May 3, 2006.

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.

32.1	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.

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CNS, INC.
Schedule II – Valuation and Qualifying Accounts
(in thousands)

	For the Years Ended March 31,

	2006			2005			2004


Allowance for doubtful accounts:
Balance beginning of period	$	183		$	380		$	330
Provision/adjustment to expense		(120	)		(66	)		110
Bad debt write-offs, net of recoveries		37			(131	)		(60	)


Balance end of period	$	100		$	183		$	380



Reserve for excess or obsolete inventory
Balance beginning of period	$	545		$	551		$	667
Provision/adjustment to expense		818			105			361
Charge offs		(831	)		(111	)		(477	)


Balance end of period	$	532		$	545		$	551

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

(i)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of March 31, 2006, has been audited by KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements in this Form10-K, as stated in their report, which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders

CNS, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting that CNS, Inc. maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). CNS, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, management’s assessment that CNS, Inc. maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, CNS, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CNS, Inc. and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2006, and our report dated May 31, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Minneapolis, Minnesota

May 31, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHDULE II

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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2006. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II- Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CNS Inc.’s internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated May 31, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Minneapolis, MN

May 31, 2006

F-1

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

	For the Years Ended March 31,
	2006		2005		2004


Net sales	$	112,644	$	93,732	$	86,980
Cost of goods sold		33,185		26,704		26,904


Gross profit		79,459		67,028		60,076


Operating expenses:
Advertising and promotion		34,945		29,684		32,168
Selling, general and administrative		18,914		17,293		15,160


Total operating expenses		53,859		46,977		47,328


Operating income		25,600		20,051		12,748

Investment income		1,219		935		725


Income before income taxes		26,819		20,986		13,473

Income tax expense		9,576		7,284		4,926


Net income	$	17,243	$	13,702	$	8,547



Basic net income per share	$	1.22	$	.98	$	.63


Weighted average number of common shares outstanding		14,153		13,972		13,576



Diluted net income per share	$	1.15	$	.93	$	.59

Weighted average number of common
and potential common shares outstanding		15,001		14,758		14,488

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

F-2

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

	March 31,
Assets	2006			2005


Current assets:
Cash and cash equivalents	$	4,152		$	4,814
Marketable securities		48,439			55,936
Accounts receivable, net of allowance for doubtful accounts
of $100 in 2006 and $183 in 2005		17,667			15,030
Inventories		5,766			4,531
Deferred income taxes		1,791			1,968
Prepaid expenses and other current assets		1,486			1,435


Total current assets		79,301			83,714

Property and equipment, net		1,308			1,118
Product rights, net		8,845			1,360
Deferred income taxes		1,020			1,023


	$	90,474		$	87,215


Liabilities and Stockholders’ Equity


Current liabilities:
Accounts payable	$	5,908		$	7,770
Accrued expenses		7,557			7,177
Accrued income taxes		1,746			1,117


Total current liabilities		15,211			16,064

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 2006 and 2005		193			193
Additional paid-in capital		64,068			61,693
Treasury shares – at cost; 5,316 shares in 2006 and 5,049 shares in 2005		(35,977	)		(23,779	)
Retained earnings		47,124			33,284
Accumulated other comprehensive loss		(145	)		(240	)


Total stockholders’ equity		75,263			71,151

Commitments and contingencies (notes 9, 10 and 11)


	$	90,474		$	87,215

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

F-3

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

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


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
Exercise of stock options		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		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

Stock issued in connection with
Employee Stock Purchase Plan		0		0		84			(18	)		74			0			0			158
Exercise of stock options and warrants		0		0		373			(551	)		1,376			0			0			1,749
Tax benefit of options exercised		0		0		1,400			0			0			0			0			1,400
Other		0		0		1			0			0			0			0			1
Dividends ($.20 per share)		0		0		0			0			0			(2,797	)		0			(2,797	)
Treasury shares purchased		0		0		0			106			(1,351	)		0			0			(1,351	)
Comprehensive income:
Net income		0		0		0			0			0			13,702			0			13,702
Unrealized losses on marketable securities
net of income tax effect of $208		0		0		0			0			0			0			(355	)		(355	)

Total comprehensive income																					13,347


Balance at March 31, 2005		19,295	$	193	$	61,693			5,049		$	(23,779	)	$	33,284		$	(240	)	$	71,151

Stock issued in connection with
Employee Stock Purchase Plan		0		0		134			(14	)		61			0			0			195
Exercise of stock options		0		0		74			(374	)		1,670			0			0			1,744
Tax benefit of options exercised		0		0		2,167			0			0			0			0			2,167
Other		0		0		0			0			0			0			0			0
Dividends ($.24 per share)		0		0		0			0			0			(3,403	)		0			(3,403	)
Treasury shares purchased		0		0		0			655			(13,929	)		0			0			(13,929	)
Comprehensive income:
Net income		0		0		0			0			0			17,243			0			17,243
Unrealized losses on marketable securities
net of income tax effect of $55		0		0		0			0			0			0			95			95

Total comprehensive income																					17,338


Balance at March 31, 2006		19,295	$	193	$	64,068			5,316		$	(35,977	)	$	47,124		$	(145	)	$	75,263

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

F-4

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

	For the Years Ended March 31,
	2006			2005			2004


Operating activities:
Net income	$	17,243		$	13,702		$	8,547
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		964			797			958
Deferred income taxes		180			299			2,468
Equity compensation income tax benefits		2,167			1,400			836
Other		0			1			60
Changes in operating assets and liabilities:
Accounts receivable		(2,636	)		(3,636	)		(383	)
Inventories		(1,234	)		(399	)		(866	)
Prepaid expenses and other current assets		(52	)		1,402			(1,801	)
Accounts payable and accrued expenses		(853	)		1,176			(1,264	)


Net cash provided by operating activities		15,779			14,742			8,555


Investing activities:
Purchases of marketable securities		(59,513	)		(80,795	)		(90,325	)
Sales and maturities of marketable securities		67,105			64,846			74,749
Payments for purchases of property and equipment		(637	)		(52	)		(478	)
Payments for product rights		(8,003	)		(557	)		(310	)


Net cash used in investing activities		(1,048	)		(16,558	)		(16,364	)


Financing activities:
Proceeds from the issuance of common stock
under Employee Stock Purchase Plan		195			158			150
Proceeds from the exercise of stock options		1,744			1,749			1,616
Purchase of treasury shares		(13,929	)		(1,351	)		0
Dividends paid		(3,403	)		(2,797	)		(1,640	)


Net cash provided by (used in) financing activities		(15,393	)		(2,241	)		126


Net decrease in cash and cash equivalents		(662	)		(4,057	)		(7,683	)

Cash and cash equivalents:
Beginning of period		4,814			8,871			16,554


End of period	$	4,152		$	4,814		$	8,871


Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	0		$	0		$	132
Cash paid during the year for income taxes, net of refunds		6,661			3,633			2,994

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

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CNS, INC.

Notes to Consolidated Financial Statements

March 31, 2006, 2005 and 2004

(1)

Summary of Significant Accounting Policies

Business The Company develops and markets consumer health care products, including Breathe Right® branded products focused on better breathing, and FiberChoice® branded products focused on digestive health. Theses products are sold over-the-counter in retail outlets, including mass merchant, drug, grocery, club stores, military base stores and on-line retailers. The Company primarily uses international distributors to market Breathe Right nasal strips outside the U.S.

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.

Accounting Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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, inventory obsolescence and realization of deferred tax assets.

Basis of Presentation Certain amounts from prior years’ consolidated financial statements have been reclassified to conform to the current year presentation. Research costs of $831,000 and $933,000 were reclassified from advertising and promotion expense to selling, general and administration expense for the years end March 31, 2005 and 2004.

Revenue Recognition Revenue 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. The Company records provisions for trade promotions, returns and customer discounts as a reduction to 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 because of the short-term nature of these instruments.

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. Marketable securities represent the investment of excess cash that would be available to meet current obligations or fund potential acqusitions.

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 and the establishment of a new cost basis for the security. Realized securities gains or

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losses are included in gain (loss) on sales of marketable securities in the consolidated statements of operations.

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 ten years using the straight-line method. The weighted average remaining amortization life is 9.0 years as of March 31, 2006. 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 consolidated 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
	March 31
	2006		2005		2004

Expected lives (Years)	5.2		4.6		5.7
Dividend Yield	1.5	%	2.0	%	1.4	%
Expected volatility	59.3	%	61.0	%	62.0	%
Risk-Free Interest Rate	4.0	%	3.8	%	3.1	%

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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
	March 31,
	2006		2005		2004
Net income, as reported	$	17,243	$	13,702	$	8,547
Deduct: Total stock-based compensation
expense determined under the fair value
based method for all awards, net of related
tax effects		1,419		810		603

Proforma net income	$	15,824	$	12,892	$	7,944



Earnings per share:
Basic – as reported	$	1.22	$	.98	$	.63
Basic – proforma	$	1.12	$	.92	$	.59

Diluted – as reported	$	1.15	$	.93	$	.59
Diluted – proforma	$	1.06	$	.87	$	.56

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 includes federal and state income taxes. The provision for income taxes is composed of current income tax expense and the 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 Earnings Per Share Basic net income 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.

Comprehensive Income Comprehensive income consists of the Company’s net income and unrealized gains (losses) on marketable securities and is presented in the consolidated statements of stockholders’ equity and comprehensive income.

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Recent Accounting Pronouncements In December 2004, the FASB issued SFAS 123R, “Share-Based Payments: an amendment of FASB Statements No. 123 and 95”, which requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The provisions of the interpretation are effective for the Company’s consolidated financial statements for periods beginning April 1, 2006.

(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,
	2006				2005
		Cost		Fair Value		Cost		Fair Value

Municipal obligations	$	46,652	$	46,438	$	41,634	$	41,358
Corporate bonds		1,011		1,001		6,110		6,064
U.S. government obligations		1,006		1,000		8,572		8,514

Total marketable securities	$	48,669	$	48,439	$	56,316	$	55,936

Maturities of marketable securities at March 31, 2006 are as follows (in thousands):

		Cost		Fair Value

Due within one year	$	38,279	$	38,147
Due after one year through three years		10,390		10,292

Total marketable securities	$	48,669	$	48,439

There were no gross unrealized gains on marketable securities available for sale at March 31, 2006 and March 31, 2005. Gross unrealized losses on marketable securities available for sale totaled $230,000 and $380,000 at March 31, 2006 and 2005, respectively.

The Company did not realize any gains or losses on sales of marketable securities for the years ended March 31, 2006, 2005 and 2004, respectively.

(3)

Advertising

At March 31, 2006 and 2005, the Company reported $614,000 and $472,000, respectively, of advertising costs as prepaid assets. Advertising expense was $28,938,00, $24,083,000 and $25,211,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

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(4)

Details of Selected Balance Sheet Accounts

	March 31,
	2006			2005
Allowance for doubtful accounts:
Balance beginning of period	$	183		$	380
Provision/adjustment for doubtful accounts		(120	)		(66	)
Less bad debt write-offs, net of recoveries		37			(131	)

Balance end of period	$	100		$	183

Inventories:
Finished goods	$	4,771		$	3,547
Raw materials and component parts		995			984

Total inventories	$	5,766		$	4,531

Property and equipment:
Warehouse and production equipment	$	821		$	770
Office equipment and information systems		4,746			4,161
Leasehold improvements		1,087			1,087

Less accumulated depreciation		(5,346	)		(4,900	)

Property and equipment, net	$	1,308		$	1,118

Product rights:
Product rights	$	12,173		$	4,170
Less accumulated amortization		(3,328	)		(2,810	)

Product rights, net	$	8,845		$	1,360

Accrued expenses:
Promotions and allowances	$	3,014		$	3,230
Royalties and commissions		969			1,087
Salaries, incentives and paid time off		2,928			2,373
Other		646			487

Total accrued expenses	$	7,557		$	7,177

Product right amortization:

	For the Years Ended March 31,
	2006		2005		2004

Amortization expense	$	482	$	303	$	542

Estimated amortization expense for the year ending March 31,		Amount

2007	$	1,085
2008		1,051
2009		1,031
2010		967
2011		919

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(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 5,500,000 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, 2006.

Stock option activity under these plans is summarized as follows:

	Weighted-average Exercise Price Per Option		Options Outstanding		Options Available For Grant

Balance at March 31, 2003	$	4.58	2,084,504		86,710
Amendment of 2000 Plan			0		650,000
Granted		11.00	362,020		(362,020	)
Exercised		4.09	(481,464	)	0
Canceled/Expired		6.20	(77,500	)	76,900

Balance at March 31, 2004		5.87	1,887,560		451,590
Granted		10.84	243,188		(243,188	)
Exercised		4.69	(575,467	)	0
Canceled/Expired		10.32	(78,613	)	56,743

Balance at March 31, 2005	$	6.91	1,476,668		265,145
Amendment of 2000 Plan			0		1,200,000
Granted		16.44	214,684		(214,684	)
Exercised		4.77	(377,513	)	0
Canceled/Expired		26.62	(3,000	)	3,000

Balance at March 31, 2006	$	9.04	1,310,839		1,253,461

Information on outstanding and currently exercisable options by price range as of March 31, 2006, is summarized as follows:

		Options Outstanding				Options Exercisable
	Price Range Per Option	Total Number Of Options	Weighted-average Remaining Life (Years)		Weighted-average Exercise Price	Exercisable Number of Options		Weighted average Exercise Price
$	2.81	40,800	3.0	$	2.81	40,800	$	2.81
	3.13 – 3.94	64,400	3.6		3.68	64.400		3.68
	4.00 – 4.50	179,417	4.5		4.27	179,417		4.27
	5.00 – 5.44	178,450	3.4		5.35	156,450		5.34
	6.05 – 6.85	152,060	6.2		6.50	136,660		6.52
	7.25	20,000	1.3		7.25	20,000		7.25
	10.06 – 10.95	166,348	8.2		10.12	52,063		10.10
	11.01 – 11.37	271,280	7.5		11.34	155,007		11.35
	12.90	7,200	8.8		12.90	2,400		12.90
	15.74	198,684	9.1		15.74	0		—
	18.08	19,200	9.0		18.08	3,840		18.08
	22.15	5,000	10.0		22.15	0		—
	24.25	1,000	9.8		24.25	0		—
	26.62	7,000	9.3		26.62	0		—
		1,310,839	6.3	$	9.04	811,037	$	6.63

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At March 31, 2006, 2005 and 2004, currently exercisable options aggregated 811,037, 995,306 and 1,384,500 shares of common stock, respectively and the weighted-average exercise price of those options was $6.63, $5.35 and $4.60, respectively.

The per share weighted-average fair value of stock options granted during the years ended March 31, 2006, 2005 and 2004 is estimated as $8.33, $4.90 and $5.71 respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: volatility of 60% in 2006, 61% in 2005 and 62% in 2004; risk-free interest rate of 3.97% in 2006, 3.86% in 2005 and 3.19% in 2004, and an expected life of 5.5 years in 2006, 4.9 years in 2005 and 5.8 years in 2004.

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 299,459 shares as of March 31, 2006. Common shares sold to employees under the Purchase Plan in fiscal 2006, 2005 and 2004 were 13,716, 18,446 and 23,413, respectively.

The weighted-average fair value of each purchase right granted in fiscal 2006, 2005 and 2004 was $4.71, $4.17 and $5.02, respectively.

(6)

Income Taxes

Income tax expense for the years ended March 31, 2006, 2005 and 2004 is as follows (in thousands):

	For the Years Ended March 31,
	2006		2005			2004

Current income tax expense
Federal	$	8,469	$	6,728		$	2,349
State		823		256			58

		9,292		6,984			2,407

Deferred income tax expense
Federal		260		(101	)		2,104
State		24		401			415

		284		300			2,519

Total income tax expense	$	9,576	$	7,284		$	4,926

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The following table is a reconciliation of the statutory federal income tax expense to the effective income tax expense for the years ended March 31, 2006, 2005 and 2004 (in thousands):

	For the Years Ended March 31,
	2006			2005			2004

Statutory federal tax expense	$	9,387		$	7,345		$	4,715
State taxes, net of federal benefit		550			427			308
Tax exempt investment earnings		(409	)		(195	)		(13)
Export incentive		(89	)		(112	)		(93)
Other		137			(181	)		9

Actual tax expense	$	9,576		$	7,284		$	4,926

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for 2006 and 2005 are presented below (in thousands):

	March 31,
	2006		2005

Deferred tax assets:
Inventory items	$	197	$	202
Accounts receivable allowance		37		68
Product rights		562		534
Accrued expenses		1,472		1,564
Contract termination		401		524
Unrealized losses on marketable securities		85		141
Property and equipment		57		0
		2,811		3,033

Deferred tax liabilities:
Property and equipment		0		(35	)
Other		0		(7	)
		0		(42	)

Net deferred tax assets	$	2,811	$	2,991

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.

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(7)

Sales

The Company operates as a single operating segment of consumer health care products that are similar with respect to: economic characteristics, gross margins, products and services, production processes, types or classes of customers, methods of distribution, and regulatory environments. Net sales by brand and geographic area are as follows (in thousands):

		For the Years Ended March 31,
		2006		2005		2004
Domestic
	Breathe Right	$	74,633	$	68,423	$	64,126
	FiberChoice		20,844		12,245		9,290
	Other		200		197		588

Total domestic			95,677		80,865		74,004
International
	Japan		5,000		2,404		4,430
	Canada		3,195		1,826		1,372
	Italy		2,892		3,371		1,899
	UK		2,930		2,223		2,349
	Other		2,950		3,043		2,926

Total international			16,967		12,867		12,976

Net sales		$	112,644	$	93,732	$	86,980

The Company had one significant customer who accounted for 31%, 31% and 32% of sales in the years ended March 31, 2006, 2005 and 2004, respectively. Accounts receivable from this customer as of March 31, 2006 and 2005 were $6,104,000 and $4,933,000, respectively.

(8)

Employee Benefit Plan

The Company provides a defined contribution plan which covers all eligible employees. Generally, employees may contribute up to 100% 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 $341,000, $266,000 and $251,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

(9)

License Agreements

The Company has agreements to exclusively license intellectual property rights to certain products. Royalties due under these agreements are based on various percentages of net sales. To maintain the Company’s licenses, it must make minimum royalty payments of $550,000 each year until patents for the products expire. Royalties are classified as a component of cost of goods sold. Royalty expense was approximately $3,454,000, $3,225,000 and $2,612,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

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(10)

Operating Leases

The Company leases equipment and office space under noncancelable operating leases that have initial or noncancelable lease terms in excess of one year. Future minimum lease payments due in accordance with these leases as of March 31, 2006 are as follows (in thousands):

Year ending March 31,		Amount

2007	$	788
2008		788
2009		788
2010		745
2011		494
Later years		0

Future minimum lease payments	$	3,603

Total rental expense for operating leases was $780,000, $783,000 and $780,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

(11)

Purchase Obligations

As of March 31, 2006, the Company had $16,826,000 of inventory purchase and advertising commitments with its suppliers as part of the normal course of business. The Company does not expect potential payments under these agreements to materially affect its financial condition.

(12)

Realization of Contingent Gain

The Company received a $1.1 million refund of previously paid European Community import duties on Breathe Right nasal strips relating to an import duty appeal. The Company recorded this nonrecurring item as a reduction in cost of goods sold during the quarter ended December 31, 2004.

(13)

Purchase of Product Rights

On January 4, 2006, the Company purchased a portfolio of domestic and international patents and patents pending related to the FiberChoice products for approximately $8.0 million in cash from Onesta Nutrition, Inc. The cost of these product rights will be amortized over the remaining life of the patents.

(14)

Net Income Per Share

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

	For the Years Ended March 31,
	2006	2005	2004

Weighted average number of common shares outstanding	14,153	13,972	13,576
Potential common shares	848	786	912

Weighted average number of common and potential common shares outstanding	15,001	14,758	14,488

Options to purchase 8,000, 26,600 and 324,000 shares of common stock at weighted average per share exercise prices of $26.32, $16.63 and $11.34 for the years ended March 31, 2006, 2005 and 2004 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 between 2014 and 2016.

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(15)

Summary of Quarterly Financial Data (Unaudited)

The following is a condensed summary of actual quarterly operating results for fiscal 2006 and 2005 (in thousands):

		Jun 30, 2005		Sep 30, 2005		Dec 31, 2005		Mar 31, 2006
Net sales	$	23,539	$	26,058	$	30,929	$	32,118
Cost of goods sold		6,968		7,625		9,401		9,191
Gross profit		16,571		18,433		21,528		22,927
Operating expenses:
Advertising and promotion		5,957		6,932		11,372		10,684
Selling, general and administrative		4,709		4,831		4,234		5,140
Total operating expenses		10,666		11,763		15,606		15,824
Operating income		5,905		6,670		5,922		7,103
Investment income		321		312		330		256
Income before income taxes		6,226		6,982		6,252		7,359
Income tax expense		2,181		2,452		2,284		2,659
Net income	$	4,045	$	4,530	$	3,968	$	4,700

Basic net income per share	$	.28	$	.32	$	.28	$	.33
Diluted net income per share	$	.27	$	.30	$	.26	$	.32

		Jun 30, 2004		Sep 30, 2004		Dec 31, 2004		Mar 31, 2005
Net sales	$	16,531	$	20,041	$	28,737	$	28,421
Cost of goods sold		5,394		5,716		7,099		8,496
Gross profit		11,137		14,325		21,638		19,925
Operating expenses:
Advertising and promotion		4,818		5,559		10,587		8,720
Selling, general and administrative		3,908		3,612		4,640		5,131
Total operating expenses		8,726		9,171		15,227		13,851
Operating income		2,411		5,154		6,411		6,074
Investment income		214		200		256		265
Income before income taxes		2,625		5,354		6,667		6,339
Income tax expense		952		1,870		2,262		2,200
Net income	$	1,673	$	3,484	$	4,405	$	4,139

Basic net income per share	$	.12	$	.25	$	.32	$	.29
Diluted net income per share	$	.11	$	.24	$	.30	$	.28

The above financial summary reflects the reclassification of a potion of research expense from advertising and promotion expense to selling, general and administration expense.

The sum of the 2005 quarterly earnings per share amounts do not equal the annual amount reported since per share amounts are computed independently for each quarter and for the full year based on respective weighted-average common shares outstanding and other dilutive potential common shares.

During the quarter ended March 31, 2006, the Company reduced the reserve for potential future product returns as a result of a decrease in the current period experience rate. Net sales for the quarter ended March 31, 2006 were favorably impacted by $585,000.

F-16

EX-10.11 2 cns062185_ex10-11.htm MEDICAL SPECIALTIES MATERIAL PURCHASE AGMT Exhibit 10.11 to CNS, Inc. Form 10-K for the year ended March 31, 2006

EXHIBIT 10.11

MEDICAL SPECIALTIES

MATERIAL PURCHASE AGREEMENT

1.	Parties: This Agreement is between Minnesota Mining and Manufacturing Company (“3M”), through its Medical Specialties Department, located at 3M Center, Bldg. 275-5W-05, St. Paul, MN 55144-1000) and 3M’s medical Component customer (“Customer”) identified below:

CNS. Inc.
Company Name 7615 Smetana Lane
Address Eden Prairie, MN 55439	952-229-1500
City, State Zip	Telephone

Purpose and Effect: This Agreement authorizes Customer and its authorized converters (“Converters”) to purchase the 3M Components set forth in Schedule 1 at the prices shown as Contract Price in Schedule 1, meeting the specifications set forth in Schedule 2, and such other materials as the parties may agree in writing to add in the future, (“Components”). Customer agrees to use Components solely for its use or use by Converters in the manufacture of nasal dilators and other products as described in paragraph 5 of this Agreement. This Agreement does not establish Customer or its Converters as a dealer or distributor of the Components. Customer shall direct its Converters not to resell any Components to any third party for resale. In the event a Converter is in breach of Medical Specialties Terms and Conditions of Sale or any other contractual obligations Converter may have to 3M, 3M reserves the right not to supply Components to such Converter. Customer acknowledges and agrees that it has sole responsibility for testing and evaluating the safety and suitability of use of Components in the product(s) for which Customer or Converters are purchasing Components.

3.	Term: The term of this Agreement begins on the date the last party signs this Agreement (the “Effective Date”) and will continue for Twenty-four months. (“Term”).

Termination for Cause: Upon default by either party in the performance of any material obligation in this Agreement, either party may give notice in writing to the other party and the defaulting party shall have thirty (30) days to cure the default. However, if the default is not cured within thirty (30) days, the non-defaulting party may terminate this Agreement by providing notice of termination, which shall take effect no earlier than ten (10) days from the receipt of such notice. Termination under this paragraph shall not relieve either party of an obligation existing upon the date of termination or relieve either party from liability for breach of this Agreement subject to the terms of this Agreement.

5.	Exclusive Sale and Purchase; Exceptions; First Right of Refusal:

Customer agrees that during the Term of this Agreement it will purchase and direct its Converters to purchase all of its global requirements of medical grade adhesive tapes used in the manufacturing of external nasal dilators, with the exception of Items in Exhibit A.

If Customer develops or has an opportunity to obtain a new or modified external nasal dilator or any other product that requires the use of medical grade adhesives or tapes not included as Components in this Agreement, then Customer agrees to provide specifications, including but not limited to performance, color, adhesive, and price to 3M. 3M will then determine its ability to supply such medical grade adhesives or tapes. If 3M agrees to supply such new medical grade adhesives or tapes, then these new adhesives or tapes would become Components and would be added to Schedule 1 by addendum. Purchases of such new Components would be included in total purchases to determine if Customer meets minimum purchase quantities. If 3M cannot or does not choose to supply the requested new medical grade adhesives or tapes to Customer, then 3M will provide such notice to Customer within 60 days and Customer can purchase the requested medical grade adhesives or tapes from another source. However, if no other supplier can supply medical grade adhesives or tapes that meet the specifications, and Customer changes the specifications in order to purchase a medical grade adhesive or tape for these new or modified products, then Customer agrees to give 3M Medical Specialties the first right of refusal to supply such adhesives or tapes using the new specifications under the same conditions described earlier in this paragraph. Customer reserves the right to determine if the 3M medical grade adhesive tapes meet the new or revised specifications.

During the Term 3M Medical Specialties Department will not supply finished external nasal dilators or Components for use in the manufacture of external nasal dilators to any third party(s) other than Customer and its Converters nor will 3M Medical Specialties sell nasal dilators in the retail market.

3M agrees to give Customer a right of first refusal for any new tapes or adhesives 3M might develop which could be useful for external nasal dilators (“New Components”). Customer will have 60 days to commit to using such a New Component(s) and introducing a product containing such New Component(s) within eighteen (18) months. Customer agrees to provide to 3M, regular, timely progress reports regarding the development and introduction of new or modified products using these New Components. If satisfactory progress is not made by Customer toward introduction of such new or modified products, as determined solely by 3M, then 3M shall have the right to sell New Components, after notification to Customer in writing, to any other customer for any applications without exceptions. In like manner, if Customer decides to cease efforts to develop and introduce new or modified products using New Components, then Customer shall immediately notify 3M of such decision in writing. 3M will then have the right to sell New Components to any other customer for use in any product without restrictions. If a third party approaches 3M for any New Components not already offered to Customer, with the intent to use the New Components in external nasal dilators, 3M will provide Customer with a right of first refusal to purchase such New Component under the terms proposed by such third party and Customer will have 60 days to accept or reject such offer. If Customer accepts the offer, then Customer commits to purchase and use New Component(s) in the same manner as described earlier in this paragraph.

Forecasts, Binding Purchase Orders, Minimum Purchase Requirement: Throughout the Term of this Agreement, Customer shall deliver to 3M on a monthly basis a forecast showing its estimated requirements for Components stated in number of strips, for the succeeding two calendar quarters (“Rolling Forecast”). Customer, through its converters, will assist 3M in translating the number of required finished strips into the equivalent number of square yards of Components required to produce the forecasted strips. Customer agrees that it is bound to purchase, or to direct its Converters to purchase, the first 60 days of forecasted Component requirements in the months such quantities were forecast. Binding purchase orders for requirements for Components shall be placed at least twenty-eight (28) days in advance of the requested ship date. If an order has been received and accepted by 3M for Components and Customer’s converter(s) request to alter the order quantity of Components or any original requested ship date(s) for Components, 3M will not be obliged to accept such requests without prior approval of Customer and agreement by 3M. 3M will not be obliged to fulfill orders received less than 28 days from the requested ship date or for quantities more than 10% above the applicable Rolling Forecast. If however, Component requirements exceed 10% of Rolling Forecast, 3M shall meet with Customer to discuss if and how Customer’s production needs can be met. 3M will use reasonable efforts to meet such increased requirements.

Use of Name and Trademarks: Neither party will make any use whatsoever of the other party’s name without its written permission. The decision to grant such permission is within sole discretion of the non-requesting party. Neither party will use or reproduce any of the other party’s trademarks or logos in any manner without prior written approval. To request this approval, the requesting party must forward to the other party a complete and accurate specimen copy of the proposed use. The non-requesting party agrees to reply to the requesting party within thirty (30) days of receipt of such proposed use. Any permitted use extends only to authorized materials. 3M agrees to keep prices, forecast volumes, quantity of purchases and other material information related to this Agreement confidential during the Term and for a period of two (2) years thereafter.

Other Terms and Conditions: Payment shall be according to the price set forth on Schedule 1 subject to the following. In each twelve-month period during the Term, the first period beginning upon the first day of the month of the Effective Date and ending twelve months thereafter, the Customer alone or together with its Converters shall purchase Components in an amount equal to at least 95% of the dollar value of Components purchased during the previous 12 month period (the first 12 month period in the Term shall be measured against the 12 month period prior to the Effective Date) (Minimum Purchase Requirement). In the event Customer, together with its Converters do not purchase the Minimum Purchase Requirement in any successive twelve-month period of the Term, pricing for the subsequent 12 month period shall revert back to the order volume prices based on unit volume per order as shown in Schedule 1. Failure to purchase the Minimum Purchase Requirement shall not constitute a breach of this agreement. A price change will not affect any order properly placed before the effective date of such change. Customer shall direct its Converters to make payment within 30 days of the date of invoice. 3M reserves the right to not ship Components to any Converter whose accounts payable for Components are not current. The price for product set forth in Schedule 1 includes the cost of standard freight to one destination in the U.S. 3M and Customer will work together in good faith to try to find opportunities for reducing the cost of Customer’s external nasal dilators that use Components.

Shipment Deadlines; Risk of Loss; Title: 3M will ship Components to Customer or its authorized converter FOB Point of Shipment, freight and insurance prepaid and allowed to the first U.S. destination specified in Customer’s or its authorized converter’s purchase order. 3M shall make reasonable efforts to meet any shipping dates specified in purchase orders, but failure to meet any particular shipping deadline less than 21 days from promised ship date will not constitute a breach of this Agreement. Risk of loss passes to Customer when Components are delivered to designated ship-to dock. For all Components contained in any single shipment, title passes to Customer’s Converters only when Customer’s Converters have fully paid for the shipment.

10.	Regulatory Approvals: Customer shall be responsible for obtaining and maintaining all necessary regulatory approvals for Customer’s products that incorporate Components in the country where products are sold.

11.

Warranties Limited; Indemnification: All statements, technical information and recommendations contained in any specifications are based on tests 3M believes to be reliable. 3M warrants only that at the time of shipment the Components will meet the Component specifications in effect at the time of ordering and it has the right and authority to sell the Components pursuant to the terms and conditions of the Agreement. 3M DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES WITH RESPECT TO COMPONENTS, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND FREEDOM FROM INFRINGEMENT. 3M specifically DOES NOT warrant the Components for any intended or unintended uses (whether or not foreseeable); for compatibility or suitability with other materials; for a customers or Third party’s negligence in handling or storage; or for the suitability or acceptability of the Component specifications or test methods. Nor does 3M warrant that the Component will perform as anticipated as assembled. 3M also disclaims all warranties against infringement of any third party patent, in combination with any other materials or in any process of manufacture or use alone or in combination with any other materials. Customer shall indemnify and hold 3M harmless from any and all loss or liability for any and all claims, causes of action, suits, proceedings, damages, demands, fees, expenses, fines, penalties and costs (including without limitation, attorney’s fees, costs and disbursements) arising from any injury or alleged injury to any person or business for property damage, personal injury or incidental, special or consequential damages made against Customer or 3M for liability arising from or caused by Customer’s use of Components in Customer’s products except to the extent such liability is caused by the negligence of 3M in the production, handling or distribution of Components prior to receipt by Customer or its Converter or by 3M’s failure to supply Components in accordance with the warranty set forth in Paragraph 11.

12.

Limitation of Remedies: If properly and promptly notified (see Paragraph 13), 3M will, at its option, replace or refund the purchase price of any Component that is proved not to conform to 3M’s express limited warranty at the time of shipment. THESE REMEDIES ARE EXCLUSIVE REMEDIES AGAINST 3M FOR ANY ALLEGED OR ACTUAL NONCONFORMANCE TO SPECIFICATIONS OR DEFECT OR OTHER FAILURE IN THE COMPONENTS OR FOR 3M’S PERFORMANCE OF THIS AGREEMENT. UNDER NO CIRCUMSTANCES IS 3M LIABLE TO CUSTOMER OR CUSTOMER’S DESIGNATED CONVERTER FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) IN ANY WAY RELATED TO THE COMPONENTS OR TO PERFORMANCE OF THIS AGREEMENT UNDER ANY THEORY OF LAW INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE AND STRICT LIABILITY.

13.

Customer’s Duty to Inspect; Returns: Customer will direct its Converters to promptly inspect any shipment of Components received from 3M and to promptly notify 3M in writing of any defects. The notice must specify the defects in detail; any defect not specified is waived. Any goods not rejected within fifteen 15 days of delivery are accepted. After sending the notice, Customer will direct its Converters to follow the 3M Return Goods Policy then in effect, or any specific and reasonable instructions that 3M may issue. Customer will allow or will direct its Converters to allow 3M to inspect any allegedly defective goods at Customers’ or its Converters’ site or direct that a sample be provided to 3M for Investigation. For any goods which 3M determines are defective, Customer and/or its Converters will follow the 3M instructions and either return the goods to 3M, with 3M responsible for the return freight, or dispose of the goods in a safe manner as directed by 3M. Reasonable costs for such disposal will be paid by 3M.

14.

Proper Use of Components: Customer will direct its Converters that they will not process handle or package the Components in any way that might compromise the Components efficacy or safety. Customer will not and will direct its Converters to not misuse or mishandle the Components or treat or deal with the Components in any way that might misrepresent the characteristics and capabilities of such Components. It is understood and agreed that the application of mentholated encapsulated slurry to manufacture mentholated nasal strips does not create a breach of this agreement. It is further understood that the application of such slurry to any Component is solely the decision of Customer and 3M’s warranty obligations are limited as provided in paragraph 11 or this agreement.

15.

Intellectual Property; No Exclusive Rights: Nothing herein shall grant to Customer or any of its Converters any patent, license, right or assignment in any patent, trade secret or other intellectual property owned or controlled by 3M or its affiliated companies. Likewise, nothing herein shall grant to 3M any patent, license, right or assignment in any patent, trade secret or other intellectual property owned or controlled by Customer or its Converters.

16.	Component Discontinuance: 3M may discontinue its production or sale of Components at any time during the Term of this Agreement if 3M has reasonable grounds to believe the Components or Customer’s products that use Components present a serious health, safety or environmental risk.

17.	Miscellaneous:

Insurance: Customer will maintain a liability insurance program covering such risks (including, but not limited, to products liability and contractual liability) as are appropriate in accordance with the sound business practice and Customer’s obligations under this Agreement, including, but not limited to, at least $5,000,000 in product liability and $5,000,000 in general liability coverage. At the request of 3M, Customer shall provide a certificate of insurance evidencing the existence of these coverages on an annual basis.

Events of excused performance: Neither 3M nor Customer shall be considered in default or be liable to the other for any delay beyond the reasonable control of such party, including, but not limited to, acts of God, explosion, earthquake, fire, flood, war whether declared or not, accident, strikes, labor disturbances, inability to procure supplies from third party vendors, sabotage, or order or decrees of any court or action of a governmental authority. If such delay continues for a period of more than 30 consecutive days Customer is relieved of its obligation to purchase exclusively from 3M for the period of 3M’s inability to supply and such longer period as may be reasonably necessary to secure a supply of similar components from a third party. 3M agrees to use reasonable commercial efforts to help Customer identify such a supplier.

No assignment or delegation: Neither this Agreement nor any of the rights and obligations of a party hereunder shall be assigned, delegated, sold, transferred, sublicensed or otherwise disposed of, by operation of law or otherwise, to any third party without the prior written consent of the other party not to be unreasonably withheld; provided, however, that either party may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the sale of all or substantially all of its assets related to the business for the ingredients or the products, or in the event of its merger or consolidation or change in control or similar transaction. This paragraph does not prevent Customer from using a designated converter to process some or all of Components for Customer.

Notices: Any notice, order or other communication required by this Agreement must be in writing, sent by first class mail or faster written means, and addressed to the address listed on Attachment 1. A party may designate in writing a substitute address.

Entire agreement; no waiver. This Agreement, the schedules attached hereto, as well as any 3M Component specifications, state the complete understanding between 3M and Customer on this subject and replace any statements, communications or understandings, whether oral or written, made before, during or after this Agreement is signed. Customer or its Converters may place orders under this Agreement using Customer’s or Converters’ regular purchase order form. The only function of such purchase order shall be to communicate the quantity of Components desired and any delivery instructions. Any other terms on such forms are void and of no effect. This Agreement cannot be modified except in wilting, signed by both parties. No sales representative of 3M may orally or in writing modify this Agreement. A course of dealing or of performance or usage of trade does not effect a waiver or modification unless ratified in writing. A party’s failure to exercise a right in one instance does not waive that party’s right to later exercise that right.

Governing law and venue: Any questions, claims or disputes concerning or related to this Agreement are governed by the laws of Minnesota, notwithstanding any conflict of law principle to the contrary. The parties consent to jurisdiction and venue in the State of Minnesota.

Converters: It is acknowledged and agreed that Customer shall not be liable for the performance of any obligation that may be undertaken by any of the Converters to 3M in connection with the purchase of Components pursuant to this agreement or otherwise including, without limitation, the payment for Components pursuant to any orders placed by such Converters with 3M. Not withstanding the foregoing, Customer agrees to cooperate with 3M and render all assistance that may be reasonably requested with respect to any default by Converter in connection with its purchase of Components from 3M.

National Account Representation: 3M agrees during the term of the agreement to provide Customer with National Account or similar status and to designate individual(s) where one or more of their responsibilities is to represent 3M and be a primary contact person for Customer’s staff for, but not limited to the following purposes: new business opportunities, periodic forecast submissions, material lead-time and delivery or quantity Issues; etc.

Both parties agree not to disclose the terms or existence of this agreement to any third party, other than Customer’s Converters, except to the extent such disclosure is required by law or a valid court order.

Accepted and Agreed to: MINNESOTA, MINING AND MANUFACTURING COMPANY		CUSTOMER


By	/s/ JM McQuade	/s/ Larry Muma

	J. Michael McQuade	Larry Muma
	Print Name	Print Name

	Vice President, 3M Medical	VP Operations
	Title	Title

	11/16/04	11/22/04
	Date	Date

		CNS, Inc.
		Company Name

EX-10.16 3 cns062185_ex10-16.htm REINKENSMEYER EMPLOYMENT AGREEMENT Exhibit 10.16 to CNS, Inc. Form 10-K for the year ended March 31, 2006

EXHIBIT 10.16

EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement is made as of May 3, 2006 (the “Effective Date”) between CNS, Inc. a Delaware corporation (“CNS”) and Samuel E. Reinkensmeyer (“Employee”).

WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and

WHEREAS, Employee has made and is expected to continue to make, due to Employee’s experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and

WHEREAS, CNS, as a publicly held corporation, recognizes that the possibility of a change in control may exist and that such possibility and the uncertainty and questions which it may raise among management may result in the departure of Employee or distraction to the performance of Employee’s duties to the detriment of CNS and its shareholders; and

WHEREAS, Employee is willing to continue Employee’s employment with CNS upon the understanding that CNS will provide income security if Employee’s employment is terminated under certain terms and conditions; and

WHEREAS, it is in the best interests of CNS and its stockholders to employ Employee and to reinforce and encourage Employee’s continued attention and dedication to Employee’s assigned duties without distraction and to ensure Employee’s continued availability to CNS in the event of a Change in Control; and

WHEREAS, it is in CNS’s best interests to receive certain assurances from Employee regarding CNS’s confidentiality, competition and other proprietary business concerns;

THEREFORE, in consideration of the foregoing and of this agreement, certain change in control protection, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows:

1.	Employment. CNS agrees to continue to employ Employee as its Vice President-Finance and Chief Financial Officer (“CFO”) under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits.

2.	Term. The term of Employee’s employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein.

Duties. In Employee’s position as Vice President-Finance and CFO, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to Employee from time to time by the Chief Executive Officer, President or Chairman of the Board of Directors of CNS (the “Board”); devote Employee’s full time, energy and skill to CNS’s business, as is reasonably necessary to execute fully Employee’s duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with Employee’s duties hereunder; and promote CNS’s best interests. The principal place of employment and the location of Employee’s principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of Employee’s duties during the term of this Agreement. Employee shall notify the Chief Executive Officer of any other paid position which Employee is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the Chief Executive Officer’s prior approval.

Compensation. For all services rendered by Employee, CNS shall pay Employee the annualized base salary (“Annual Base Salary”) described in Exhibit A, payable at such times as salaried employees of CNS are customarily paid. The Board shall, from time to time during Employee’s employment, review Employee’s Annual Base Salary in connection with possible increases, giving consideration to inflation factors, performance of Employee and CNS, salaries paid for positions of similar responsibility for other companies, and other relevant factors, and shall provide for such increases when deemed appropriate. Employee shall in addition be eligible to participate in the annual management incentive bonus program, as approved by the Board of Directors, the initial amount, as a percentage of Annual Base Salary, is described in Exhibit A.

Benefits. Employee shall be entitled to Paid Time Off consistent with CNS policy and such insurance, 401(k) program and other benefits available to all salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Board. Employee shall also be entitled to reimbursement of Employee’s reasonable and necessary expenses incurred in connection with the performance of Employee’s duties hereunder.

Resignation by Employee. Employee may resign Employee’s employment with CNS effective upon 30 days’ advance written notice to the Chief Executive Officer. If Employee resigns under this paragraph, the Chief Executive Officer retains the right to terminate Employee’s employment, effective upon written notice to Employee, at any time during the 30-day notice period, provided, however, that Annual Base Salary and the employer portion of Employee’s health, dental and life insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period. In connection with Employee’s termination, Employee will receive any accrued unused Paid Time Off to which Employee is entitled.

7.	Termination of Employment. Employee’s employment with CNS may be terminated in any of the following ways:

CNS may, by written notice to Employee, terminate Employee’s employment without Good Cause (as defined in paragraph 7.b.) (i) prior to a Change in Control (as defined in paragraph 8.a), or (ii) after the terms of paragraph 8.b. are no longer effective, in which event CNS shall:

pay Employee his Annual Base Salary up to the date of termination

ii.

pay Employee the Target Bonus in effect for the bonus period in which Employee’s Date of Termination (as defined in paragraph 8.d.) occurs multiplied by a fraction, the numerator of which is the number of days worked by Employee in the bonus period to the Date of Termination, and the denominator of which is the number of days in the bonus period, less any amount of the Target Bonus that has been paid. For purposes of this Agreement, “Target Bonus” shall mean the amount payable in cash under all annual incentive compensation plans of CNS in which Employee participates, waiving any condition precedent to the payment to Employee and assuming that the performance goals for the period were achieved at the 100% level;

iii.

pay the Employee Salary Continuation for one (1) year from Employee’s Date of Termination, as additional consideration for Employee’s obligations under Sections 9, 10, 11 and 12 of this Agreement. For purposes of this Agreement, “Salary Continuation” shall mean a total payment by CNS of one times (1X) the Employee’s Annual Base Salary as of Employee’s Date of Termination, the total amount to be payable to Employee over the one (1) year period on the same schedule and in the same amount as the payment of Annual Base Salary prior to termination of Employee’s employment, until such time as the full Salary Continuation obligation/non-compete shall be discharged, as provided in this paragraph 7.a., but subject to earlier termination and the rights as provided in Section 13.b;

iv.

continue to pay the employer’s portion of the premium cost for any group health, dental and life insurance benefit during the Salary Continuation period or the applicable continuation period required by law, whichever is shorter, provided, however, that Employee shall be responsible to pay the employee’s portion of cost of any such benefits and the continuation period required under applicable law will not be extended as a result of CNS’s payment provided for in this clause;

pay to Employee any accrued unused Paid Time Off to which Employee is entitled; and

vi.

provide qualified outplacement services to Employee through an entity selected by CNS for a period of up to six months at the sole cost of CNS.

As a condition of receiving the Salary Continuation and other benefits provided in this paragraph 7.a., Employee shall be required to sign a standard release agreement in the form of Exhibit B with CNS in which Employee agrees to release any and all claims and causes of action which Employee might have against CNS and its releasees, in which Employee affirms and acknowledges Employee’s obligations under paragraphs 9, 10, 11 and 12 of this Agreement, and which includes an obligation not to speak negatively about or harm CNS, confidentiality with regard to the termination process and cooperation with the transition of responsibilities. Payments under paragraph 7.a. shall begin after all rescission periods provided in the standard release agreement have run or have been waived.

CNS, by written notice to Employee, may terminate Employee’s employment for Good Cause, as defined below, (i) prior to a Change in Control or (ii) after the terms of paragraph 8.b. are no longer effective. In the event of termination under this paragraph 7.b., CNS shall continue to pay Employee’s Annual Base Salary up to the Date of Termination. For purposes of this Agreement, “Good Cause” shall mean one or more of the following:

willful and premeditated failure or refusal of Employee to render services to CNS in accordance with Employee’s obligations under paragraph 3;

ii.

the commission by Employee of a willful breach of fiduciary duty to CNS or an intentional and knowing fraud against CNS or any customer, supplier, client, agent or employee thereof;

iii.

the engaging by Employee in intentional or willful misconduct that violates a material provision of any written policy, code of conduct or directive of the Board or that could result in an enforcement action or sanctions against the Company or Employee by any state or federal agency or department or any foreign government or agency having jurisdiction over the Company or Employee (it being understood that mere negligence in performance of duties is not Good Cause under this Agreement);

iv.

the breach by Employee of any provision of this Agreement;

the commission of a felony by Employee; or

vi.

prior to a Change in Control, Employee’s unsatisfactory performance after specific notice by CNS of Employee’s performance deficiencies, description of expectations and a 60-day opportunity to cure.

CNS, by written notice to Employee, may terminate Employee’s employment under this Agreement if Employee becomes physically or mentally disabled (as determined under the Americans with Disabilities Act) during the term so that Employee has not been able to substantially perform, for a period of 120 consecutive days, with reasonable accommodation, the usual duties assigned to Employee hereunder (“Disability”). Upon such determination by CNS of Employee’s Disability, CNS shall pay to Employee the Annual Base Salary up to the Date of Termination.

This Agreement shall terminate upon the Employee’s death during its term, except that CNS shall pay to the legal representative of Employee’s estate Employee’s Annual Base Salary due Employee up to the date of Employee’s death.

8.	Termination Following a Change in Control.

For purposes of this Agreement, “Change in Control” shall mean the occurrence of one of the following events:

Acquisition of 25% of Stock of CNS. Any “person” [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)], is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CNS’s then outstanding securities, but shall not include CNS, any direct or indirect subsidiary of CNS or any employee benefit plan of CNS or of any subsidiary of CNS or any entity holding shares of common stock of the Company organized, appointed or established for, or pursuant to the terms of, any such plan.

ii.

Change in Board of Directors. During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CNS, and any new director (other than a director designated by a person who has entered into agreement with CNS to effect a transaction constituting a Change in Control under Section 8.a.i., 8.a.iii. or 8.a.iv.) whose election by the Board of Directors of CNS or nomination for election by CNS’s stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (“Continuing Directors”), cease for any reason to constitute at least a majority of the Board of Directors of CNS.

iii.

Merger or Consolidation. Consummation of a merger or consolidation of CNS with any other corporation, other than (A) a merger or consolidation (1) which would result in the voting securities of CNS outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CNS or such merged or consolidated entity outstanding immediately after such merger or consolidation and (2) after which at least a majority of the members of the board of directors of the resulting entity were Continuing Directors at the time of the action of the Board of Directors of CNS approving the merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CNS or similar transaction in which no person (as defined in subparagraph 8.a.i.) acquires more than 25% of the combined voting power of CNS’s then outstanding securities.

iv.

Liquidation or Sale of Assets. Consummation of (A) a plan of complete liquidation or (B) a sale or disposition by CNS of all or substantially all of CNS’s assets. “The sale or disposition by CNS of all or substantially all of CNS’s assets” shall mean a sale or other disposition transaction or series of related transactions involving assets of CNS or of any direct or indirect subsidiary of CNS (including the stock of any direct or indirect subsidiary of CNS) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 75% of the fair market value of CNS. For purposes of the preceding sentence, the “fair market value of CNS” shall be the aggregate market value of CNS’s outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS’s other outstanding equity securities. The aggregate market value of CNS’s common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement (“Transaction Date”) with respect to the sale or disposition by CNS of all or substantially all of CNS’s assets by the average closing price for CNS’s common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS’s common stock or by such other method as the Board of Directors of CNS shall determine is appropriate.

Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of CNS occurring after the date hereof, Employee will remain in the employ of CNS for a period of 30 days from the occurrence of such Change in Control.

Applicability. In the event of a Change in Control, the terms of this paragraph 8.b shall be effective for a period of 24 months following the Change in Control. Employee shall be entitled to receive the benefits set forth in paragraph 8.f if, within 24 months following such Change in Control, Employee’s employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i. below). As a condition to receiving such benefits, Employee shall be required to sign a standard release agreement with CNS in the form of Exhibit B. Payments required under this paragraph 8.b shall begin after all rescission periods provided in the standard release agreement have run or have been waived.

Termination for Good Reason shall be effective immediately upon written notice from the Employee to the Chief Executive Officer. For purposes of this Agreement, “Good Reason” shall exist if: (A) CNS has materially breached any of the terms of this Agreement; (B) Employee is assigned duties which are materially inconsistent with Employee’s position, duties, responsibilities and status as Vice President-Finance and CFO; (C) Employee’s Annual Base Salary, or Target Bonus (as defined below), or the face value of annual equity grants, is reduced below the amount in effect immediately prior to the Change in Control; (D) the aggregate monetary value of Employee’s participation in, or payment or benefit under all benefit plans, arrangements and perquisites, is materially reduced from the aggregate monetary value of those plans, arrangements or perquisites that were in effect immediately prior to the Change in Control; or (E) relocation of CNS would require Employee to relocate Employee’s principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area.

ii.

Termination without Good Cause shall be effective upon 30 days’ advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in paragraph 7.b.

Notice of Termination. Any purported termination of employment under this paragraph 8 and also under paragraphs 6 and 7 shall be communicated by written Notice of Termination to the other party hereto in accordance with paragraph 22 hereunder. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that indicates the specific termination provision in this Agreement relied upon and which sets forth the facts and circumstances claimed to provide a basis for termination of Employee’s employment.

Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, “Date of Termination” shall mean:

if Employee’s employment is terminated for Disability, as defined in paragraph 7.c. hereunder, 30 days after Notice of Termination is given (provided that Employee shall not have returned to the full-time performance of Employee’s duties during such 30 day period); and

ii.

if Employee’s employment is terminated pursuant to a provision contained in paragraph 6, 7 or 8 herein or for any other reason (other than Disability), the date specified in the Notice of Termination, consistent with the provisions in said paragraphs.

Dispute of Termination. If, within ten days after any Notice of Termination is given under this paragraph 8, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or as provided in paragraph 16, (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, CNS shall continue to pay Employee full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Annual Base Salary) and continue Employee as a participant in all compensation, benefit and insurance plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.

Compensation Upon Termination. Following a Change in Control, as defined in paragraph 8.a. above, to the extent provided in paragraph 8.b. above, and subject to the limitation under paragraph 8.j., CNS shall pay or provide Employee the following benefits in lieu of any benefits which would otherwise be available to Employee upon termination under paragraphs 6 or 7 hereunder:

pay Employee through the Date of Termination Employee’s Annual Base Salary at the rate in effect at the time the Notice of Termination is given, and any other form or type of compensation otherwise payable for such period, including any applicable incentive bonus, commensurate with his performance and the performance of CNS;

ii.

in lieu of any further salary payments for periods subsequent to the Date of Termination, CNS shall pay a severance payment (the “Severance Payment”) equal to 24 months of Employee’s Compensation, as defined below, based on the average monthly Compensation paid to Employee during the 24-month period ending immediately prior to the Date of Termination (without giving effect to any reduction in such Compensation which would constitute a breach of this Agreement). If the Employee has not been employed by CNS for 24 months as of the Date of Termination, average monthly Compensation shall be the Employee’s average monthly Compensation for the number of months during which the Employee has been employed at CNS. For purposes of this subparagraph, Compensation shall mean and include every type and form of compensation paid to Employee by CNS (or any corporation (“Affiliate”) affiliated with CNS within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the “Code”)) and included in Employee’s gross income for federal income tax purposes, but excluding compensation income arising from (1) hiring bonuses, and (2) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired. All of Employee’s contributions to any qualified plan pursuant to Section 401(k) of the Code or any flexible benefit plan pursuant to Section 125 of the Code shall be deemed to be included in gross income for federal tax purposes for purposes of this subparagraph. The Severance Payment shall be made: (A) as to one-half in a single lump sum within 60 days after the Date of Termination; and (B) as to the remaining one-half in 12 equal monthly installments beginning on the first of the month following the Date of Termination (as additional consideration for Employee’s obligations under Sections 9, 10, 11 and 12 of this Agreement), subject to earlier termination and the rights as provided in Section 13.b;

iii.

continue to pay the employer’s portion of the premium cost for any group health, dental and life insurance benefit during the applicable continuation period required by law, provided, however, that Employee shall be responsible to pay the employee’s portion of cost of any such benefits and the continuation period required under applicable law will not be extended as a result of CNS’s payment provided for in this clause; and

iv.

pay to Employee all legal fees and expenses incurred by Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this paragraph, but only if such contest, dispute or enforcement is conducted in accordance with the terms of Section 16 of this Agreement).

Employee shall not be required to mitigate the amount of any payment provided for in paragraph 8.b or 8.f. by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in paragraph 8.b. or 8.f. be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided in paragraph 8.f.

In order to assure the performance of CNS or its successor of its obligations under this paragraph, CNS may deposit in trust an amount equal to the maximum payment that will be due Employee under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Employee (or Employee’s legal representative, as the case may be) the amount to which Employee shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to CNS. If CNS deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay Employee under this Agreement, CNS shall remain liable for any and all payments due to Employee. In accordance with the terms of such trust, at all times during the term of this Agreement, Employee shall have no rights, other than as an unsecured general creditor of CNS, to any amounts held in trust and all trust assets shall be general assets of CNS and subject to the claims of creditors of CNS. Failure of CNS to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by CNS.

As a condition of receiving the Severance Payment and other benefits provided in paragraph 8.f., Employee shall be required to sign a standard release agreement in the form of Exhibit B with CNS in which Employee agrees to release any and all claims and causes of action which Employee might have against CNS and its releasees, in which Employee affirms and acknowledges Employee’s obligations under paragraphs 9, 10, 11 and 12 of this Agreement, and includes an obligation not to speak negatively about or harm CNS, confidentiality with regard to the termination process and cooperation with the transition of responsibilities. Payments under paragraph 8.f. shall begin after all rescission periods provided in the standard release agreement have run or have been waived.

Immediately prior to a Change in Control, Employee shall vest in all stock options which have been granted to Employee and Employee shall be entitled to exercise all rights to receive all benefits accruing to Employee under any and all CNS stock purchase and stock option plans and programs. Approval of this Agreement by the Compensation Committee shall be deemed approval of the vesting of options as provided in the immediately preceding sentence for all purposes under CNS stock purchase and stock option plans and programs. In the event that the vesting of the options, together with all other payments and the value of any benefit received or to be received by Employee would result in all or a portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, then Employee’s payments shall be either (A) the full payment or (B) such lesser amount that would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of such payments and benefits may be taxable under 4999 of the Code. All determinations required to be made under this paragraph 8.j. be made by a nationally recognized accounting firm which is CNS’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax, which firm must be reasonably acceptable to Employee (the “Accounting Firm”). CNS shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to CNS and Employee. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Employee to a payment under this paragraph 8. All fees and expenses of the Accounting Firm shall be borne solely by CNS. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code).

Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has 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 Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed “Confidential Information” herein. Employee’s obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee 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’s Board, or (d) Employee is obligated by law to disclose.

10.	Disclosure and Transfer of Product Developments, etc.

Employee will make full and prompt disclosure to CNS or all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations, instructions, methods and inventions (all of which are collectively termed “Developments” herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under Employee’s direction during Employee’s employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by Employee’s acceptance of this Agreement that CNS owns and shall own all of the Developments.

Employee also agrees on behalf of himself and Employee’s heirs and legal representatives that Employee will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of Employee’s right, title and interest in the Developments covered by paragraph 10.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with Employee’s employment.

Notwithstanding paragraphs 10.a. and b., however, this paragraph 10 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee’s own time, and (A) which do not relate (1) directly to the business of CNS or (2) to CNS’s actual or demonstrably anticipated research or development, or (B) which does not result from any work performed by Employee for CNS.

This will confirm that Employee’s obligations to CNS under paragraphs 9, 10, 11 and 12 will continue after the termination of Employee’s employment.

11.

Non-competition. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee 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 (as defined below) or products of CNS, either as an individual for Employee’s 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 Employee shall not: avail himself of any advantages or acquaintances Employee has made with any person who has, within the twelve (12) month period ended on the Employee’s Date of Termination, 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. 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 and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (l) year prior to the Employee’s Date of Termination.

Employee acknowledges that CNS directly, or indirectly through its affiliates, currently is engaged in business on a worldwide basis. Consequently, Employee agrees that the obligations under this Section 11 shall apply in any market, foreign or domestic, in which (a) CNS or, as applicable, a CNS affiliate(s), operates during the one (1) year period prior to the Employee’s Date of Termination, and (b) CNS or, as applicable, a CNS affiliate(s), has plans to enter on the Employee’s Date of Termination.

12.

Non-Solicitation. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are 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 customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one (1) year immediately preceding Employee’s Date of Termination. Prospective CNS customers, brokers, vendors and distributors include 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 (6) months following Employee’s Date of Termination. Employee also agrees that during Employee’s employment and in the one (1) year period following Employee’s employment, Employee will not directly or indirectly solicit any CNS employees to terminate his employment with CNS. This Employee non-solicitation obligation applies to employees of CNS during Employee’s employment and as of Employee’s Date of Termination.

13.

Remedies.

Employee acknowledges that the restrictions set forth in paragraphs 9, 10, 11 and 12 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates Employee’s obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law and as provided in (b) below, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance Payment or Salary Continuation, benefits or bonus which Employee may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of Employee’s violation of any of Employee’s obligations under this Agreement. In the event of cessation of payments and benefits, Employee’s release of Employee’s claims against CNS shall remain valid and fully enforceable in consideration of the benefits that Employee received prior to said breach.

Employee acknowledges and agrees that the Salary Continuation (under Section 7.a) or the installments of Severance Payments (under Section 8.f.ii.B) shall constitute additional consideration for Employee’s obligation under Sections 9, 10, 11 and 12. Therefore, in the event Employee breaches any of the terms of Sections 9, 10, 11 and 12 in any material respect, which breach is not cured by Employee within ten days after written notice from CNS specifying the breach, in addition to any other remedy available to CNS, CNS may discontinue any Salary Continuation payments and any installments of Severance Payments otherwise payable to Employee under Section 8.f.ii.B and Employee shall immediately repay CNS all Salary Continuation payments described in Section 7.a. and Severance Payment installments described in Section 8.f.ii.B previously received by Employee. Any unpaid portion of such Salary Continuation or Severance Payment installment shall, until paid, bear interest from the first day repayment is due at the rate set forth in Section 24.a.

14.

Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended.

15.

Cooperation. For a reasonable period after termination of employment, Employee agrees to be available to, cooperate with and assist CNS as it may reasonably request in connection with any litigation or other legal proceeding, claims or potential claims or any internal or governmental investigation with respect to matters about which Employee has or may have knowledge as a result of Employee’s employment with CNS. Employee also agrees to promptly inform CNS if Employee is asked to assist in any investigation of CNS (or its actions) that may relate to services performed by Employee for CNS, regardless of whether a lawsuit has then been filed against CNS with respect to such investigation. In the event CNS requests Employee’s assistance in any litigation or regulatory matter after Employee’s employment termination, CNS will pay or reimburse Employee for any out-of-pocket costs and for any time Employee spends on such matter as requested by CNS, at a daily rate based on Employee’s Annual Base Salary at the time of termination.

16.	Dispute Resolution Procedure.

CNS and Employee desire to establish a reasonable and confidential means of resolving any dispute, question or interpretation arising out of or relating to:

this Agreement or the alleged breach or threatened breach of it;

ii.

the making of this Agreement, including claims of fraud in the inducement;

iii.

Employee’s employment by CNS pursuant to this Agreement, including claims of wrongful termination or discrimination; or

iv.

any activities by Employee following the cessation of employment with CNS (each such dispute to be referred to herein as a “Dispute”).

In furtherance of the parties’ mutual desire, CNS and Employee agree that if either party believes a Dispute exists, that party shall provide the other with written notice of the claimed Dispute. Upon receipt of that written notice, except as provided in paragraph 13, the following procedure shall be the exclusive means of fully and finally resolving the Dispute. First, within ten (10) days of the other party receiving that notice, Employee and appropriate representatives of CNS and/or Board will meet to attempt to resolve amicably the Dispute. Second, if a mutually agreeable resolution is not reached within ten (10) days following the parties’ first meeting, the parties will engage in mediation with a neutral mediator mutually agreeable to the parties, said mediation to be held within thirty (30) days of the final meeting between Employee and representatives of CNS and/or Board. Third, if the Dispute is not resolved through mediation within ten (10) days of such mediation, the Dispute shall be resolved exclusively by final and binding arbitration held in accordance with the provisions of this Agreement and the American Arbitration Association (“AAA”) National Rules for the Resolution of Employment Disputes then in effect, unless such rules are inconsistent with the provisions of this Agreement. In connection with such arbitration:

any such arbitration shall be conducted: (A) by a neutral arbitrator appointed by mutual agreement of the parties; or (B) failing such agreement, by a neutral arbitrator appointed in accordance with said AAA rules;

ii.

CNS shall pay the fees and expenses of the arbitrator;

iii.

the parties shall be permitted reasonable discovery in accordance with the provisions of the Minnesota Rules of Civil Procedure, including the production of relevant documents by the other party, the exchange of witness lists, and a limited number of depositions, including depositions of any expert who will testify at the arbitration;

iv.

the summary judgment procedure applicable under Rule 56 of the Minnesota Rules of Civil Procedure shall be available and apply to any arbitration conducted pursuant to this Agreement;

the arbitrator’s award shall include findings of fact and conclusions of law showing the legal and factual bases for the arbitrator’s decision;

vi.

except as provided in Section 8.f.(iv), the arbitrator shall have the authority to award to the prevailing party any remedy or relief that a United States District Court or court of the State of Minnesota could order or grant if the dispute had first been brought in that judicial forum, including costs (other than the arbitrator’s fees and expenses and attorneys’ fees);

vii.

the arbitrator’s award may be entered by any court of competent jurisdiction; and

viii.

unless otherwise agreed by the parties, the place of any arbitration proceeding shall be Minneapolis, Minnesota.

Except as the parties shall agree in writing, upon court order, or as required by law, neither CNS nor Employee will disclose to any third party, except for their counsel, retained experts and other persons directly serving counsel or retained experts, any fact or information in any way pertaining to the process of resolving a Dispute under this paragraph 16, or to the fact of or any term that is part of a resolution or settlement of any Dispute. This prohibition on disclosure specifically includes, without limitation, any disclosure of an oral statement or of a written document made or provided by either Employee or CNS, or by any of CNS’s or Employee’s representatives, counsel or retained experts, or other persons directly serving any representatives, counsel or retained experts.

17.	Binding Effect.

CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of CNS (as defined in paragraph 8.a.) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term “CNS” as used in this Agreement shall instead refer to CNS’ successor; provided, however, that the provisions of paragraph 8.b. shall apply and be of no further effect at the end of the 24 month period following a Change in Control, except as provided in paragraph 23. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from CNS in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee’s employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

This Agreement shall inure to the benefit of and be enforceable by Employee’s personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee’s designated beneficiaries, or, if there is no such designated beneficiary, to Employee’s estate.

18.

Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation, including but not limited to, the prior Employment Agreement dated as of October 15, 2003 and the letter agreement dated September 18, 2003.

19.

Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability. For purposes of the release agreement which Employee shall be required to execute as a condition of receiving any payments and benefits hereunder, “CNS”, as referred to in this Agreement, shall include CNS and all its affiliates, shareholders, officers, directors, employees, agents, attorneys, insurers and indemnitors.

20.

Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota.

21.	Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law.

22.	Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to Employee’s residence in the case of Employee, or to its principal office in the case of CNS.

23.

Survival of Rights and Obligations. All of Employee’s rights and CNS’s obligations hereunder, including Employee’s rights to compensation and benefits (including under paragraphs 6, 7 and 8 hereof), and Employee’s obligations under paragraphs 9, 10, 11 and 12 hereof shall survive the termination of Employee’s employment and/or the termination of this Agreement.

24.	Payment of Compensation. Notwithstanding anything in this Agreement or elsewhere to the contrary:

If payment or provision of any amount or other benefit that is “deferred compensation” subject to Section 409A of the Code at the time otherwise specified in this Agreement or elsewhere would subject such amount or benefit to additional tax pursuant to Section 409A(a)(1)(B) of the Code, and if payment or provision thereof at a later date would avoid any such additional tax, then the payment or provision thereof shall be postponed to the earliest date on which such amount or benefit can be paid or provided without incurring any such additional tax. In the event this paragraph 24 requires a deferral of any payment, such payment shall be accumulated and paid in a single lump sum on such earliest date, together with interest for the period of delay, compounded annually, equal to the prime rate (as published in the Wall Street Journal) and in effect as of the date the payment should otherwise have been provided.

If any payment under this Agreement is subject to Code Section 409A, payment of such amounts shall not be made prior to separation from service, disability or death as permitted under Section 409A(a)(2)(A)(i), (ii), (iii), (v) or (vi) of the Code, subject to the six-month delayed payment requirement of Section 409A(a)(2)(B) in the event that the Employee is a specified employee within the meaning of such subsection (using December 31 as the “identification date” for specified employee status), and subject further to the early payout provisions of paragraphs 2 and 5 of this Agreement.

Payment of amounts deferred under the Plan may not be accelerated in a manner inconsistent with Section 409A(a)(3) of the Code, subject to the early payout provision of paragraphs 2 and 5 of this Agreement.

Any deferral elections permitted by this Agreement shall be made in a manner consistent with Section 409A(a)(4) of the Code.

If any payment or benefit permitted or required under this Agreement, or otherwise, is reasonably determined by either party to be subject for any reason to a material risk of additional tax pursuant to Section 409A(a)(1)(B) of the Code, then the parties shall promptly agree in good faith on appropriate provisions to avoid such risk without materially changing the economic value of this Agreement to either party.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

		CNS, INC.
		By:	/s/ Marti Morfitt

		Its:	President and Chief Executive Officer

		EMPLOYEE
		By:	/s/ Samuel E. Reinkensmeyer
			Samuel E. Reinkensmeyer

EXECUTIVE EMPLOYMENT AGREEMENT

EXHIBIT A

Name:

Samuel E. Reinkensmeyer

Position:

Vice President-Finance and Chief Financial Officer

Annual Base Salary:

$220,110

Management Incentive Plan Level:	17.5 % at Threshold
	35 %	at Plan
	70 %	at Maximum

RELEASE AGREEMENT

EXHIBIT B

In consideration of the benefits to be afforded to the undersigned under that certain Executive Employment Agreement dated May 3, 2006 between CNS, Inc., a Delaware corporation (“CNS”) and the undersigned (the “Employment Agreement”), the undersigned agrees to do the following things:

The undersigned hereby releases CNS, 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 the undersigned may have against any and all of them. Through this release, the undersigned extinguishes all causes of action against the Releasees occurring up to the date on which the undersigned signs this release 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 and the Family and Medical Leave Act. This release extinguishes any potential claims of employment discrimination arising from the undersigned’s employment with and termination of employment with or 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: (i) that arise against CNS after the undersigned signs this release agreement; (ii) arising under this release agreement; (iii) to any benefits to which the undersigned is otherwise entitled under any CNS benefit plan as of the date of this release agreement; (iv) related to workers’ compensation; (v) arising under unemployment compensation law; (vi) to the right to indemnification under CNS bylaws or insurance; or (vii) compensation or benefits owing the undersigned in connection with the termination of his employment under the Employment Agreement. The undersigned certifies that he (a) has not filed any claims, complaints or other actions against any Releasee; and (b) is hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by the undersigned or any federal, state or local agency on the undersigned’s behalf based upon any event occurring up to the date on which the undersigned signs this release agreement. The undersigned acknowledges that he has been advised by CNS to review his rights and responsibilities under this release agreement with his own lawyer.

The undersigned has 21 days to review and consider this release agreement. If the undersigned signs this release agreement before 21 days have elapsed from the date on which the undersigned first receives it, then the undersigned will be voluntarily waiving his right to the full 21-day review period. The undersigned also has the right to rescind this release agreement within 15 calendar days of the date upon which the undersigned signs it. The undersigned understands that if the undersigned desires to rescind this release agreement, the undersigned must put the rescission in writing and deliver it to Nicole Strait, 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 the undersigned signs this release agreement. If the undersigned delivers the rescission by mail, it must be postmarked within 15 calendar days of the date on which the undersigned signs this release agreement and sent by certified mail, return receipt requested. If the undersigned rescinds this release agreement, all of CNS’s obligations to the undersigned under the Employment Agreement, other than payment of accrued unused paid time off, will immediately cease and CNS will owe the undersigned nothing under the Employment Agreement.

At CNS’s specific request and at mutually convenient times while the undersigned is receiving payments under the Employment Agreement, the undersigned agrees to consult with CNS without additional compensation with respect to a limited amount of transitional CNS business matters. The undersigned also agrees to cooperate with CNS in any current or future claims or lawsuits involving CNS where the undersigned has knowledge of the underlying facts, and CNS will pay or reimburse the undersigned 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, the undersigned agrees that he 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 release agreement will be construed to prevent the undersigned from testifying truthfully as required by valid legal or administrative process.

3.	The undersigned agrees that he will continue to speak positively and with respect towards CNS as he has in the past.

The undersigned agrees to maintain the confidentiality of the terms of this release agreement and the terms of the Employment Agreement related hereto, to the extent not publicly disclosed by CNS, and agrees not to disclose such terms to anyone other than his family members, tax and legal advisors or as otherwise required by law.

5.	The undersigned affirms and acknowledges his obligations under paragraphs 9, 10, 11 and 12 of the Employment Agreement.

This release 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 the undersigned. CNS specifically denies and disclaims any such liability or wrongful acts.

The undersigned understands that if he violates any obligation that he has to CNS under this release agreement or the Employment Agreement, all payments and benefits to him hereunder will immediately cease. In such event, the undersigned’s release of his claims shall remain fully in effect in consideration of the payments and benefits that the undersigned received prior to any such breach.

The undersigned hereby declares that he has entered into this release agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.

Acknowledged and agreed to, with declarations confirmed, this _____ day of ___________, 200_.


	Samuel E. Reinkensmeyer

EX-10.19 4 cns062185_ex10-19.htm STRAIT EMPLOYMENT AGREEMENT Exhibit 10.19 to CNS, Inc. Form 10-K for the year ended March 31, 2006

EXHIBIT 10.19

EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement is made as of May 3, 2006 (the “Effective Date”) between CNS, Inc. a Delaware corporation (“CNS”) and Nicole Strait (“Employee”).

WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and

WHEREAS, it is in CNS’s best interests to receive certain assurances from Employee regarding CNS’s confidentiality, competition and other proprietary business concerns;

1.	Employment. CNS agrees to continue to employ Employee as its Vice President – Human Resources under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits.

2.	Term. The term of Employee’s employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein.

3.	Duties. In Employee’s position as Vice President – Human Resources, Employee will continue to faithfully and diligently perform such executive management responsibilities as may be assigned to Employee from time to time by the Chief Executive Officer,

President or Chairman of the Board of Directors of CNS (the “Board”); devote Employee’s full time, energy and skill to CNS’s business, as is reasonably necessary to execute fully Employee’s duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with Employee’s duties hereunder; and promote CNS’s best interests. The principal place of employment and the location of Employee’s principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of Employee’s duties during the term of this Agreement. Employee shall notify the Chief Executive Officer of any other paid position which Employee is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the Chief Executive Officer’s prior approval.

7.	Termination of Employment. Employee’s employment with CNS may be terminated in any of the following ways:

CNS may, by written notice to Employee, terminate Employee’s employment without Good Cause (as defined in paragraph 7.b.) prior to a Change in Control (as defined in paragraph 8.a), in which event CNS shall:

pay Employee his Annual Base Salary up to the date of termination

ii.

iii.

iv.

pay to Employee any accrued unused Paid Time Off to which Employee is entitled; and

provide qualified outplacement services to Employee through an entity selected by CNS for a period of up to six months at the sole cost of CNS.

CNS, by written notice to Employee, may terminate Employee’s employment for Good Cause, as defined below, prior to a Change in Control. In the event of

termination under this paragraph 7.b., CNS shall continue to pay Employee’s Annual Base Salary up to the Date of Termination. For purposes of this Agreement, “Good Cause” shall mean one or more of the following:

willful and premeditated failure or refusal of Employee to render services to CNS in accordance with Employee’s obligations under paragraph 3;

ii.

the commission by Employee of a willful breach of fiduciary duty to CNS or an intentional and knowing fraud against CNS or any customer, supplier, client, agent or employee thereof;

iii.

iv.

the breach by Employee of any provision of this Agreement;

the commission of a felony by Employee; or

vi.

8.	Termination Following a Change in Control.

For purposes of this Agreement, “Change in Control” shall mean the occurrence of one of the following events:

ii.

iii.

iv.

otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CNS determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 75% of the fair market value of CNS. For purposes of the preceding sentence, the “fair market value of CNS” shall be the aggregate market value of CNS’s outstanding common stock (on a fully diluted basis) plus the aggregate market value of CNS’s other outstanding equity securities. The aggregate market value of CNS’s common stock shall be determined by multiplying the number of shares of CNS common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement (“Transaction Date”) with respect to the sale or disposition by CNS of all or substantially all of CNS’s assets by the average closing price for CNS’s common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CNS shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CNS’s common stock or by such other method as the Board of Directors of CNS shall determine is appropriate.

Applicability. In the event of a Change in Control, the terms of this paragraph 8.b shall be effective for a period of 24 months following the Change in Control. At the expiration of such 24-month period, this Agreement in its entirety shall be terminated and be of no further effect, except as provided in paragraph 23. Notwithstanding the foregoing provisions of this Section 8.b., Employee shall be entitled to receive the benefits set forth in paragraph 8.f if, within 24 months following such Change in Control, Employee’s employment is terminated by CNS or its successor without Good Cause (as defined in paragraph 7.a above), or by Employee for Good Reason (as defined in subparagraph 8.b.i. below). As a condition to receiving such benefits, Employee shall be required to sign a standard release agreement with CNS in the form of Exhibit B. Payments required under this paragraph 8.b shall begin after all rescission periods provided in the standard release agreement have run or have been waived.

effect immediately prior to the Change in Control; (D) the aggregate monetary value of Employee’s participation in, or payment or benefit under all benefit plans, arrangements and perquisites, is materially reduced from the aggregate monetary value of those plans, arrangements or perquisites that were in effect immediately prior to the Change in Control; or (E) relocation of CNS would require Employee to relocate Employee’s principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area.

ii.

Termination without Good Cause shall be effective upon 30 days’ advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in paragraph 7.b.

Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, “Date of Termination” shall mean:

ii.

plans in which Employee was participating when the notice giving rise to the dispute was given, to the extent permissible under the terms of the applicable group plans and state and federal law, until the dispute is finally resolved in accordance with this subparagraph. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.

ii.

of this Agreement), subject to earlier termination and the rights as provided in Section 13.b;

iii.

iv.

not to speak negatively about or harm CNS, confidentiality with regard to the termination process and cooperation with the transition of responsibilities. Payments under paragraph 8.f. shall begin after all rescission periods provided in the standard release agreement have run or have been waived.

Immediately prior to a Change in Control, Employee shall vest in all stock options which have been granted to Employee and Employee shall be entitled to exercise all rights to receive all benefits accruing to Employee under any and all CNS stock purchase and stock option plans and programs. Approval of this Agreement by the Compensation Committee shall be deemed approval of the vesting of options as provided in the immediately preceding sentence for all purposes under CNS stock purchase and stock option plans and programs. In the event that the vesting of the options, together with all other payments and the value of any benefit received or to be received by Employee would result in all or a portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, then Employee’s payments shall be either (A) the full payment or (B) such lesser amount that would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of such payments and benefits may be taxable under 4999 of the Code. All determinations required to be made under this paragraph 8.j. be made by a nationally recognized accounting firm which is CNS’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax, which firm must be reasonably acceptable to Employee (the “Accounting Firm”) . CNS shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to CNS and Employee. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Employee to a payment under this paragraph 8. All fees and expenses of the Accounting Firm shall be borne solely by CNS. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code).

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’s Board, or (d) Employee is obligated by law to disclose.

10.	Disclosure and Transfer of Product Developments, etc.

This will confirm that Employee’s obligations to CNS under paragraphs 9, 10, 11 and 12 will continue after the termination of Employee’s employment.

11.

period Employee shall not: avail himself of any advantages or acquaintances Employee has made with any person who has, within the twelve (12) month period ended on the Employee’s Date of Termination, 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. 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 and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (l) year prior to the Employee’s Date of Termination.

12.

Non-Solicitation. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are 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 customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one (1) year immediately preceding Employee’s Date of Termination. Prospective CNS customers, brokers, vendors and distributors include 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 (6) months following Employee’s Date of Termination. Employee also agrees that during Employee’s employment and in the one (1) year period following Employee’s employment, Employee will not directly or indirectly solicit any CNS employees to terminate her or her employment with CNS. This Employee non-solicitation obligation applies to employees of CNS during Employee’s employment and as of Employee’s Date of Termination.

13.

Remedies.

jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any Severance Payment or Salary Continuation, benefits or bonus which Employee may be entitled to receive or is receiving under paragraphs 6, 7 or 8 hereunder or otherwise, in the event of Employee’s violation of any of Employee’s obligations under this Agreement. In the event of cessation of payments and benefits, Employee’s release of Employee’s claims against CNS shall remain valid and fully enforceable in consideration of the benefits that Employee received prior to said breach.

14.

15.

regulatory matter after Employee’s employment termination, CNS will pay or reimburse Employee for any out-of-pocket costs and for any time Employee spends on such matter as requested by CNS, at a daily rate based on Employee’s Annual Base Salary at the time of termination.

16.	Dispute Resolution Procedure.

CNS and Employee desire to establish a reasonable and confidential means of resolving any dispute, question or interpretation arising out of or relating to:

this Agreement or the alleged breach or threatened breach of it;

ii.

the making of this Agreement, including claims of fraud in the inducement;

iii.

Employee’s employment by CNS pursuant to this Agreement, including claims of wrongful termination or discrimination; or

iv.

any activities by Employee following the cessation of employment with CNS (each such dispute to be referred to herein as a “Dispute”).

ii.

CNS shall pay the fees and expenses of the arbitrator;

iii.

the parties shall be permitted reasonable discovery in accordance with the provisions of the Minnesota Rules of Civil Procedure, including the

production of relevant documents by the other party, the exchange of witness lists, and a limited number of depositions, including depositions of any expert who will testify at the arbitration;

iv.

the summary judgment procedure applicable under Rule 56 of the Minnesota Rules of Civil Procedure shall be available and apply to any arbitration conducted pursuant to this Agreement;

the arbitrator’s award shall include findings of fact and conclusions of law showing the legal and factual bases for the arbitrator’s decision;

vi.

vii.

the arbitrator’s award may be entered by any court of competent jurisdiction; and

viii.

unless otherwise agreed by the parties, the place of any arbitration proceeding shall be Minneapolis, Minnesota.

17.	Binding Effect.

CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of CNS (as defined in paragraph 8.a.) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term “CNS” as used in this Agreement shall instead refer to CNS’ successor; provided, however, that the provisions of paragraph 8.b. shall apply and this Agreement in its entirety shall terminate and be of no further effect at the end of the 24 month period following a Change in Control, except as provided in paragraph 23. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and

shall entitle Employee to compensation from CNS in the same amount and on the same terms as Employee would be entitled hereunder if Employee terminated Employee’s employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

18.

Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation, including but not limited to, the prior Employment Agreement dated as of March 7, 2005 and the letter agreement dated January 31, 2005.

19.

20.

21.	Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law.

22.	Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to Employee’s residence in the case of Employee, or to its principal office in the case of CNS.

23.

24.	Payment of Compensation. Notwithstanding anything in this Agreement or elsewhere to the contrary:

Any deferral elections permitted by this Agreement shall be made in a manner consistent with Section 409A(a)(4) of the Code.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

		CNS, INC.
		By:	/s/ Marti Morfitt

		Its:	President and Chief Executive Officer

		EMPLOYEE
		By:	/s/ Nicole Strait
			Nicole Strait

EXECUTIVE EMPLOYMENT AGREEMENT

EXHIBIT A

Name:

Nicole Strait

Position:

Vice President – Human Resources

Annual Base Salary:

$140,000

Management Incentive Plan Level:	15% at Threshold
	30% at Plan
	60% at Maximum

RELEASE AGREEMENT

EXHIBIT B

The undersigned hereby releases CNS, 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 the undersigned may have against any and all of them. Through this release, the undersigned extinguishes all causes of action against the Releasees occurring up to the date on which the undersigned signs this release 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 and the Family and Medical Leave Act. This release extinguishes any potential claims of employment discrimination arising from the undersigned’s employment with and termination of employment with or 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: (i) that arise against CNS after the undersigned signs this release agreement; (ii) arising under this release agreement; (iii) to any benefits to which the undersigned is otherwise entitled under any CNS benefit plan as of the date of this release agreement; (iv) related to workers’ compensation; (v) arising under unemployment compensation law; (vi) to the right to indemnification under CNS bylaws or insurance; or (vii) compensation or benefits owing the undersigned in connection with the termination of her employment under the Employment Agreement. The undersigned certifies that she (a) has not filed any claims, complaints or other actions against any Releasee; and (b) is hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by the undersigned or any federal, state or local agency on the undersigned’s behalf based upon any event occurring up to the date on which the undersigned signs this release agreement. The undersigned acknowledges that she has been advised by CNS to review her rights and responsibilities under this release agreement with her own lawyer.

release agreement, the undersigned must put the rescission in writing and deliver it to Nicole Strait, 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 the undersigned signs this release agreement. If the undersigned delivers the rescission by mail, it must be postmarked within 15 calendar days of the date on which the undersigned signs this release agreement and sent by certified mail, return receipt requested. If the undersigned rescinds this release agreement, all of CNS’s obligations to the undersigned under the Employment Agreement, other than payment of accrued unused paid time off, will immediately cease and CNS will owe the undersigned nothing under the Employment Agreement.

At CNS’s specific request and at mutually convenient times while the undersigned is receiving payments under the Employment Agreement, the undersigned agrees to consult with CNS without additional compensation with respect to a limited amount of transitional CNS business matters. The undersigned also agrees to cooperate with CNS in any current or future claims or lawsuits involving CNS where the undersigned has knowledge of the underlying facts, and CNS will pay or reimburse the undersigned 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, the undersigned agrees that she 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 release agreement will be construed to prevent the undersigned from testifying truthfully as required by valid legal or administrative process.

3.	The undersigned agrees that she will continue to speak positively and with respect towards CNS as she has in the past.

The undersigned agrees to maintain the confidentiality of the terms of this release agreement and the terms of the Employment Agreement related hereto, to the extent not publicly disclosed by CNS, and agrees not to disclose such terms to anyone other than her family members, tax and legal advisors or as otherwise required by law.

5.	The undersigned affirms and acknowledges her obligations under paragraphs 9, 10, 11 and 12 of the Employment Agreement.

The undersigned understands that if she violates any obligation that she has to CNS under this release agreement or the Employment Agreement, all payments and benefits to her hereunder will immediately cease. In such event, the undersigned’s release of her claims shall remain fully in effect in consideration of the payments and benefits that the undersigned received prior to any such breach.

The undersigned hereby declares that she has entered into this release agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.

Acknowledged and agreed to, with declarations confirmed, this _____ day of ___________, 200_.

	___________________________________
		Nicole Strait

EX-10.20 5 cns062185_ex10-20.htm HORVATH EMPLOYMENT AGREEMENT Exhibit 10.20 to CNS, Inc. Form 10-K for the year ended March 31, 2006

EXHIBIT 10.20

EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement is made as of May 3, 2006 (the “Effective Date”) between CNS, Inc. a Delaware corporation (“CNS”) and Susan Horvath (“Employee”).

WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and

WHEREAS, it is in CNS’s best interests to receive certain assurances from Employee regarding CNS’s confidentiality, competition and other proprietary business concerns;

1.	Employment. CNS agrees to continue to employ Employee as its Vice President and Team Leader, International under the terms, conditions and benefits set forth herein and Employee accepts continued employment with CNS on said terms, conditions and benefits.

2.	Term. The term of Employee’s employment shall continue until terminated pursuant to paragraph 6, 7, or 8 herein.

3.	Duties. In Employee’s position as Vice President and Team Leader, International, Employee will continue to faithfully and diligently perform such executive management

responsibilities as may be assigned to Employee from time to time by the Chief Executive Officer, President or Chairman of the Board of Directors of CNS (the “Board”); devote Employee’s full time, energy and skill to CNS’s business, as is reasonably necessary to execute fully Employee’s duties hereunder, except for vacations, absences made necessary because of illness, and service on other corporate, civic, or charitable boards or committees not significantly interfering with Employee’s duties hereunder; and promote CNS’s best interests. The principal place of employment and the location of Employee’s principal office and normal place of work shall be in the Minneapolis, Minnesota metropolitan area. Employee will be expected to travel to other locations, as necessary, in the performance of Employee’s duties during the term of this Agreement. Employee shall notify the Chief Executive Officer of any other paid position which Employee is considering accepting, including but not limited to a board of directors position, a position as an employee or an independent consultant, or any position, whether or not for pay, which could constitute a conflict of interest with CNS. The Employee agrees not to accept any such position without the Chief Executive Officer’s prior approval.

7.	Termination of Employment. Employee’s employment with CNS may be terminated in any of the following ways:

pay Employee her Annual Base Salary up to the date of termination

ii.

iii.

iv.

pay to Employee any accrued unused Paid Time Off to which Employee is entitled; and

provide qualified outplacement services to Employee through an entity selected by CNS for a period of up to six months at the sole cost of CNS.

CNS, by written notice to Employee, may terminate Employee’s employment for Good Cause, as defined below, prior to a Change in Control. In the event of termination under this paragraph 7.b., CNS shall continue to pay Employee’s Annual Base Salary up to the Date of Termination. For purposes of this Agreement, “Good Cause” shall mean one or more of the following:

willful and premeditated failure or refusal of Employee to render services to CNS in accordance with Employee’s obligations under paragraph 3;

ii.

the commission by Employee of a willful breach of fiduciary duty to CNS or an intentional and knowing fraud against CNS or any customer, supplier, client, agent or employee thereof;

iii.

iv.

the breach by Employee of any provision of this Agreement;

the commission of a felony by Employee; or

vi.

8.	Termination Following a Change in Control.

For purposes of this Agreement, “Change in Control” shall mean the occurrence of one of the following events:

ii.

iii.

iv.

the amount in effect immediately prior to the Change in Control; (D) the aggregate monetary value of Employee’s participation in, or payment or benefit under all benefit plans, arrangements and perquisites, is materially reduced from the aggregate monetary value of those plans, arrangements or perquisites that were in effect immediately prior to the Change in Control; or (E) relocation of CNS would require Employee to relocate Employee’s principal residence outside reasonable commuting distance of the Twin Cities Metropolitan area.

ii.

Termination without Good Cause shall be effective upon 30 days’ advance notice by CNS to the Employee. For purposes of this paragraph 8, Good Cause shall be defined as in paragraph 7.b.

Date of Termination. For purposes of this paragraph 8 and also paragraphs 6 and 7 of this Agreement, “Date of Termination” shall mean:

ii.

of this Agreement), subject to earlier termination and the rights as provided in Section 13.b;

iii.

iv.

Immediately prior to a Change in Control, Employee shall vest in all stock options which have been granted to Employee and Employee shall be entitled to exercise all rights to receive all benefits accruing to Employee under any and all CNS stock purchase and stock option plans and programs. Approval of this Agreement by the Compensation Committee shall be deemed approval of the vesting of options as provided in the immediately preceding sentence for all purposes under CNS stock purchase and stock option plans and programs. In the event that the vesting of the options, together with all other payments and the value of any benefit received or to be received by Employee would result in all or a portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, then Employee’s payments shall be either (A) the full payment or (B) such lesser amount that would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by Employee, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of such payments and benefits may be taxable under 4999 of the Code. All determinations required to be made under this paragraph 8.j. be made by a nationally recognized accounting firm which is CNS’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax, which firm must be reasonably acceptable to Employee (the “Accounting Firm”) . CNS shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to CNS and Employee. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Employee to a payment under this paragraph 8. All fees and expenses of the Accounting Firm shall be borne solely by CNS. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code).

10.	Disclosure and Transfer of Product Developments, etc.

This will confirm that Employee’s obligations to CNS under paragraphs 9, 10, 11 and 12 will continue after the termination of Employee’s employment.

11.

12.

Non-Solicitation. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are 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 customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one (1) year immediately preceding Employee’s Date of Termination. Prospective CNS customers, brokers, vendors and distributors include 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 (6) months following Employee’s Date of Termination. Employee also agrees that during Employee’s employment and in the one (1) year period following Employee’s employment, Employee will not directly or indirectly solicit any CNS employees to terminate her or her employment with CNS. This Employee non-solicitation obligation applies to employees of CNS during Employee’s employment and as of Employee’s Date of Termination.

13.

Remedies.

14.

15.

16.	Dispute Resolution Procedure.

CNS and Employee desire to establish a reasonable and confidential means of resolving any dispute, question or interpretation arising out of or relating to:

this Agreement or the alleged breach or threatened breach of it;

ii.

the making of this Agreement, including claims of fraud in the inducement;

iii.

Employee’s employment by CNS pursuant to this Agreement, including claims of wrongful termination or discrimination; or

iv.

any activities by Employee following the cessation of employment with CNS (each such dispute to be referred to herein as a “Dispute”).

ii.

CNS shall pay the fees and expenses of the arbitrator;

iii.

the parties shall be permitted reasonable discovery in accordance with the provisions of the Minnesota Rules of Civil Procedure, including the

production of relevant documents by the other party, the exchange of witness lists, and a limited number of depositions, including depositions of any expert who will testify at the arbitration;

iv.

the summary judgment procedure applicable under Rule 56 of the Minnesota Rules of Civil Procedure shall be available and apply to any arbitration conducted pursuant to this Agreement;

the arbitrator’s award shall include findings of fact and conclusions of law showing the legal and factual bases for the arbitrator’s decision;

vi.

vii.

the arbitrator’s award may be entered by any court of competent jurisdiction; and

viii.

unless otherwise agreed by the parties, the place of any arbitration proceeding shall be Minneapolis, Minnesota.

17.	Binding Effect.

CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of CNS (as defined in paragraph 8.a.) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term “CNS” as used in this Agreement shall instead refer to CNS’ successor; provided, however, that the provisions of paragraph 8.b. shall apply and this Agreement in its entirety shall terminate and be of no further effect at the end of the 24 month period following a Change in Control, except as provided in paragraph 23. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and

18.

Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations, or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation, including but not limited to, the prior Employment Agreement dated as of September 1, 1999, and the memorandum agreement dated June 1, 2005.

19.

20.

21.	Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law.

22.	Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to Employee’s residence in the case of Employee, or to its principal office in the case of CNS.

23.

24.	Payment of Compensation. Notwithstanding anything in this Agreement or elsewhere to the contrary:

Any deferral elections permitted by this Agreement shall be made in a manner consistent with Section 409A(a)(4) of the Code.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

		CNS, INC.
		By:	/s/ Marti Morfitt

		Its:	President and Chief Executive Officer

		EMPLOYEE
		By:	/s/ Susan Horvath
			Susan Horvath

EXECUTIVE EMPLOYMENT AGREEMENT

EXHIBIT A

Name:

Susan Horvath

Position:

Vice President and Team Leader, International

Annual Base Salary:

$160,500

Management Incentive Plan Level:	17.5% at Threshold
	35% at Plan
	70% at Maximum

RELEASE AGREEMENT

EXHIBIT B

The undersigned hereby releases CNS, 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 the undersigned may have against any and all of them. Through this release, the undersigned extinguishes all causes of action against the Releasees occurring up to the date on which the undersigned signs this release 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 and the Family and Medical Leave Act. This release extinguishes any potential claims of employment discrimination arising from the undersigned’s employment with and termination of employment with or 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: (i) that arise against CNS after the undersigned signs this release agreement; (ii) arising under this release agreement; (iii) to any benefits to which the undersigned is otherwise entitled under any CNS benefit plan as of the date of this release agreement; (iv) related to workers’ compensation; (v) arising under unemployment compensation law; (vi) to the right to indemnification under CNS bylaws or insurance; or (vii) compensation or benefits owing the undersigned in connection with the termination of her employment under the Employment Agreement. The undersigned certifies that she (a) has not filed any claims, complaints or other actions against any Releasee; and (b) is hereby waiving any right to recover from any Releasee under any lawsuit or charge filed by the undersigned or any federal, state or local agency on the undersigned’s behalf based upon any event occurring up to the date on which the undersigned signs this release agreement. The undersigned acknowledges that she has been advised by CNS to review her rights and responsibilities under this release agreement with her own lawyer.

At CNS’s specific request and at mutually convenient times while the undersigned is receiving payments under the Employment Agreement, the undersigned agrees to consult with CNS without additional compensation with respect to a limited amount of transitional CNS business matters. The undersigned also agrees to cooperate with CNS in any current or future claims or lawsuits involving CNS where the undersigned has knowledge of the underlying facts, and CNS will pay or reimburse the undersigned 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, the undersigned agrees that she 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 release agreement will be construed to prevent the undersigned from testifying truthfully as required by valid legal or administrative process.

3.	The undersigned agrees that she will continue to speak positively and with respect towards CNS as she has in the past.

The undersigned agrees to maintain the confidentiality of the terms of this release agreement and the terms of the Employment Agreement related hereto, to the extent not publicly disclosed by CNS, and agrees not to disclose such terms to anyone other than her family members, tax and legal advisors or as otherwise required by law.

5.	The undersigned affirms and acknowledges her obligations under paragraphs 9, 10, 11 and 12 of the Employment Agreement.

The undersigned hereby declares that she has entered into this release agreement voluntarily, without coercion, duress, or reliance on any representations by any CNS employee, agent or lawyer.

Acknowledged and agreed to, with declarations confirmed, this _____ day of ___________, 200_.

	___________________________________
		Susan Horvath

EX-10.21 6 cns062185_ex10-21.htm COHEN AMENDED EMPLOYMENT AGREEMENT Exhibit 10.21 to CNS, Inc. Form 10-K for the year ended March 31, 2006

EXHIBIT 10.21

AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

This Amended and Restated Executive Employment Agreement (the “Agreement”) is made as of May 3, 2006 (the “Effective Date”) between CNS, Inc., a Delaware corporation (“CNS”), and Dan Cohen (“Employee”) and amends and restates the Executive Employment Agreement dated February 12, 1999, as amended June 29, 2001, June 29, 2003, June 30, 2004 and June 7, 2005 between CNS and Employee.

WHEREAS, CNS considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CNS and its shareholders; and

WHEREAS, Employee has made and is expected to continue to make, due to his experience and knowledge, a significant contribution to the profitability, growth and financial strength of CNS; and

WHEREAS, it is in the best interests of CNS to receive certain assurances from Employee regarding CNS’s confidentiality, competition and other proprietary business concerns;

THEREFORE, in consideration of the foregoing and of this Agreement, continued employment and other benefits hereunder, as well as other mutual covenants and obligations hereinafter set forth, CNS and Employee agree as follows:

1. Employment. Employee’s sole duties and responsibilities will be that of Chairman of the Board of Directors of CNS, Inc., a part-time, regular position with the Company. As such, Employee will perform the duties of Board Chairman and director, which shall include chairing Board meetings and interacting with the Chief Executive Officer as appropriate. Employee agrees to make himself available to assist the CEO and CFO, as requested, in reviewing new products and negotiating licensing contracts with inventors. Employee will also provide other expertise and assistance, as requested by the CEO or other members of the Management Team. The Company will provide Employee home office support and will make an office available to Employee at CNS.

2. Term. The Company agrees to retain Employee as an employee of the Company under the terms of this Agreement until June 30, 2007, at which time, unless the Agreement is extended by mutual agreement of the parties, the Agreement shall terminate, except with respect to the provisions of Sections 6, 7, 8, 9, 10 and 11 of the Agreement, which shall survive. Effective June 30, 2007, Employee will cease to be an employee of the Company, and Employee’s salary, perquisites and any other welfare and fringe benefits provided to him as an employee shall thereupon cease. Employee shall not be entitled to any salary continuation, severance or similar payment from the Company under the Agreement or any policy or practice of the Company because of such termination on June 30, 2007.

3. Compensation. As full compensation during the term of employment for services as Chairman, the Company will pay Employee a base salary at a rate of One Hundred Thousand Dollars ($100,000) per annum, payable in semi-monthly installments, subject to tax withholding to the extent required by law. Employee will not accrue paid time off during the term of employment, but shall be entitled to take time off as required without any change in base salary.

4. Benefits. Employee shall be entitled to such insurance, 401(k) program and other benefits available to all part-time salaried employees of CNS, subject to any limitations on such benefits to officers, directors or highly paid employees in order that such benefit programs qualify under federal or state law for favored tax or other treatment. Such benefit programs may be changed from time to time by the Company. Employee shall also be entitled to reimbursement of his reasonable and necessary expenses incurred in connection with the performance of his duties hereunder. The Company shall also pay or reimburse Employee for the reasonable and necessary costs associated with a home office maintained by the Employee, provided that the Employee provides reasonable proof of such expenses in accordance with general Company policies.

5. Termination by Employee. Employee may resign his employment with CNS effective upon 30 days’ advance written notice to the Chief Executive Officer. If Employee resigns under this paragraph, the Chief Executive Officer retains the right to terminate his employment, effective upon written notice to Employee, at any time during the 30-day notice period; provided, however, that base salary and the employer portion of his health insurance premiums will continue to be paid by CNS for the duration of the 30-day notice period.

6. Confidential Information. All knowledge and information not already available to the public which Employee may acquire or has 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 Employee as strictly confidential and shall not be used by Employee directly or indirectly or disclosed to any persons, corporations or firms. All of the foregoing knowledge and information are collectively termed “Confidential Information” herein. Employee’s obligations under this paragraph will not apply to any information which (a) is or becomes known to the general public under circumstances involving no breach by Employee 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’s Board; or (d) Employee is obligated by law to disclose.

7. Disclosure and Transfer of Product Developments, etc.

Employee will make full and prompt disclosure to CNS of all product developments, improvements, modifications, discoveries, computer software, programs, codes and documentation, research, designs, formulas, configurations,

instructions, methods and inventions (all of which are collectively termed “Developments” herein), whether patentable or not, made, discovered, conceived or first reduced to practice by Employee or under his direction during his employment, alone or with others, whether or not made or conceived during normal working hours or on the premises of CNS which relate in any material way to the business or to research or development work of CNS. Employee confirms by his acceptance of this Agreement that CNS owns and shall own all of the Developments.

Employee also agrees on behalf of himself and his heirs and legal representatives that he will promptly communicate, disclose and transfer to CNS, free of encumbrances and restrictions, all of his right, title and interest in the Developments covered by subparagraph 7.a. and any patents or patent applications covering such Developments and to execute and deliver such assignments, patents and applications, and any other documents as CNS may direct, and to cooperate fully with CNS to enable it to secure any patents or otherwise protect such Developments in any and all countries. Employee shall assign to CNS any and all copyrights and reproduction rights to all material prepared by Employee in connection with his employment.

Notwithstanding subparagraphs 7.a. and b., however, this paragraph 7 shall not apply to Developments for which no equipment, supplies, facility or trade secret information of CNS was used and which was developed entirely on the Employee’s own time, and (1) which do not relate (a) directly to the business of CNS, or (b) to CNS’s actual or demonstrably anticipated research or development; or (2) which does not result from any work performed by Employee for CNS.

This will confirm that Employee’s obligations to CNS under paragraphs 6, 7 and 8 will continue after the termination of Employee’s employment.

8. Non-Competition. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee 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 Employee’s 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 Employee shall not: avail himself of any advantages or acquaintances he has made with any person who has, within the twelve (12) month period ended on the date of termination of his 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 Employee’s 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 and any other products currently offered or currently under development by CNS or offered or currently under development by CNS during one (1) year prior to the date of termination of Employee’s employment.

Inasmuch as the activities of CNS are conducted on an international basis, the restrictions of this paragraph 8 shall apply throughout the United States, Canada, Japan, Europe and Mexico.

9. Non-Solicitation. During the term of Employee’s employment by CNS and for twelve (12) months thereafter, Employee shall not directly or indirectly solicit any current or prospective CNS customer, broker, vendor or distributor for the purpose of providing products or services for or on behalf of said customer, broker, vendor or distributor which are 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 customer, brokers, vendors or distributors with whom CNS has had a business relationship at any time within one year immediately preceding Employee’s termination date. Prospective CNS customers, brokers, vendors and distributors include 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 Employee’s termination date. Employee also agrees that during his employment in the one-year period following his employment, he will not directly or indirectly solicit any CNS employees to terminate his or her employment with CNS. This Employee non-solicitation obligation applies to Employees of CNS during Employee’s employment and as of his termination date.

10. Remedies. Employee acknowledges that the restrictions set forth in paragraphs 6, 7, 8 and 9 hereof are reasonably necessary to protect legitimate business interests of CNS. It is understood that if Employee violates his obligations under any of these paragraphs, CNS would suffer irreparable harm for which a recovery of money damages would be an incomplete and inadequate remedy. It is therefore agreed that CNS, in addition to any remedies at law, shall be entitled, as a matter of right, in any court of competent jurisdiction, to a mandatory injunction restraining Employee pending litigation, as well as upon final determination thereof, from violating this Agreement. In addition, CNS will discontinue payment to Employee of any salary, benefits or bonus which he may be entitled to receive or is receiving under paragraph 5 hereunder, or otherwise in the event of his violation of any of his obligations under this Agreement.

11. Severability. The parties intend that the covenants and agreements contained herein shall be deemed to be a series of separate covenants and agreements, one for each and every state of the United States and political subdivision outside the United States where the business described is conducted. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in such action, then such unenforceable covenants

shall be deemed eliminated from the provisions of this Agreement for the purpose of such proceeding to the extent necessary to permit the remaining covenants to be enforced in such proceeding. Further, in the event that any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended.

12. Binding Effect.

CNS will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of CNS to expressly assume and agree to perform this Agreement in the same manner and to the same extent that CNS would be required to perform it if no such succession had taken place, in which case, the term “CNS” as used in this Agreement shall instead refer to CNS’ successor. Failure of CNS to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement.

13. Entire Agreement. From and after the date of this Agreement the terms and provisions of this Agreement constitute the entire agreement between the parties and this Agreement supersedes any previous oral or written communications, representations or agreements with respect to any subject, including the subject matter of compensation, bonus, participation and profit sharing and termination compensation.

14. Waiver and Interpretation. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party. No waiver shall be valid unless in writing and signed by the party providing such waiver. If any provision of this Agreement is held by any court to be unenforceable, then such provision shall be deemed to be eliminated from the Agreement to permit enforceability of the remaining provisions. If any provision is held to be overbroad, such provision shall be amended to narrow its application to the extent necessary for enforceability.

15. Applicable Law. All questions pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Minnesota. The parties consent to the personal jurisdiction of the State of Minnesota, waive any argument that such a forum is not convenient, and agree that any litigation relating to this Agreement shall be venued in Minneapolis, Minnesota.

16. Tax Withholding. CNS may withhold from any payment of benefits under this Agreement (and forward to the appropriate taxing authority) any taxes required to be withheld under applicable law.

17. Notice. Any notice required or desired to be given under this Agreement shall be deemed given if in writing sent by certified mail to his residence in the case of Employee, or to its principal office in the case of CNS.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above.

		CNS, INC.
		By:	/s/ Marti Morfitt

		Its:	President and Chief Executive Officer

		EMPLOYEE
		By:	/s/ Dan Cohen
			Dan Cohen

EX-23.1 7 cns062185_ex23-1.htm CONSENT OF INDEPENDENT REG. PUBLIC ACCT. FIRM Exhibit 23.1 to CNS, Inc. Form 10-K for the year ended March 31, 2006

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 (File Nos. 333-129457, 333-109110, 333-68310, 333-42108, 333-60017, 33-59719, 33-42971, 33-29454, 33-19043, 33-15044 and 33-14052) on Form S-8 of CNS, Inc. of our reports dated May 24, 2006, with respect to: (a) the consolidated balance sheets of CNS, Inc and subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended March 31, 2006, and the financial statement schedule; and (b) management’s assessment of the effectiveness of internal control over financial reporting as of March 31, 2006 and the effectiveness of internal control over financial reporting as of March 31, 2006; which reports appears in the March 31, 2006, annual report on Form 10-K of CNS, Inc.

/s/ KPMG LLP

Minneapolis, Minnesota

May 31, 2006

EX-31.1 8 cns062185_ex31-1.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31.1 to CNS, Inc. Form 10-K for the year ended March 31, 2006

Exhibit 31.1

CERTIFICATIONS

I, Marti Morfitt, certify that:

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

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;

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;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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

(d) 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

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 May 31, 2006	/s/ Marti Morfitt

	Chief Executive Officer

EX-31.2 9 cns062185_ex31-2.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302 Exhibit 31.2 to CNS, Inc. Form 10-K for the year ended March 31, 2006

Exhibit 31.2

CERTIFICATIONS

I, Samuel Reinkensmeyer, certify that:

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

(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 May 31, 2006	/s/ Samuel Reinkensmeyer

	Vice President of Finance and Chief Financial Officer

EX-32.1 10 cns062185_ex32-1.htm CERTIFICATION OF CEO/CFO PURSUANT TO SECTION 906 Exhibit 32.1 to CNS, Inc. Form 10-K for the year ended March 31, 2006

Exhibit 32.1

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, 2006 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: May 31, 2006
			/s/ Marti Morfitt

			Marti Morfitt, President & Chief Executive Officer

Date: May 31, 2006
			/s/ Samuel E. Reinkensmeyer

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

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