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-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7SPSVqoJ0Ia5Vw/yGt+oOudnFhvYAMrp1f+vOQnvrcIB2X8TJvwKkpfUoTZsV1ydp84LsOsAcTKUIjY+F4s1iu3w==910<SEC-DOCUMENT>0000897101-00-000300.txt : 2000041111<SEC-HEADER>0000897101-00-000300.hdr.sgml : 2000041112ACCESSION NUMBER: 0000897101-00-00030013CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 915CONFORMED PERIOD OF REPORT: 1999123116FILED AS OF DATE: 200003291718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: CNS INC /DE/22CENTRAL INDEX KEY: 000081425823STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]24IRS NUMBER: 41158027025STATE OF INCORPORATION: DE26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT:31SEC FILE NUMBER: 000-1661232FILM NUMBER: 5838753334BUSINESS ADDRESS:35STREET 1: PO BOX 3980236CITY: MINNEAPOLIS37STATE: MN38ZIP: 5543939BUSINESS PHONE: 61282066964041MAIL ADDRESS:42STREET 1: PO BOX 3980243STREET 2: PO BOX 3980244CITY: MINNEAPOLIS45STATE: MN46ZIP: 5543947</SEC-HEADER>48<DOCUMENT>49<TYPE>10-K50<SEQUENCE>151<TEXT>525354<HTML>55<head>56<TITLE>Prepared by American Financial Printing, Inc. www.afpi.com</TITLE>57</head>58<body>59<center>60<b><FONT Size="2">UNITED STATES<BR>61SECURITIES AND EXCHANGE COMMISSION<BR>62Washington, D.C. 20549</b></FONT>63<p><font size="4"><b>FORM 10-K</b></font></p>64</center>65<p><font size="1">(MARK ONE)</font></p>66<center>67<table border="0" cellpadding="0" cellspacing="10" width="60%">68<tr>69<td width="10%" valign="top"><P ALIGN="RIGHT">70<b><FONT Size="2">[X]</FONT></b></P>71</td>72<td width="90%" valign="top"><P ALIGN="LEFT">73<b><FONT Size="2">ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES74EXCHANGE ACT OF 1934</b></P></FONT>75</td>76</tr>77</TABLE></CENTER>78<p><CENTER><FONT Size="2">For the fiscal year ended December 31, 1999</FONT></CENTER></p>79<p><CENTER><B><FONT Size="2">OR</FONT></B></CENTER></p>80<CENTER><table border="0" cellpadding="0" cellspacing="10" width="60%">81<tr>82<td width="10%" valign="top"><P ALIGN="RIGHT"><B><FONT Size="2">[ ]</FONT></B></P></td>83<td width="90%" valign="top"><P ALIGN="LEFT"><FONT Size="2"><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE84SECURITIES EXCHANGE ACT OF 1934</B></FONT></P></td>85</tr>86</TABLE></CENTER>8788<P><CENTER><FONT Size="2">For the Transition period from _________ to __________</FONT></CENTER></P>8990<P><CENTER><B><FONT Size="2">COMMISSION FILE NUMBER: 0-16612</FONT></B></CENTER></P>9192<P><CENTER><FONT Size="6"><B>CNS, INC.</B></FONT><BR>93<FONT Size="1">(Exact name of registrant as specified in its charter)</FONT></P>94</CENTER>9596<CENTER><TABLE border="0" cellpadding="0" cellspacing="0" width="90%">97<TR>98<TD width="40%"><CENTER><U><B><FONT Size="2">Delaware</FONT></B></U><BR><FONT Size="1">(State or other jurisdiction<BR>of incorporation or organization)</FONT></CENTER></TD>99<TD width="20%"> </TD>100<TD width="40%"><CENTER><U><B><FONT Size="2">41-1580270</FONT></B></U><BR><FONT Size="1">(I.R.S. Employer<BR>Identification No.)</FONT></CENTER></TD>101</TR>102</TABLE>103</CENTER>104105<CENTER><B><FONT Size="2">P.O. Box 39802<BR>106Minneapolis, MN 55439</B></FONT><BR>107<FONT Size="1">(Address of principal executive offices and zip code)</FONT></CENTER>108109<P><FONT Size="2">Registrant's telephone number, including area code: (612) 820-6696</FONT></P>110111<P><FONT Size="2">Securities registered pursuant to section 12(b) of the Act: None</FONT></P>112113<P><FONT Size="2">Securities registered pursuant to section 12(g) of the Act:</FONT></P>114115116<TABLE border="0" cellpadding="0" cellspacing="0" width="50%">117<TR>118<TD width="30%"> </TD>119<TD width="70%"><U><FONT Size="2">Title of each class</U><BR>120Common Stock, par value of $.01 per share<BR>121Preferred Stock purchase rights</TD></FONT>122</TR>123</TABLE>124125<P ALIGN="justify"><FONT Size="2">Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the126Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required127to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES <U> X </U> No<U> </U></FONT></P>128129<P ALIGN="justify"><FONT Size="2">Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein,130and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated131by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]</FONT></P>132133<P ALIGN="justify"><FONT Size="2">As of March 15, 2000, assuming as market value the price of $5.125 per share, the closing sale price of the Company's134Common Stock on the Nasdaq National Market, the aggregate market value of shares held by non-affiliates was135approximately $55,000,000.</P></FONT>136137<P ALIGN="justify"><FONT Size="2">As of March 15, 2000, the Company had outstanding 14,436,561 shares of Common Stock of $.01 par value per share.</FONT></P>138139<P ALIGN="justify"><FONT Size="2">Documents Incorporated by Reference: Portions of the Company's Proxy Statement for its Annual Meeting of Stockholders140to be held on May 3, 2000, are incorporated by reference into Part III of this Form 10-K.</P></FONT>141142<HR SIZE=5 COLOR=GRAY NOSHADE>143144<CENTER><U><B><FONT Size="2">TABLE OF CONTENTS</FONT></B></U></CENTER>145146<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">147<TR>148<TD COLSPAN="2" VALIGN="TOP"> </TD>149<TD WIDTH="5%" VALIGN="TOP"><FONT Size="2"><U><B>Page</B></U></FONT></TD>150</TR>151<TR>152<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTI">PART I</A></B></U></FONT></TD>153</TR>154<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>155<TR>156<TD WIDTH="10%" VALIGN="TOP"><FONT Size="2"><A HREF="#Item1">Item 1.</A></FONT></TD>157<TD WIDTH="85%" VALIGN="TOP"><FONT Size="2"><A HREF="#Item1">Business</A></FONT></TD>158<TD VALIGN="TOP"><FONT SIZE="2"> 3</FONT></TD>159</TR>160<TR>161<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item2">Item 2.</A></FONT></TD>162<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item2">Properties</A></FONT></TD>163<TD VALIGN="TOP"><FONT SIZE="2">16</FONT></TD>164</TR>165<TR>166<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item3">Item 3.</A></FONT></TD>167<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item3">Legal Proceedings</A></FONT></TD>168<TD VALIGN="TOP"><FONT SIZE="2">17</FONT></TD>169</TR>170<TR>171<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item4">Item 4.</A></FONT></TD>172<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item4">Submission of Matters to a Vote of Security Holders</A></FONT></TD>173<TD VALIGN="TOP"><FONT SIZE="2">17</FONT></TD>174</TR>175<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>176<TR>177<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTII">PART II</A></B></U></FONT></TD>178</TR>179<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>180<TR>181<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item5">Item 5.</A></FONT></TD>182<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item5">Market for Registrant's Common Equity and Related Stockholder Matters</A></FONT></TD>183<TD VALIGN="TOP"><FONT SIZE="2">18</FONT></TD>184</TR>185<TR>186<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item6">Item 6.</A></FONT></TD>187<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item6">Selected Financial Data</A></FONT></TD>188<TD VALIGN="TOP"><FONT SIZE="2">19</FONT></TD>189</TR>190<TR>191<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7">Item 7.</A></FONT></TD>192<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7">Management's Discussion and Analysis of Financial Condition</A><BR>193 <A HREF="#Item7">and Results of Operations</A></FONT></TD>194<TD VALIGN="TOP"><FONT SIZE="2">20</FONT></TD>195</TR>196<TR>197<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7A">Item 7A.</A></FONT></TD>198<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item7A">Quantitative and Qualitative Disclosures about Market Risk</A></FONT></TD>199<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>200</TR>201<TR>202<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item8">Item 8.</A></FONT></TD>203<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item8">Financial Statements and Supplementary Data</A></FONT></TD>204<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>205</TR>206<TR>207<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item9">Item 9.</A></FONT></TD>208<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item9">Changes in and Disagreements with Accountants on Accounting and</A><BR>209 <A HREF="#Item9">Financial Disclosure</A></FONT></TD>210<TD VALIGN="TOP"><FONT SIZE="2">26</FONT></TD>211</TR>212<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>213<TR>214<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTIII">PART III</A></B></U></FONT></TD>215</TR>216<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>217<TR>218<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item10">Item 10.</A></FONT></TD>219<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item10">Directors and Executive Officers of the Registrant</A></FONT></TD>220<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>221</TR>222<TR>223<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item11">Item 11.</A></FONT></TD>224<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item11">Executive Compensation</A></FONT></TD>225<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>226</TR>227<TR>228<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item12">Item 12.</A></FONT></TD>229<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item12">Security Ownership of Certain Beneficial Owners and Management</A></FONT></TD>230<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>231</TR>232<TR>233<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item13">Item 13.</A></FONT></TD>234<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item13">Certain Relationships and Related Transactions</A></FONT></TD>235<TD VALIGN="TOP"><FONT SIZE="2">27</FONT></TD>236</TR>237<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>238<TR>239<TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"><U><B><A HREF="#PARTIV">PART IV</A></B></U></FONT></TD>240</TR>241<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>242<TR>243<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item14">Item 14.</A></FONT></TD>244<TD VALIGN="TOP"><FONT Size="2"><A HREF="#Item14">Exhibits, Financial Statement Schedules, and</A><BR>245 <A HREF="#Item14">Reports on Form 8-K</A></FONT></TD>246<TD VALIGN="TOP"><FONT SIZE="2">28</FONT></TD>247</TR>248<TR><TD COLSPAN="3" VALIGN="TOP"><FONT Size="2"> </FONT></TD></TR>249<TR>250<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"><A HREF="#SIGNATURES">SIGNATURES</A></FONT></TD>251<TD VALIGN="TOP"><FONT SIZE="2">29</FONT></TD>252</TR>253<TR>254<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"><A HREF="#EXHIBIT_INDEX">EXHIBIT INDEX</A></FONT></TD>255<TD VALIGN="TOP"><FONT SIZE="2">31</FONT></TD>256</TR>257<TR>258<TD COLSPAN="2" VALIGN="TOP"><FONT SIZE="2"><A HREF="#FINANCIAL_STATEMENTS">FINANCIAL STATEMENTS</A></FONT></TD>259<TD VALIGN="TOP"><FONT SIZE="2">F-1</FONT></TD>260</TR>261</TABLE>262263<CENTER><FONT Size="2">2</FONT></CENTER>264<HR SIZE=5 COLOR=GRAY NOSHADE>265266<P><U><B><FONT Size="2">Forward-Looking Statements</FONT></B></U></P>267268<P ALIGN="justify"><FONT Size="2"> Certain statements contained in this Annual Report on Form 10-K and other written and oral statements269made from time to time by the Company do not relate strictly to historical or current facts but provide current270expectations or forecasts of future events. As such, they are considered "forward-looking statements" under271the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could272cause actual results to differ materially from those presently anticipated or projected. Such forward-looking273statements can be identified by the use of terminology such as "may," "will," "expect," "plan," "intend,"274"anticipate," "estimate," or "continue" or similar words or expressions. It is not possible to foresee or identify275all factors affecting the Company's forward-looking statements and investors therefore should not consider any276list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.277Factors that could cause actual results to differ from the results discussed in the forward-looking statements278include, but are not limited to, the following factors: (i) the Company's revenue and profitability is reliant on279sales of Breathe Right® nasal strips; (ii) the Company's success and future growth will depend significantly280on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets281for additional products; (iii) the Company's competitive position will, to some extent, be dependent on the282enforceability and comprehensiveness of its patents on the Breathe Right nasal strip technology which have283been, and in the future may be, the subject of litigation (see Item 1, "Patents, Trademarks and Proprietary284Rights" and Item 3, "Litigation"); (iv) the Company operates in competitive markets where recent and potential285entrants into the nasal dilator segment pose greater competitive challenges than those faced by the Company286in the past (see Item 1, "Competition"); (v) the Company has faced and will continue to face challenges in287successfully developing and introducing new products and anticipates that there will be substantial costs,288expenses and risks associated with the introduction of new products during 2000, including those associated289with the introduction of the Company's FiberChoice<SUP>TM</SUP> chewable fiber tablets (see Item 1, "Business"); (vii) the290Company is currently establishing its own channels of distribution for its nasal strip products in international291markets (see Item 1, "International Distribution"), and there can be no assurance that the Company's efforts to292develop its international distribution will be successful; and (viii) the Company is dependent upon contract293manufacturers for the production of substantially all of its products.</P></FONT>294295<P><CENTER><B><FONT Size="2"><A NAME="PARTI">PART I</A></FONT></B></CENTER></P>296297<P><U><B><FONT Size="2"><A NAME="Item1">Item 1. BUSINESS</A></FONT></B></U></P>298299<P><B><FONT Size="2">General</FONT></B></P>300301<P ALIGN="justify"><FONT Size="2"> CNS, Inc. (the "Company") develops and markets consumer health care products, including the Breathe302Right® nasal strip. The Breathe Right nasal strip improves breathing by reducing nasal airflow resistence. It303can be effective in providing temporary relief for nasal congestion, reducing snoring and reducing breathing304difficulties due to a deviated nasal septum. The Company has recently announced its expansion of the Breathe305Right product line to include nasal strips for colds with Vicks® mentholated vapors that are sized for the entire306family, and nasal strips for children that will be available in multiple colors and designs. Both are expected to307be on retail shelves during the fall 2000 cough/cold season.</P></FONT>308309<P ALIGN="justify"><FONT Size="2"> In the third quarter of 1999, the Company introduced a product for race horses called the FLAIR<SUP>TM</SUP>310equine nasal strip. Invented by two veterinarians, the FLAIR equine nasal strip is a patented, drug-free product311that enables horses to breathe more easily during strenuous exercise. The Company plans to introduce its new312FiberChoice<SUP>TM</SUP> chewable fiber tablets in 2000. The FiberChoice product is a flavored, chewable fiber tablet that313offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber.</P></FONT>314315<P ALIGN="justify"><FONT Size="2"> In addition to expanding the Breathe Right brand and introducing other new products, the Company is316exploring possibilities for acquiring new consumer health care products or companies that have established317consumer brands. The Company is also considering opportunities for licensing new products and technologies.</P></FONT>318319<CENTER><FONT Size="2">3</FONT></CENTER>320<HR SIZE=5 COLOR=GRAY NOSHADE>321322<P><B><FONT Size="2">Management</FONT></B></P>323324<P ALIGN="justify"><FONT Size="2"> During 1998, the Company added to its management team several executive officers with a diverse body325of consumer packaged goods experience. See Item 1, "Executive Officers of the Company." The Company also326reorganized its management structure into strategic business teams in order to expand the platform for building327the Breathe Right brand and develop and launch new products: Breathe Right Brand Team; FiberChoice Team;328FLAIR Team; International Team; and Business Development Team. The Company believes that its team focus329enables the Company to more effectively implement its business strategies and position itself to become a large,330multi-product consumer products company with a significant international presence.</P></FONT>331332<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Team.</I></B> The Company's Breathe Right Brand Team is responsible for the strategic333development and management of the Breathe Right nasal strip business and other non-nasal strip products that334seek to leverage the Breathe Right brand name. Breathe Right nasal strip products currently represent the335cornerstone of the Company's business. The Company intends to exploit new markets and opportunities that336it believes exist for its current nasal strip products and plans to commercialize potential new Breathe Right brand337products. The Company has developed two new products, nasal strips for colds with Vicks® mentholated vapors338for the entire family and nasal strips for children. Both products are expected to be introduced during the fall339of 2000 to coincide with the cough/cold season.</P></FONT>340341<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Team.</I></B> The Company has recently completed an evaluation and testing of its FiberChoice342chewable fiber tablets and plans to introduce the product during the second quarter of 2000. The FiberChoice343Product Team is responsible for the strategic development and management of the FiberChoice chewable fiber344supplement business and will lead the Company's launch of the product.</P></FONT>345346<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Team.</I></B> The Company introduced the FLAIR equine nasal strip on a limited basis during the347fourth quarter of 1999 and plans an official launch of the product in the spring of 2000. The Company's FLAIR348Product Team is responsible for the strategic development and management of the FLAIR equine nasal strip349business.</P></FONT>350351<P ALIGN="justify"><FONT Size="2"> <B><I>International Team.</I></B> The Company intends to develop international markets for all of its products and is negotiating with distributors and352representatives for distribution of Breathe Right nasal strips in a number of353countries in order to further expand the Company's presence in international markets. See Item 1, "International354Distribution." The International Team is responsible for developing and managing the Company's overseas355business and its relationships with distributors and representatives in international markets.</P></FONT>356357<P ALIGN="justify"><FONT Size="2"> <B><I>Business Development Team.</I></B> The Business Development Team is committed to the expansion of the358Company's product base through the acquisition or licensing of promising consumer health care products that359have significant market potential. The Business Development Team is responsible for identifying and360evaluating potential new products, inventions and other business prospects that will enable the Company to361achieve its long-term growth and profit objectives, including opportunities for the acquisition of companies that362have established product lines.</P></FONT>363364<P><B><FONT Size="2">Products</FONT></B></P>365366<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Nasal Strips.</I></B> The Breathe Right nasal strip is a nonprescription, single-use disposable367device that improves breathing by opening the nasal passages. The Company has 510(k) clearance from the368United States Food and Drug Administration ("FDA") to market the Breathe Right nasal strip for improvement369of nasal breathing, temporary relief of nasal congestion, elimination or reduction of snoring and temporary relief370of breathing difficulties due to a deviated nasal septum. See Item 1, "Government Regulation." The Breathe371Right nasal strip comes both in tan and clear.</P></FONT>372373<P ALIGN="justify"><FONT Size="2"> The Breathe Right nasal strip includes two embedded plastic strips. When folded down onto the sides374of the nose, the Breathe Right nasal strip lifts the side walls of the nose outward to open the nasal passages. The375product improves nasal breathing upon application and does not include any medication, thereby avoiding any376medicinal side effects. The Breathe Right nasal strip is offered in two sizes (small/medium and medium/large)377to accommodate the range of nose sizes. The Breathe Right nasal strip is packaged for the consumer market in various quantities ranging between 12 to 38 strips per box.</P></FONT>378379<CENTER><FONT Size="2">4</FONT></CENTER>380<HR SIZE=5 COLOR=GRAY NOSHADE>381382383<P ALIGN="justify"><FONT Size="2">The Company believes that the Breathe Right384nasal strip is priced comparably to medicinal decongestants on a daily or nightly dosage basis at suggested retail385prices ranging between $3.99 and $11.99 per box. The Company expanded the Breathe Right nasal strip line386with the reintroduction of the Breathe Right clear nasal strip in the second half of 1999. Research has suggested387that the clear nasal strip product could increase the Company's customer base for nasal strip products by388addressing vanity issues that may be associated with the use of the tan Breathe Right nasal strip product.</P></FONT>389390<P ALIGN="justify"><FONT Size="2"> The Company is currently planning to introduce two new nasal strip products in the fall of 2000. The391first product is a Vicks mentholated strip that uses traditional Breathe Right strip technology but contains a392soothing mentholated aroma for additional relief. The mentholated vapors are released when the strip surface393is rubbed. The second is a nasal strip product that is specifically sized and styled for children. The Kid's Strips394will be sized specifically to fit children and include a brightly colored version and a mentholated version.</P></FONT>395396<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Products.</I></B> During the third quarter of 1998, the Company began the national397introduction of a saline nasal spray that leverages the Breathe Right brand name. The Breathe Right saline nasal398spray is a non-habit forming, drug-free product that restores moisture to comfort and soothe dry, irritated nasal399passages due to colds, allergies, dry air (low humidity), air pollution and the overuse of nasal decongestants.400The Company intends to introduce additional non-nasal strip products in the future that carry the Breathe Right401brand name and to extend the product line.</P></FONT>402403<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablets.</I></B> The Company has recently completed evaluation and testing404of its FiberChoice chewable fiber tablets. FiberChoice is a flavored, chewable tablet that offers consumers an405effective, convenient good-tasting way to supplement their daily intake of dietary fiber. The Company plans406to introduce its FiberChoice product during the second quarter of 2000. The FiberChoice tablets will be407available in both regular and sugar-free varieties. The product will be packaged in both 90-count bottles and40810-count rolls.</P></FONT>409410<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strips.</I></B> The FLAIR equine nasal strip is a product for horses that capitalizes on411the Company's current nasal strip technology. Invented by two veterinarians, the FLAIR equine nasal strip is412a patented, drug-free product that enables horses to breathe more easily during strenuous exercise. Results from413a limited clinical trial indicate that the equine nasal strip product also reduces a bleeding condition in horses414called exercise-induced pulmonary hemorrhaging ("EIPH") that often occurs during and after races, high415performance events and strenuous workouts. The FLAIR equine nasal strip holds open the nasal passages of416the horses, which can breathe only through their noses, and reduces the effort required to breathe.</P></FONT>417418<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip was introduced for the first time during the Breeder's Cup in November419of 1999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR is being sold in tack shops, through equine420catalogs and in equine supply stores. The Company expects to officially launch FLAIR in the spring of 2000.</P></FONT>421422<CENTER><FONT Size="2">5</FONT></CENTER>423<HR SIZE=5 COLOR=GRAY NOSHADE>424425426<P ALIGN="justify"><FONT Size="2"><B>Markets</B></FONT></P>427428<P ALIGN="justify"><FONT Size="2"> <B><I>Breathe Right Brand Product Line.</I></B> The Breathe Right brand of products includes the Breathe Right429nasal strips and the Breathe Right saline nasal spray.</FONT></P>430431<P ALIGN="justify"><FONT Size="2"> Air impedance in the nose accounts for approximately one-half of the total airway resistance involved432in the respiratory system (i.e., one-half of the energy required for breathing). If the effort to breathe through433the nose during sleep is excessive, the person will resort to mouth breathing, promoting snoring, dry mouth, sore434throat and mini-awakenings which disrupt sleep. In addition, nasal breathing difficulties during sleep are often435caused by nasal congestion found in people who have a common cold, allergies and sinusitis and by those who436experience nasal obstruction due to a deviated nasal septum. The Company believes that people with chronic437conditions such as snoring or allergies or with structural problems such as deviated septa may be more438predisposed to use Breathe Right products on a regular or daily basis while seasonal sufferers are likely to use439Breathe Right products as needed. These conditions are aggravated when people have nasal congestion, thus440increasing the opportunity for consumer trial during the cough/cold season. People suffering from these441conditions are currently the primary users of the Company's Breathe Right products and are the main targets442of its advertising.</FONT></P>443444<P ALIGN="justify"><FONT Size="2"> In 1999, the Company began to emphasize the Breathe Right nasal strip position as a product that445provides instant, drug-free relief for those suffering from nasal congestion and other symptoms due to the446common cold, allergies and sinusitis. The Company's new advertising emphasizes the ability of Breathe Right447nasal strips to provide immediate relief from nasal congestion due to colds and allergies.</FONT></P>448449<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts capitalize on the benefits of Breathe Right products to consumers in450various, and often overlapping, consumer market segments:</FONT></P>451452<TABLE BORDER="0"CELLPADDING="0" CELLSPACING="0">453<TR>454<TD WIDTH="3%"> </TD>455<TD WIDTH="3%" VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>456<TD WIDTH="94%" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Nasal Congestion Relief.</I></U> Virtually all Americans suffer some nasal congestion annually as a457result of the common cold, while nasal congestion as a result of allergies affects approximately45835 million Americans. The Company believes that the Breathe Right nasal strip is often used459as either an alternative or as an adjunct to decongestant drugs (including nasal sprays and oral460decongestants). This broad cough/cold market represents a significant potential for the Breathe461Right nasal strip. Prior to 1999, the product had not been marketed directly to the cough/cold462consumer in any significant respect. In 1999, the Company commenced marketing efforts463aimed at repositioning the Breathe Right nasal strip as a product that provides relief for the464common cold. The Company believes that its recent efforts to reposition this product will465increase a significant segment of its business. In the fall of 2000, the Company plans to466introduce two new products that could also increase the Breathe Right business for colds.467These products include nasal strips for colds with soothing Vicks mentholated vapors and nasal468strips for children.</FONT></P></TD>469</TR>470<TR><TD VALIGN="TOP"> </TD><TD VALIGN="TOP"> </TD></TR>471<TR>472<TD> </TD>473<TD VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>474<TD VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Snoring Relief.</I></U> Breathe Right nasal strips were effective in eliminating snoring or reducing475snoring loudness in approximately 75% of the participants in a clinical study. Snoring relief476was one of the Company's key advertising messages prior to 1999. This market remains very477important to the Company since approximately 37 million people snore regularly, while another47850 million people snore occasionally. The Company believes that snorers can be targeted479effectively and directly through relationship marketing efforts as well as through broad-based480advertising.</FONT></P></TD>481</TR>482<TR><TD VALIGN="TOP"> </TD><TD VALIGN="TOP"> </TD></TR>483<TR>484<TD> </TD>485<TD VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>486<TD VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Improved Breathing for Consumers with Deviated Septa.</I></U> Approximately 12 million people in487the United States suffer from a deviated septum, a bend in the cartilage or bone that divides the488nostrils. Breathe Right nasal strips were cleared by the Food and Drug Administration in 1996489to provide temporary relief from breathing difficulties associated with a deviated septum. The490Company plans to approach this market more directly through targeted marketing efforts.</FONT></P></TD>491</TR>492</TABLE>493494<CENTER><FONT Size="2">6</FONT></CENTER>495<HR SIZE=5 COLOR=GRAY NOSHADE>496497498<TABLE BORDER="0"CELLPADDING="0" CELLSPACING="0">499<TR>500<TD WIDTH="3%"> </TD>501<TD WIDTH="3%" VALIGN="TOP"><FONT Size="4"><B>·</B></FONT></TD>502<TD WIDTH="94%" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2"><U><I>Athletic Market.</I></U> The Company believes that the Breathe Right nasal strip may make nasal503breathing more comfortable and may improve endurance during athletic activity, particularly504when a mouth guard is used. An exercise physiology study published in peer-reviewed medical505literature in 1997 concluded that the Breathe Right nasal strip provided physiologic advantages506in ventilation and heart rate during mid-level exercise. Other exercise physiology studies have507been conducted and add to the substantiation of the positive effects of the Breathe Right nasal508strip during exercise. The Company continues to use athletes to endorse the Breathe Right509nasal strip to increase the visibility of the product, which thereby leads to greater awareness of510the product.</FONT></P></TD>511</TR>512</TABLE>513514<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablets.</I></B> Approximately 10 million U.S. households annually purchase515bulk fiber products, primarily to promote regularity and improve digestive health. The bulk fiber category516represents approximately $300 million in U.S. retail sales. The Company believes there is a significant517opportunity to expand this category due to both the aging of the baby-boomer generation and the marketing of518a better consumer solution to existing dietary fiber products–FiberChoice chewable fiber tablets. As people age,519they frequently develop digestive problems. People over 55 years old are three times more likely to purchase520a bulk fiber supplement than those younger than 55. The first year the baby-boom generation will turn 55 is in5212001. This generation is generally more active and demanding than their parents. These consumers will be522searching for solutions that do not hamper their active lifestyles. The Company believes that its FiberChoice523chewable fiber tablet represents such a solution in that it provides an effective, convenient and good-tasting alternative for supplementing dietary fiber intake. The tablets can be taken anytime and anywhere, with or524without water.</FONT></P>525526<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strips.</I></B> The FLAIR equine nasal strip is similar in concept to the human Breathe527Right nasal strip adjusted to the unique anatomy and size of a horse. A horse breathes only through its nose,528not through its mouth. During strenuous exercise, large amounts of air are inhaled creating a vacuum inside the529lungs which can cause soft tissue on the side of the nose to collapse. The equine nasal strip supports those soft530tissues so they do not collapse, which allows a horse to breathe more easily with less vacuum developing in the531lungs. Results from a limited clinical trial indicate that horses wearing the FLAIR equine nasal strip use less532energy to breath and that the product reduces a bleeding condition in horses called exercise-induced pulmonary533hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts.534Additional studies are underway to more completely delineate the benefits of the FLAIR equine nasal strip535product.</FONT></P>536537<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip could be used any time a horse is engaged in strenuous exercise. The538Company estimates that in the U.S. there are approximately 1.3 million individual horse starts in racing539competitions and over 1 million individual horse starts in non-racing competitions. Horses can benefit from540the use of the FLAIR equine nasal strip in training as well as competition.</FONT></P>541542<CENTER><FONT Size="2">7</FONT></CENTER>543<HR SIZE=5 COLOR=GRAY NOSHADE>544545<P><B><FONT Size="2">Business Strategy</FONT></B></P>546547<P ALIGN="justify"><FONT Size="2"> The Company's business strategy includes increasing sales of its Breathe Right nasal strip and other548Breathe Right brand products through advertising, expanding its Breathe Right product line with value added549line extensions like Breathe Right nasal strips for colds with Vicks mentholated vapors and children's nasal550strips, and successfully introducing new products, including the FLAIR equine nasal strip and the FiberChoice551chewable fiber tablet.</FONT></P>552553<P ALIGN="justify"><FONT Size="2"> <B><I>Increasing New Consumer Product Trial and Increasing Product Usage.</I></B> The Company uses a554combination of advertising, sampling, promotions, public relations and celebrity endorsements to increase555consumer awareness and to encourage consumer trial of the Breathe Right nasal strip. In 1998, the Company556began to emphasize the position of the Breathe Right nasal strip as a product that provides instant, drug-free557relief for those suffering from nasal congestion and other symptoms due to the common cold, allergies and558sinusitis. The Company's new advertising emphasizes the ability of Breathe right nasal strips to provide instant,559drug-free relief from nasal congestion due to colds and allergies.</FONT></P>560561<P ALIGN="justify"><FONT Size="2"> <B><I>Marketing New Breathe Right Brand Products.</I></B> The Company believes that the Breathe Right brand562name is one of its most valuable assets. In 1998, the Company introduced the Breathe Right saline nasal spray.563The Company has also expanded the Breathe Right product line to include nasal strips for colds with Vicks564mentholated vapors and nasal strips for children, both of which are expected to be introduced during the fall of5652000 in order to coincide with the cough/cold season.</FONT></P>566567<P ALIGN="justify"><FONT Size="2"> <B><I>Acquiring and Marketing New Products.</I></B> The Company plans to take advantage of its marketing and568distribution strengths by acquiring or licensing the rights to new products that it believes have merit and bring569them to market. The FLAIR equine nasal strip was introduced in the fourth quarter of 1999 and the FiberChoice570chewable fiber tablet is being prepared for a 2000 launch. In addition, the Company is evaluating opportunities571for licensing new products and acquiring companies or product lines that have an established base of consumer572acceptance.</FONT></P>573574<P ALIGN="justify"><FONT Size="2"> <B><I>Expanding Company Presence in International Markets.</I></B> The Company believes that there is a575significant market potential for its products outside the United States. The 3M Company ("3M") has been the576Company's sole distributor of its nasal strip products outside the United States and Canada since August of5771995. The Company's relationship with 3M produced less than anticipated results. On September 30, 1999,578the Company negotiated the termination of its distribution agreement with 3M to allow the Company to assume579the role of selling, marketing and distributing its nasal strip products in international markets during 2000. See580Item 1, "International Distribution." The Company is devoting significant resources to the development of its581international business and is in the process of entering into agreements with distributors and representatives for582the distribution of the Company's nasal strip products in foreign countries. The Company believes that the583network that it is attempting to establish for the international distribution of Breathe Right nasal strips will also584enable the Company to build its international marketing and distribution capacity for other products. See Item5851, "International Distribution."</FONT></P>586587<P><B><FONT Size="2">Marketing Strategy</FONT></B></P>588589<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts for Breathe Right products are primarily directed to the consumer590market. The Company's advertising focuses on the Breathe Right brand benefit of providing instant, drug-free591relief from nasal congestion. The Company has primarily used television, magazine and radio advertising to592market its products. The Company also uses product promotion programs, such as sampling, coupons and593public relations activities to encourage product trial and repeat purchases. Introduction of the new Breathe Right594nasal strips for colds with Vicks mentholated vapors will include joint promotional programs with Vicks products. Marketing communications are generally designed to promote trial of Breathe Right brand products595by increasing consumer awareness of the benefits of each product.</FONT></P>596597<FONT Size="2"><CENTER>8</CENTER></FONT>598<HR SIZE=5 COLOR=GRAY NOSHADE>599600<P ALIGN="justify"><FONT Size="2"> Because the Breathe Right nasal strip is sold as a consumer product, sales of the product will depend601in part upon the degree to which the consumer is aware of the product and is satisfied with its use, which also602influences repeat usage and word of mouth referrals. The most recent research data collected by a nationally603recognized consumer market research firm indicated that approximately 32% of those in the United States who604had purchased Breathe Right nasal strips have purchased additional product in the same year.</FONT></P>605606<P ALIGN="justify"><FONT Size="2"> The Company's marketing efforts for FiberChoice chewable fiber tablets will concentrate on advertising607through television and magazines to consumers who are 55 or more years old. In addition, the Company plans608to distribute samples of the product and coupons to current users of bulk fiber products. Marketing609communications are designed to promote awareness and trial of this new product among current category users.</FONT></P>610611<P ALIGN="justify"><FONT Size="2"> The Company's marketing communications for FLAIR equine nasal strips focus on the benefits of using612the product in training as well as competition. Marketing efforts will include advertising in influential equine613magazines and public relations activities surrounding high profile races and events in order to create awareness614in the racing and non-racing segments of the market. The Company will also use sampling and direct mail to615generate trial among top horse trainers and competitors.</FONT></P>616617<P><B><FONT Size="2">New Products Strategy</FONT></B></P>618619<P ALIGN="justify"><FONT Size="2"> The Company is committed to the expansion of its product base through the acquisition and620development of unique consumer health care products and technologies that have good market potential. The621Business Development Team is responsible for identifying for acquisition or license new products and potential622acquisition of companies that have established products in the Company's focus areas of better breathing,623digestive health and aging well. The Company has licensed the Vicks trademark from The Proctor & Gamble624Company for use with the new product, Breathe Right nasal strips for colds with Vicks mentholated vapors.625The Company routinely evaluates the merit of product concepts and acquisition opportunities and, from time626to time, may acquire or license the rights to products which it believes could successfully be sold through the627Company's established distribution channels.</FONT></P>628629<P ALIGN="justify"><FONT Size="2"> Most, if not all, of the Company's current products are regulated to varying degrees by the FDA and630other regulatory bodies. See Item 1, "Government Regulation." Products that the Company may acquire or631develop in the future could also be subject to a variety of regulatory requirements. Some products will require632extensive clinical studies and regulatory approvals prior to marketing and sale. There can be no assurance that633any required regulatory approvals will be obtained or that the Company will market or sell any of these634products.</FONT></P>635636<P><B><FONT Size="2">Domestic Distribution</FONT></B></P>637638<P ALIGN="justify"><FONT Size="2"> The Breathe Right nasal strip and the Breathe Right saline nasal spray are sold primarily as consumer639products in mass merchant chain stores, drug stores, grocery stores, warehouse clubs and military base stores640in the United States. The Company expects that the FiberChoice chewable fiber tablet will be sold in most of641the same retail outlets. The Company sells its products through a direct sales force that concentrates on serving642certain key retail accounts as well as through a network of independent sales representatives referred to in the643industry as non-food general merchandise brokers. The Company uses direct sales people and broker groups644who call on the mass merchant, chain drug, and grocery accounts and the wholesalers who serve primarily the645independent drug stores and many of the grocery stores in the United States.</FONT></P>646647<P ALIGN="justify"><FONT Size="2"> The Breathe Right nasal strip is typically positioned in the cough, cold and allergy section of stores648because it provides benefits similar to those obtained with other decongestant products. The Breathe Right649saline nasal spray is also usually positioned in the same section of the store as the Breathe Right nasal strip since650the products are typically used by those suffering from congestion, allergies and colds. Dietary fiber products651typically occupy a small section of a particular store and the Company anticipates that its FiberChoice chewable652fiber tablets will be positioned near well-established brands.</FONT></P>653654<CENTER><FONT Size="2">9</FONT></CENTER>655<HR SIZE=5 COLOR=GRAY NOSHADE>656657<P ALIGN="justify"><FONT Size="2"> The Company's retail customers include national chains of mass merchants, drug stores and grocery658stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens, RiteAid, CVS, and Albertson's and warehouse659clubs such as Sam's Club and Price Costco, as well as regional and independent stores in the same store660categories. In 1999, one retailer accounted for approximately 24% of sales. The loss of this customer or any661other large retailer would require the Company to replace the lost sales through other retail outlets and could662disrupt distribution of the Breathe Right nasal strip.</FONT></P>663664<P ALIGN="justify"><FONT Size="2"> The FLAIR equine nasal strip will, at least initially, be sold primarily to trainers and owners in the horse665racing industry through tack shops, equine catalogs and equine supply stores. The product was introduced on666a limited basis during the fourth quarter of 1999. The Company intends to officially launch the FLAIR equine667nasal strip in the spring of 2000.</FONT></P>668669<P><B><FONT Size="2">International Distribution</FONT></B></P>670671<P ALIGN="justify"><FONT Size="2"> In August of 1995, the Company executed an international distribution agreement with 3M pursuant672to which 3M was given the exclusive right to distribute the Breathe Right nasal strip outside of the United States673and Canada. Under the terms of the agreement, 3M was obligated to buy product from the Company and was674responsible for obtaining all necessary regulatory approvals outside of the United States and for all marketing675and selling expenses. The agreement contained certain minimum performance objectives and breakup676provisions. The contractual relationship with 3M produced less than anticipated results in international markets.677International sales for the Company were approximately $1 million for 1999, down from its high of678approximately $26 million for 1996. The decrease in international sales during that period were attributable679in substantial part to the high inventory levels of nasal strips maintained by 3M and disappointing marketing680efforts in the international sector.</FONT></P>681682<P ALIGN="justify"><FONT Size="2"> The Company is optimistic about the prospects for generating increased sales of nasal strips outside the683United States and believes that international markets require an increased level of focus, advertising and684promotion to reach their potential. On September 30, 1999, the Company and 3M agreed to terminate the685existing distribution agreement in a manner that enables the Company to take a direct and immediate role in the686sale, marketing and distribution of its nasal strip products in international markets. The amended distribution687agreement provides for an orderly transition of the international business from 3M to the Company. Under the688amended distribution agreement, 3M has the nonexclusive right to distribute Breathe Right nasal strips outside689the United States and Canada until June 30, 2000. The right of 3M to distribute the Company's nasal strip690products terminates on June 30, 2000 and, for a period of two years thereafter, 3M has agreed not to sell any691nasal dilator devices. The Company paid 3M a one-time termination fee of approximately $6.3 million. The692Company is not obligated to repurchase any unsold inventory of nasal strips after 3M exits the market.</FONT></P>693694<P ALIGN="justify"><FONT Size="2"> The Company is currently involved in establishing a broad-ranging international distribution system695for the Breathe Right nasal strip business that will consist of both sales representatives and reselling distributors.696The markets that the Company plans to address first will be western Europe as well as Japan and Australia.697Sales will be supervised by the Company from its Minnesota headquarters and by CNS International, Inc., a698wholly-owned domestic subsidiary which has hired one business manager in Europe. The business manager699will supervise and coordinate the activities of the distributors and sales representatives. It is expected that the distributors will be appointed largely on an exclusive basis, with territories consisting of one or more countries.700The Company will retain control over packaging and advertising in all territories. Most shipments are expected701to be made in bulk, either to reselling distributors who will package for the local market, or to Company-controlled warehouse facilities, where final packaging may be arranged by the Company directly before702shipment to retailers.</FONT></P>703704<P ALIGN="justify"><FONT Size="2"> In 1995, the Company executed a distribution agreement with LOCIN Industries, a Canadian dental705floss company, to establish distribution of the Breathe Right nasal strip in the Canadian market. LOCIN706purchases nasal strips from the Company in bulk, does its own packaging and distributes the product in Canada.</FONT></P>707708<CENTER><FONT Size="2">10</FONT></CENTER>709<HR SIZE=5 COLOR=GRAY NOSHADE>710711<P><FONT Size="2"><B>Manufacturing and Operations</B></FONT></P>712713<P ALIGN="justify"><FONT Size="2"> The Company currently subcontracts with multiple manufacturers to produce the Breathe Right nasal714strip, Breathe Right saline nasal spray, the FiberChoice chewable fiber tablet and the FLAIR equine nasal strip.715The Company does no in-house product production itself. These contract manufacturers are capable of716providing full turnkey service and shipping product to the Company that is completely packaged ready to be717sold to retailers or providing semi-finished goods to the Company that require final packaging. With respect718to the Breathe Right nasal strip, the Company has the ability to wrap individual strips in the paper sleeve719in-house and subcontracts the final packaging out to qualified packaging subcontractors.</FONT></P>720721<P ALIGN="justify"><FONT Size="2"> Each of the manufacturers builds the product to the Company's specifications using materials specified722by the Company and, for the major nasal strip materials, places orders against a supply agreement negotiated723by the Company with the material manufacturer. The contract manufacturers have all entered into724confidentiality agreements with the Company to protect the Company's intellectual property rights. Company725quality control and operations personnel periodically visit the contract manufacturers in order to observe726processes and procedures. Finished goods are inspected at the Company to ensure that they meet quality727requirements. The Company inspects its contract manufacturers on a regular basis and is not aware of any728material violation of FDA Good Manufacturing Practice Standards. The Company works closely with its729material vendors and contract manufacturers to reduce scrap and waste, improve efficiency and improve yields730to reduce the manufacturing costs of the product. The Company has received certification that it has established731and maintains a quality system which meets the requirements of ISO 9002/EN 46002.</FONT></P>732733<P ALIGN="justify"><FONT Size="2"> To ensure consistent quality and favorable pricing, the Company has entered into a multi-year material734supply agreement with 3M for the major components of the Breathe Right nasal strip. Similar materials are,735however, currently available from other suppliers. The inability to obtain sufficient quantities of these736components or the need to develop alternative sources in a timely and cost-effective manner could adversely737affect the Company's operations until new sources of these components become available, if at all. In addition,738while the Company does not expect 3M to do so, 3M has the right to discontinue its production or sale of these739products at any time upon 90 days' notice to the Company.</FONT></P>740741<P><B><FONT Size="2">Competition</FONT></B></P>742743<P><FONT Size="2"> <B><I>Breathe Right Nasal Strips</I></B></FONT></P>744745<P ALIGN="justify"><FONT Size="2"> The Company believes that the market for decongestant products is highly competitive. The Company's746competition in the consumer market for decongestant products and other cold, allergy and sinus relief products747consists primarily of pharmaceutical products, other nasal sprays and external nasal dilators while competition748in the snoring remedies market also consists primarily of nasal dilators, throat sprays and herbs. Although the749Company is currently the leading manufacturer of external nasal dilation products, Schering Plough Corp.750entered the market in the fourth quarter of 1998 with an external nasal dilation device. Other companies have751also recently entered the nasal dilation market with private label products. Many of the companies that compete752with the Breathe Right nasal strip and other Breathe Right products, including Schering Plough, have753significantly greater financial and operating resources than the Company. The Company has developed and754implemented marketing strategies aimed at minimizing the impact of competitive products. As a result, the755Breathe Right nasal strip has maintained more than 85% of the nasal dilator market despite the entry of Schering756Plough and other competitors into the market place.</FONT></P>757758<P ALIGN="justify"><FONT Size="2"> The patents licensed by the Company on the Breathe Right nasal strip will limit the ability of others to759introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States.760The Company intends to aggressively enforce the patents it has licensed covering the Breathe Right nasal strip761and has engaged in significant litigation to protect its patent rights. See Item 3, "Legal Proceedings."</FONT></P>762763<P ALIGN="justify"><FONT Size="2"> There can be no assurance that potential competitors will not be able to develop nasal dilation products764which circumvent the Company's patents. In addition, external nasal dilator products compete in the consumer765markets with decongestant and sinus relief products and snoring remedies in many international markets where766the Company does not yet have patent protection on the Breathe Right nasal strip.</FONT></P>767768<CENTER><FONT Size="2">11</FONT></CENTER>769<HR SIZE=5 COLOR=GRAY NOSHADE>770771<P ALIGN="justify"><FONT Size="2"> <B><I>FiberChoice Chewable Fiber Tablet</I></B></FONT></P>772773<P ALIGN="justify"><FONT Size="2"> Although the market for dietary fiber supplements is highly competitive and dominated by large774companies with resources greater than the Company's and established brands, such as Metamucil, Citrucel and775FiberCon, the Company believes that its FiberChoice chewable fiber tablet is a unique product that will present776a significant opportunity for the Company. The Company believes that its product will offer consumers an777effective, convenient and good tasting alternative to existing products.</FONT></P>778779<P ALIGN="justify"><FONT Size="2"> <B><I>FLAIR Equine Nasal Strip</I></B></FONT></P>780781<P ALIGN="justify"><FONT Size="2"> As an alternative to controversial drug therapies, the FLAIR equine nasal strip is a unique product which782currently has no direct competition. The only competitive product currently available is the drug Lasix. Lasix783is intended to alleviate a bleeding condition in the lungs of horses called exercise-induced pulmonary784hemorrhaging ("EIPH") that often occurs during races, high-performance events and strenuous workouts.</FONT></P>785786<P><FONT Size="2"><B>Government Regulation</B></FONT></P>787788<P ALIGN="justify"><FONT Size="2"> As a manufacturer and marketer of medical devices, the Company is subject to regulation by, among789other governmental entities, the FDA and the corresponding agencies of the states and foreign countries in which790the Company sells its products. The Company must comply with a variety of regulations, including the FDA's791Good Manufacturing Practice regulations, and is subject to periodic inspections by the FDA and applicable state792and foreign agencies. If the FDA believes that its regulations have not been fulfilled, it may implement793extensive enforcement powers, including the ability to ban products from the market, prohibit the operation of794manufacturing facilities and effect recalls of products from customer locations. The Company believes that it795is currently in compliance with applicable FDA regulations.</FONT></P>796797<P ALIGN="justify"><FONT Size="2"> FDA regulations classify medical devices into three categories that determine the degree of regulatory798control to which the manufacturer of the device is subject. In general, Class I devices involve compliance with799labeling and record keeping requirements and are subject to other general controls. Class II devices are subject800to performance standards in addition to general controls. Class III devices are those devices, usually invasive,801for which pre-market approval (as distinct from pre-market notification) is required before commercial802marketing to assure product safety and effectiveness.</FONT></P>803804<P ALIGN="justify"><FONT Size="2"> Before a new medical device can be introduced into the market, the manufacturer generally must obtain805FDA clearance through either a 510(k) pre-market notification or a pre-market approval application ("PMA").806A 510(k) clearance will be granted if the submitted data establish that the proposed device is "substantially807equivalent" to a legally marketed Class I or II medical device, or to a Class III medical device for which the808FDA has not called for PMAs. The PMA process can be expensive, uncertain and lengthy, frequently requiring809from one to several years from the date the PMA is accepted. In addition to requiring clearance for new810products, FDA rules may require a filing and waiting period prior to marketing modifications of existing811products. The Company has received 510(k) approvals to market the Breathe Right nasal strip as a device that812can (i) temporarily relieve the symptoms of nasal congestion and stuffy nose, (ii) eliminate or reduce snoring,813(iii) improve nasal breathing by reducing nasal airflow resistance, and (iv) temporarily relieve breathing814difficulties due to a deviated nasal septum. In March of 1998, nasal dilators were classified by the FDA as Class815I devices and exempt from pre-market notification.</FONT></P>816817<P ALIGN="justify"><FONT Size="2"> The Company's FiberChoice product is considered to be a dietary supplement and is regulated under818the Federal Food, Drug, and Cosmetic Act as amended by the Dietary Supplement Health and Education Act819"DSHEA" of 1994, and under the Fair Packaging and Labeling Act. There is generally no requirement that a820company obtain a license or approval from FDA before marketing dietary supplements in the United States.821The FDA is developing implementing regulations for certain provisions of the DSHEA which will be published822as final rules in the Federal Register.</FONT></P>823824<CENTER><FONT Size="2">12</FONT></CENTER>825<HR SIZE=5 COLOR=GRAY NOSHADE>826827<P ALIGN="justify"><FONT Size="2"> There is no national regulatory body for horse racing. Consequently, approval from state horse racing828commissions must be obtained on a state-by-state basis before the Company's FLAIR equine nasal strip can be829used during horse racing events. The Company has been working with state racing commissions to gain830approval for the use of the FLAIR equine nasal strip in competition. To date, the FLAIR equine nasal strip can831be used in horse races in approximately 25 states, including the leading racing states of Kentucky, California832and Florida, and 3 provinces in Canada.</FONT></P>833834<P ALIGN="justify"><FONT Size="2"> Sales of the Company's products outside the United States are subject to regulatory requirements that835vary widely from country to country. Under its international distribution agreement with the Company which836will terminate on June 30, 2000, 3M was responsible for obtaining all necessary approvals outside the United837States for Breathe Right nasal strips. As part of the renegotiations of the 3M distribution agreement (see Item8381, "International Distribution"), the Company will transfer the product registrations from the 3M subsidiary in839each country to a new distributor or third party. The Company has selected a third party to act as an840"Authorized Representative" in the European Union. The Company believes that it has the necessary841documentation to support affixing the "CE" mark, an international symbol of quality and compliance with842applicable European medical device directives, to the Company's products in Europe.</FONT></P>843844<P ALIGN="justify"><FONT Size="2"> No assurance can be given that the FDA or state or foreign regulatory agencies will give on a timely845basis, if at all, the requisite approvals or clearances for additional applications for the Breathe Right nasal strip846or for any of the other Company's products. Moreover, after clearance is given, the Company is required to847advise the FDA and these other regulatory agencies of modifications to its products. These agencies have the848power to withdraw the clearance or require the Company to change the device or its manufacturing process or849labeling, to supply additional proof of its safety and effectiveness or to recall, repair, replace or refund the cost850of the medical device if it is shown to be hazardous or defective. The process of obtaining clearance to market851products is costly and time-consuming and can delay the marketing and sale of the Company's products.852Furthermore, federal, state and foreign regulations regarding the manufacture and sale of medical devices and853other products are subject to future change. The Company cannot predict what impact, if any, such changes854might have on its business.</FONT></P>855856<P ALIGN="justify"><FONT Size="2"> The Company is also subject to substantial federal, state and local regulation regarding occupational857health and safety, environmental protection, hazardous substance control and waste management and disposal,858among others.</FONT></P>859860<P><FONT Size="2"><B>Patents, Trademarks and Proprietary Rights</B></FONT></P>861862<P ALIGN="justify"><FONT Size="2"> The Company has registered trademarks, and has a number of patents under licenses which are used in863connection with its business. Some of these patents and licenses cover significant product formulations,864processing and designs for the Company's products. The Company believes its trademarks are important as865protection for the Company's image in the marketplace and advertising. The Company's success is and will866continue to be dependent upon the existence of and ability to protect its patents, trademarks and licenses and867the Company intends to take such steps as are necessary to protect its intellectual property rights.</FONT></P>868869<P ALIGN="justify"><FONT Size="2"> There can be no assurance that the Company's technology and proprietary rights will not be challenged870on the grounds that its products infringe on patents, copyrights or other proprietary information owned or871claimed by others, or that others will not successfully utilize part or all of the Company's technology without872compensation to the Company. Nor can there be any assurance that others will not attempt to challenge the873validity or enforceability of the Company's licensed patents on the basis of prior art or introduce products874different from that of the Company. In addition to seeking patent protection for its products, the Company also875intends to protect its proprietary technologies and proprietary information as trade secrets.</FONT></P>876877<P ALIGN="justify"><FONT Size="2"> The Company entered into license agreements pursuant to which the Company acquired from the878licensors the exclusive rights to manufacture and sell the Breathe Right nasal strip, the FiberChoice chewable879fiber tablet and the FLAIR equine nasal strip. Specifically, the Company has the exclusive right pursuant to880those license agreements to manufacture, sell and otherwise practice any invention claimed in the licensor's</FONT></P>881882<CENTER><FONT Size="2">13</FONT></CENTER>883<HR SIZE=5 COLOR=GRAY NOSHADE>884885<P ALIGN="justify"><FONT Size="2">patent applications related thereto and all patents issued in any country which correspond to those applications.886The Company is obligated to pay royalties to the licensors based on sales of the products including certain887minimum royalty amounts in order to maintain its exclusivity.</FONT></P>888889<P ALIGN="justify"><FONT Size="2"> The licensor of the Breathe Right nasal strip has filed patent applications with the U.S. Patent and890Trademark Office seeking patent protection for different aspects of the Breathe Right nasal strip technology.891Six of these patent applications have resulted in issued patents in the United States, including one with claims892that cover the single-body construction of the Breathe Right nasal strip. The licensor of the Breathe Right nasal893strip also has one patent application which is currently pending. In addition, that licensor has obtained patent894protection on the Breathe Right nasal strip in several foreign countries and has various applications pending895which seek further patent protection in these and a number of additional countries. The Company has two patent896applications both pending in the U.S. and has filed a corresponding patent application seeking protection in897several foreign countries to protect certain rights to nasal dilation technology that it acquired.</FONT></P>898899<P ALIGN="justify"><FONT Size="2"> The licensor of the FiberChoice chewable fiber tablet has filed at least two patent applications with the900U.S. Patent and Trademark Office seeking patent protection for different aspects of this product which remain901pending. The licensor of the Breathe Right aromatic nasal strip has filed at least three patent applications with902the U.S. Patent and Trademark Office resulting in one issued patent so far. At least two patent applications for903the FLAIR equine nasal strip have also been filed by the licensor thereof in the U.S. Patent and Trademark904Office which have resulted in an issued U.S. patent. Each of these licensors has filed corresponding patent905applications for acquiring patent protection in several foreign countries on the licensed products.</FONT></P>906907<P ALIGN="justify"><FONT Size="2"> Although the Company believes that its licensed patents on the Breathe Right nasal strip will limit the908ability of others to introduce competitive external nasal dilator products in the United States, there can be no909assurance that the patents on the Breathe Right nasal strip, or any additional patents on this or other products910issued, if any, will effectively foreclose the development of competitive products or that the Company will have911sufficient resources to pursue enforcement of any patents issued. The Company does, however, intend to912aggressively enforce the patents covering the Breathe Right nasal strip and its other products. In order to913enforce any patents issued covering the Breathe Right nasal strip or any of its other products, the Company may914have to engage in litigation, which may result in substantial cost to the Company and counterclaims against the915Company. Any adverse outcome of such litigation could have a negative impact on the Company's business.</FONT></P>916917<P ALIGN="justify"><FONT Size="2"> The Company has in the past and is currently engaged in litigation to enforce its patent rights relating918to the Breathe Right nasal strip. The Company has recently brought a suit in federal district court to enforce919one of the licensed nasal strip patents. In the course of this suit, the defendant requested reexamination in the920U.S. Patent and Trademark Office of the patent involved which request was granted thus leaving the licensor921to await further action on the part of the Office. (See Item 3, "Legal Proceedings").</FONT></P>922923<P ALIGN="justify"><FONT Size="2"> The Company has registered its Breathe Right trademark in the United States and in several foreign924countries and is seeking further registration of that trademark and other trademarks. The Company has also925licensed the right to a U.S. trademark registration for the FLAIR equine nasal strip product as well as the926pending trademark application for the FiberChoice chewable fiber tablet.</FONT></P>927928<P><FONT Size="2"><B>Employees</B></FONT></P>929930<P ALIGN="justify"><FONT Size="2"> At March 15, 2000, the Company had 73 full-time and 3 part-time employees, of whom 18 were931engaged in operations, 23 in general administration, 31 in marketing and sales and 4 in product development.932There are no unions representing Company employees. Relations with its employees are believed to be positive933and there are no pending or threatened labor employment disputes or work interruptions.</FONT></P>934935<CENTER><FONT Size="2">14</FONT></CENTER>936<HR SIZE=5 COLOR=GRAY NOSHADE>937938<CENTER><P><B><FONT Size="2">EXECUTIVE OFFICERS OF THE COMPANY</FONT></B></P></CENTER>939940<P ALIGN="justify"><FONT Size="2"> The following table sets forth the names and ages of the Company's Executive Officers together with941all positions and offices held with the Company by such executive officers. Officers are appointed to serve until942the meeting of the Board of Directors following the next Annual Meeting of Stockholders and until their943successors have been elected and have qualified.</FONT></P>944945<CENTER>946<TABLE BORDER="0" CELLSPACING="2" CELLPADDING="0">947<TR>948<TD VALIGN="TOP" WIDTH="30%"><CENTER><FONT Size="2"><U>Name and Age</U></FONT></CENTER></TD>949<TD VALIGN="TOP" WIDTH="20%"><FONT Size="2"> </FONT></TD>950<TD VALIGN="TOP" WIDTH="50%"><CENTER><FONT Size="2"><U>Office</U></FONT></CENTER></TD>951</TR>952<TR>953<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>954<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>955<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>956</TR>957<TR>958<TD VALIGN="TOP"><FONT Size="2">Daniel E. Cohen (47)</FONT></TD>959<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>960<TD VALIGN="TOP"><FONT Size="2">Chairman of the Board, Chief Executive Officer and Director</FONT></TD>961</TR>962<TR>963<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>964<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>965<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>966</TR>967<TR>968<TD VALIGN="TOP"><FONT Size="2">Marti Morfitt (42)</FONT></TD>969<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>970<TD VALIGN="TOP"><FONT Size="2">President, Chief Operating Officer and Director</FONT></TD>971</TR>972<TR>973<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>974<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>975<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>976</TR>977<TR>978<TD VALIGN="TOP"><FONT Size="2">M. W. Anderson, Ph.D (49)</FONT></TD>979<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>980<TD VALIGN="TOP"><FONT Size="2">Vice President of Product Development and Regulatory Affairs</FONT></TD>981</TR>982<TR>983<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>984<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>985<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>986</TR>987<TR>988<TD VALIGN="TOP"><FONT Size="2">Douglas G. Austin (45)</FONT></TD>989<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>990<TD VALIGN="TOP"><FONT Size="2">Vice President of Operations</FONT></TD>991</TR>992<TR>993<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>994<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>995<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>996</TR>997<TR>998<TD VALIGN="TOP"><FONT Size="2">David J. Byrd (46)</FONT></TD>999<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1000<TD VALIGN="TOP"><FONT Size="2">Vice President of Finance, Chief Financial Officer and Treasurer</FONT></TD>1001</TR>1002<TR>1003<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1004<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1005<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1006</TR>1007<TR>1008<TD VALIGN="TOP"><FONT Size="2">Kirk P. Hodgdon (40)</FONT></TD>1009<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1010<TD VALIGN="TOP"><FONT Size="2">Vice President of Business Development</FONT></TD>1011</TR>1012<TR>1013<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1014<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1015<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1016</TR>1017<TR>1018<TD VALIGN="TOP"><FONT Size="2">John J. Keppeler (38)</FONT></TD>1019<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1020<TD VALIGN="TOP"><FONT Size="2">Vice President of Worldwide Sales</FONT></TD>1021</TR>1022<TR>1023<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1024<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1025<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1026</TR>1027<TR>1028<TD VALIGN="TOP"><FONT Size="2">Teri P. Osgood (36)</FONT></TD>1029<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1030<TD VALIGN="TOP"><FONT Size="2">Vice President of U.S. Marketing</FONT></TD>1031</TR>1032<TR>1033<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1034<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1035<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1036</TR>1037<TR>1038<TD VALIGN="TOP"><FONT Size="2">Carol J. Watzke (52)</FONT></TD>1039<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1040<TD VALIGN="TOP"><FONT Size="2">Vice President of Consumer Strategy</FONT></TD>1041</TR>1042</TABLE>1043</CENTER>10441045<P ALIGN="justify"><FONT Size="2"> <I>Daniel E. Cohen</I> has served as the Company's Chairman of the Board since 1993, its Chief Executive1046Officer since 1989 and a director since 1982. He also served as the Company's Treasurer from 1982 to March1047of 1999. Mr. Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.</FONT></P>10481049<P ALIGN="justify"><FONT Size="2"> <I>Marti Morfitt</I> has served as the Company's President and Chief Operating Officer and a director since1050March 1998. From September of 1982 through February of 1998, Ms. Morfitt served in a series of positions1051of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of1052food products, most recently serving from May of 1997 to February of 1998 as Vice-President, Meals, and from1053February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of Graco, Inc.,1054a Minneapolis-based manufacturer of fluid handling systems.</FONT></P>10551056<P ALIGN="justify"><FONT Size="2"> <I>M. W. Anderson, Ph.D</I> has served as the Company's Vice President of Product Development and1057Regulatory Affairs since 1998,Vice President of Clinical and Regulatory Affairs from 1994 to 1998, and Vice1058President of Research and Development from 1990 to 1994. He has served in various other capacities since1059joining the Company in 1984, including Director of Applications Research and Director of Research and1060Development. Prior to joining the Company in 1984, Dr. Anderson was an Assistant Professor at the University1061of Minnesota's College of Pharmacy.</FONT></P>10621063<P ALIGN="justify"><FONT Size="2"> <I>Douglas G. Austin</I> has served as the Company's Vice President of Operations since December of 1998.1064Prior to joining the Company, Mr. Austin served as: Executive Vice President and Vice President of Operations1065for Ergotron, Inc., a manufacturer of computer mounting solutions, from February 1996 to December of 1998;1066Director of Logistics and Purchasing for Wilsons - The Leather Experts, a specialty retailer of leather garments1067and accessories, from March of 1993 to February of 1996; and Director of System Stores and General1068Purchasing of Northwest Airlines, Inc. from June of 1976 to October of 1992.</FONT></P>10691070<CENTER><FONT Size="2">15</FONT></CENTER>1071<HR SIZE=5 COLOR=GRAY NOSHADE>10721073<P ALIGN="justify"><FONT Size="2"> <I>David J. Byrd</I> has served as the Company's Vice President of Finance and Chief Financial Officer since1074February of 1996 and its Treasurer since March of 1999. Prior to joining the Company, Mr. Byrd was Chief1075Financial Officer and Treasurer of Medisys, Inc., a health care services company, since 1991. From 1975 to10761991, Mr. Byrd was employed by Coopers & Lybrand, where he was a partner from 1986 to 1991. Mr. Byrd1077is a certified public accountant.</FONT></P>10781079<P ALIGN="justify"><FONT Size="2"> <I>Kirk P. Hodgdon</I> has served as the Company's Vice President of Business Development since April of10801999, and has served as the Company's Vice President of Breathe Right Brand from 1998 to 1999 and as Vice1081President of Marketing from 1994 to 1998. Prior to joining the Company, Mr. Hodgdon served as: Vice1082President-Management Supervisor at Gage Marketing Communications, a marketing services company, from10831993 to 1994; Vice President - Account Supervisor at U.S. Communications, a marketing agency, from 19891084to 1993; and Marketing Manager at Land O'Lakes, Inc., a consumer foods cooperative, from 1988 to 1989.</FONT></P>10851086<P ALIGN="justify"><FONT Size="2"> <I>John J. Keppeler</I> has served as the Company's Vice President of Worldwide Sales since August of 1999,1087and has served as the Company's Vice President of Sales from 1998 to 1999. From November of 1986 to June1088of 1998, Mr. Keppeler served in a series of sales and marketing positions of increasing responsibility with The1089Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving1090as Director of Category & Customer Development for the Green Giant and Progresso Business.</FONT></P>10911092<P ALIGN="justify"><FONT Size="2"> <I>Teri P. Osgood</I> has served as the Company's Vice President of U.S. Marketing since December of 1999,1093of the Breathe Right Brand from April to December of 1999, and has served as the Company's Vice President1094of New Business Commercialization from 1998 to April of 1999. From August of 1990 to July of 1998, Ms.1095Osgood served in a series of positions of increasing responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently serving from May of 1997 to July of 19981096as Business Team Leader for Old El Paso, and from October of 1995 to May of 1997 as Business Team Leader1097for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood was employed in marketing by the Kimberly Clark1098Corp., from 1988 to 1990.</FONT></P>10991100<P ALIGN="justify"><FONT Size="2"> <I>Carol J. Watzke</I> has served as the Company's Vice President of Consumer Strategy since July of 1998.1101Prior to joining the Company, Ms. Watzke served in a series of positions of increasing responsibility since 19741102with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food products, most recently1103serving as Consumer Insights Director from May of 1997 to July of 1998 and as Market Research Director,1104Green Giant Brands, from 1994 to 1997.</FONT></P>11051106<P><FONT Size="2"><U><B><A NAME="Item2">Item 2. PROPERTIES</A></B></U></FONT></P>11071108<P ALIGN="justify"><FONT Size="2"> The Company leases approximately 80,000 square feet of office, manufacturing and warehouse space1109in Bloomington, Minnesota. The lease expires in December of 2000. Upon the expiration of that lease, the1110Company will be moving into a different facility that consists of approximately 73,000 square feet of office,1111manufacturing and warehouse space located in Eden Prairie, Minnesota. The new lease expires in December1112of 2011 and contains a renewal option.</FONT></P>11131114<CENTER><FONT Size="2">16</FONT></CENTER>1115<HR SIZE=5 COLOR=GRAY NOSHADE>11161117<P><FONT Size="2"><U><B><A NAME="Item3">Item 3. LEGAL PROCEEDINGS</A></B></U></FONT></P>11181119<P ALIGN="justify"><FONT Size="2"> On July 20, 1999, the Company commenced a civil action in the United States District Court for the1120District of Minnesota, Case No. 99-CV-111 JMR/JGL, against JMS Labs Limited (USA), LLC, a/k/a/ JMS Labs1121Limited, asserting claims of patent infringement and Lanham Act violations. The Company contends that nasals1122strips manufactured, sold and/or offered for sale by JMS infringe United States Patent No. 5,533,499 (the "4991123Patent"), and that JMS has made false and/or misleading statements concerning the characteristics and qualities1124of its own products and the Company's products. JMS filed an answer and counterclaim, denying the1125Company's claims and asserting a counterclaim for declaratory judgment that the 499 Patent is invalid,1126unenforceable and not infringed, and that the complained of statements are not false and misleading. The1127Company intends to vigorously defend against JMS's counterclaim. No discovery has been conducted in this1128action. JMS has also moved before the United States Patent and Trademark Office for re-examination of the1129499 Patent.</FONT></P>11301131<P><FONT Size="2"><U><B><A NAME="Item4">Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></B></U></FONT></P>11321133<P><FONT Size="2"> None.</FONT></P>11341135<CENTER><FONT Size="2">17</FONT></CENTER>1136<HR SIZE=5 COLOR=GRAY NOSHADE>11371138<P><CENTER><FONT Size="2"><B><A NAME="PARTII">PART II</A></B></FONT></CENTER></P>11391140<P><FONT Size="2"><U><B><A NAME="Item5">Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</A></B></U></FONT></P>11411142<P><FONT Size="2"><B>Market Information</B></FONT></P>11431144<P ALIGN="justify"><FONT Size="2"> The Company's Common Stock has been traded on The Nasdaq Stock Market under the symbol1145"CNXS" since April 8, 1994. The following table sets forth the high and low last sale prices of the Company's1146Common Stock for the period indicated.</FONT></P>11471148<FONT SIZE="2"><PRE>1149<B>Fiscal Year Ended December 31, 1999</B> <B>High</B> <B>Low</B>1150---- ----1151First Quarter........................................................4.06 3.001152Second Quarter.......................................................3.47 2.811153Third Quarter........................................................4.19 3.471154Fourth Quarter.......................................................7.19 3.6311551156<B>Fiscal Year Ended December 31, 1998</B> <B>High</B> <B>Low</B>1157---- ----1158First Quarter........................................................7.75 5.441159Second Quarter.......................................................5.56 3.911160Third Quarter........................................................4.81 3.381161Fourth Quarter.......................................................5.06 3.411162</PRE></FONT>11631164<P ALIGN="justify"><FONT Size="2"> On March 15, 2000, the last sale price of the Common Stock was $5.125 per share.</FONT></P>11651166<P><FONT Size="2"><B>Shareholders</B></FONT></P>11671168<P ALIGN="justify"><FONT Size="2"> As of March 15, 2000, there were approximately 800 owners of record of Common Stock and an1169estimated 9,000 beneficial holders whose shares were registered in the names of nominees.</FONT></P>11701171<P><FONT Size="2"><B>Dividends</B></FONT><P>11721173<P ALIGN="justify"><FONT Size="2"> The Company has never paid any dividends on its Common Stock. The Company currently intends1174to retain any earnings for use in its operations and does not anticipate paying cash dividends in the foreseeable1175future. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors and1176will depend upon, among other things, future earnings, capital requirements, restrictions in future financing1177agreements, the general financial condition of the Company and general business considerations.</FONT></P>11781179<P><FONT Size="2"><B>Recent Sales of Unregistered Securities</B></FONT></P>11801181<P ALIGN="justify"><FONT Size="2"> On March 12, 1999, the Company issued two ten-year warrants to two individuals in connection with1182the Company's acquisition of certain intellectual property rights relating to the FLAIR equine nasal strip1183under a license agreement on that same date (the "Holders") between the Company and a business in which1184the Holders are principals. The warrants vest over a three-year period and entitle each of the Holders to1185purchase up to 25,000 shares of Common Stock of the Company at a purchase price of $3.4375 per share,1186the fair market value of the Common Stock of the Company on the date the warrants were issued. The1187Company also granted the Holders certain "piggyback" or "incidental" registration rights in connection with1188the shares of Common Stock acquired by the Holders upon exercise of the warrants. The Company believes1189that the issuance of the warrants was exempt under Section 4(2) of the Securities Act of 1933. The Company1190did not issue any unregistered securities during the quarter ended December 31, 1999.</FONT></P>11911192<CENTER><FONT Size="2">18</FONT></CENTER>1193<HR SIZE=5 COLOR=GRAY NOSHADE>11941195<P><FONT Size="2"><U><B><A NAME="Item6">Item 6. SELECTED FINANCIAL DATA</A></B></U></FONT></P>11961197<P ALIGN="justify"><FONT Size="2"> The following selected financial data should be read in conjunction with the Company's Consolidated1198Financial Statements and Notes thereto together with the "Management's Discussion and Analysis of Financial1199Condition and Results of Operations," all of which are included elsewhere in this Report. The Consolidated1200Statements of Operations and Balance Sheet data presented below as of and for the Years Ended December 31,12011997 through December 31, 1999 inclusive have been derived from the Company's Consolidated Financial1202Statements included elsewhere in this Report, which have been audited by KPMG LLP, independent certified1203public accountants.</FONT></P>12041205<CENTER><P><FONT Size="2"><B>FINANCIAL HIGHLIGHTS</B><BR>1206(In thousands, except per share amounts)</FONT></P></CENTER>12071208<FONT SIZE="2"><PRE>1209Years ended December 31,12101999 1998 1997 1996 19951211---------------------------------------------------------1212Net sales $ 46,050 $ 53,623 $ 66,957 $ 85,866 $ 48,6311213Operating income (loss) (18,696) 701 9,644 21,743 12,3981214Income (loss) from continuing operations (13,757) 2,982 8,770 15,522 13,3111215Net income (loss) (13,757) 2,982 8,770 15,522 14,0761216Diluted net income (loss) per share1217from continuing operations (0.89) 0.16 0.44 0.78 0.721218Diluted net income (loss) per share (0.89) 0.16 0.44 0.78 0.7212191220Working capital $ 50,183 $ 72,025 $ 76,919 $ 78,403 $ 25,8551221Total assets 65,337 84,963 88,495 89,409 32,3411222Stockholders' equity 53,584 75,866 80,645 79,775 26,8851223</PRE></FONT>12241225<CENTER><FONT Size="2">19</FONT></CENTER>1226<HR SIZE=5 COLOR=GRAY NOSHADE>12271228<P><FONT Size="2"><U><B><A NAME="Item7">Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></B></U></FONT></P>12291230<P ALIGN="justify"><FONT Size="2"> The following discussion of the financial condition and results of1231operations should be read in conjunction with the Company's audited consolidated1232financial statements and notes thereto appearing elsewhere in this Annual1233Report. In the opinion of the Company's management, the quarterly unaudited1234information set forth below has been prepared on the same basis as the audited1235financial information, and includes all adjustments (consisting only of normal,1236recurring adjustments) necessary to present this information fairly when read in1237conjunction with the Company's consolidated financial statements and notes1238thereto.</FONT></P>12391240<P><FONT Size="2"><B>Overview</B></FONT></P>12411242<P ALIGN="justify"><FONT Size="2"> The Company was founded in 1982. From 1987 until 1995, the Company1243designed, manufactured and marketed computer-based diagnostic devices for sleep1244disorders. Since 1995, the Company has focused primarily on the Breathe Right®1245nasal strip and divested itself of the assets related to its sleep disorders1246business. The Company's revenues are derived primarily from the manufacture and1247sale of the Breathe Right nasal strip. Revenue from sales is recognized when1248earned, at the time products are shipped.</FONT></P>12491250<P ALIGN="justify"><FONT Size="2"> The Company obtained the exclusive license to manufacture and sell the1251Breathe Right nasal strip in 1992 and received FDA clearance in October 1993 to1252market the Breathe Right nasal strip as a product that improves nasal breathing.1253In September 1994, the Company launched its consumer marketing program which was1254enhanced by broad media coverage of the use of Breathe Right nasal strips by1255professional football players. At the same time, a number of radio and1256television personalities provided unsolicited endorsements of the product on1257national radio and television.</FONT></P>12581259<P ALIGN="justify"><FONT Size="2"> In August 1995, the Company signed an exclusive international1260distribution agreement with the 3M Company ("3M") to market Breathe Right nasal1261strips outside the U.S. and Canada. On September 30, 1999, the Company and 3M1262amended the distribution agreement in a manner that allows the Company to regain1263control of its international business on a phased schedule. In exchange for the1264one-time contract termination fee noted below, 3M is authorized to continue to1265distribute primarily on a non-exclusive basis until June 30, 2000. The1266international distribution agreement with 3M will terminate on June 30, 2000.1267The Company is currently adding distributors who will reintroduce nasal strips1268to Europe, Japan and Australia.</FONT></P>12691270<P ALIGN="justify"><FONT Size="2"> In November 1995, the Company received FDA clearance to market the1271Breathe Right nasal strip for the reduction or elimination of snoring and began1272marketing programs emphasizing the related snoring benefits of the product. At1273the end of 1995, Breathe Right nasal strips were available in most domestic drug1274stores, mass merchants and warehouse clubs and a majority of grocery stores.</FONT></P>12751276<P ALIGN="justify"><FONT Size="2"> In February 1996, the Company received FDA clearance to market the1277Breathe Right nasal strip for the temporary relief of nasal congestion and1278thereafter launched a media program to increase consumer awareness of the1279benefits of the product for this application. In June 1996, the Company received1280FDA clearance to market the Breathe Right nasal strip for the temporary relief1281of breathing difficulties due to a deviated nasal septum. In July 1996, U.S.1282Utility Patents were issued covering the basic invention of the Breathe Right1283nasal strip and additional elements incorporated in the product. During 1997,1284the Company became aware of a foreign reference to a nasal dilator, not1285commercially available, that the Company believed would result in narrower1286protection in the future from the patents licensed for Breathe Right nasal1287strips.</FONT></P>12881289<CENTER><FONT Size="2">20</FONT></CENTER>1290<HR SIZE=5 COLOR=GRAY NOSHADE>12911292<P ALIGN="justify"><FONT Size="2"> During 1998, the Company strengthened its management team to add1293consumer packaged goods and new products experience and organized into focused1294business teams. The Company completed positioning research work to expand the1295Breathe Right brand and developed a road map for new product development. During12961999, the Company invested aggressively in marketing, selling and product1297development expenses to build the Breathe Right brand and position additional1298products for launch in 2000.</FONT></P>12991300<P><FONT Size="2"><B>Operating Results</B></FONT></P>13011302<P ALIGN="justify"><FONT Size="2"> The tables below set forth certain selected financial information of1303the Company and the percentage of net sales represented by certain items1304included in the Company's statements of income for the periods indicated.</FONT></P>13051306<FONT SIZE="2"><PRE>1307Three Months Ended Year Three Months Ended Year1308------------------------------------------ Ended ------------------------------------- Ended1309Mar 31, Jun 30, Sep 30, Dec 31, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,13101999 1999 1999 1999 1999 1999 1999 1999 1999 19991311--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1312(In thousands)1313Domestic net sales $ 11,811 $ 7,994 $ 10,151 $ 15,106 $ 45,0621314International net sales 123 191 312 362 9881315--------- -------- -------- --------- --------1316Net sales 11,934 8,185 10,463 15,468 46,050 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %1317Cost of goods sold 4,688 3,629 3,992 6,049 18,358 39.3 44.3 38.2 39.1 39.91318--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1319Gross profit 7,246 4,556 6,471 9,419 27,692 60.7 55.7 61.8 60.9 60.11320--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1321Operating expenses:1322Marketing and selling 11,430 4,361 4,644 12,918 33,353 95.8 53.3 44.4 83.5 72.41323General and administrative 803 824 941 815 3,383 6.7 10.1 9.0 5.3 7.31324Product development 979 843 782 702 3,306 8.2 10.3 7.5 4.5 7.21325Contract termination fee 0 0 6,345 0 6,345 0.0 0.0 60.6 0.0 13.81326--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1327Total operating expenses 13,212 6,028 12,712 14,435 46,387 110.7 73.6 121.5 93.3 100.71328--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1329Operating loss (5,966) (1,472) (6,241) (5,016) (18,695) (50.0) (18.0) (59.6) (32.4) (40.6)1330Investment income 899 698 643 598 2,838 7.5 8.5 6.1 3.9 6.21331--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1332Loss before income taxes $ (5,067)$ (774)$ (5,598)$ (4,418)$ (15,857) (42.5)% (9.5)% (53.5)% (28.6)% (34.4)%1333========= ======== ======== ========= ======== ======== ======== ======== ======== ========133413351336Three Months Ended Year Three Months Ended Year1337------------------------------------------ Ended ------------------------------------- Ended1338Mar 31, Jun 30, Sep 30, Dec 31, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,13391998 1998 1998 1998 1998 1998 1998 1998 1998 19981340--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1341(In thousands)1342Domestic net sales $ 13,354 $ 11,789 $ 12,581 $ 14,130 $ 51,8541343International net sales 1,127 168 168 305 1,7681344--------- -------- -------- --------- --------1345Net sales 14,481 11,957 12,749 14,435 53,622 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %1346Cost of goods sold 4,470 4,454 4,242 5,320 18,486 30.9 37.3 33.3 36.9 34.51347--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1348Gross profit 10,011 7,503 8,507 9,115 35,136 69.1 62.7 66.7 63.1 65.51349--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1350Operating expenses:1351Marketing and selling 9,694 5,581 7,032 6,470 28,777 66.9 46.7 55.2 44.8 53.71352General and administrative 1,047 1,167 810 596 3,620 7.2 9.8 6.4 4.1 6.81353Product development 395 589 540 515 2,039 2.7 4.9 4.2 3.6 3.81354--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1355Total operating expenses 11,136 7,337 8,382 7,581 34,436 76.9 61.4 65.7 52.5 64.21356--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1357Operating income (loss) (1,125) 166 125 1,534 700 (7.8) 1.4 1.0 10.6 1.31358Investment income 690 730 712 660 2,792 4.8 6.1 5.6 4.6 5.21359--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1360Income (loss) before income taxes $ (435)$ 896 $ 837 $ 2,194 $ 3,492 (3.0)% 7.5 % 6.6 % 15.2 % 6.5 %1361========= ======== ======== ========= ======== ======== ======== ======== ======== ========1362</PRE></FONT>13631364<CENTER><FONT Size="2">21</FONT></CENTER>1365<HR SIZE=5 COLOR=GRAY NOSHADE>13661367<FONT SIZE="2"><PRE>1368Three Months Ended Year Three Months Ended Year1369------------------------------------------ Ended ------------------------------------- Ended1370Mar 31, Jun 30, Sep 30, Dec 31, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Dec 31,13711997 1997 1997 1997 1997 1997 1997 1997 1997 19971372--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1373(In thousands)1374Domestic net sales $ 16,909 $ 12,623 $ 12,352 $ 18,718 $ 60,6021375International net sales 2,486 970 291 2,608 6,3551376--------- -------- -------- --------- --------1377Net sales 19,395 13,593 12,643 21,326 66,957 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %1378Cost of goods sold 6,245 4,456 3,897 6,695 21,293 32.2 32.8 30.8 31.4 31.81379--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1380Gross profit 13,150 9,137 8,746 14,631 45,664 67.8 67.2 69.2 68.6 68.21381--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1382Operating expenses:1383Marketing and selling 11,124 4,900 4,582 11,033 31,639 57.4 36.0 36.2 51.7 47.31384General and administrative 762 812 933 768 3,275 3.9 6.0 7.4 3.6 4.91385Product development 202 289 246 369 1,106 1.0 2.1 1.9 1.7 1.71386--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1387Total operating expenses 12,088 6,001 5,761 12,170 36,020 62.3 44.1 45.6 57.1 53.81388--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1389Operating income 1,062 3,136 2,985 2,461 9,644 5.5 23.1 23.6 11.5 14.41390Investment income 710 777 773 716 2,976 3.7 5.7 6.1 3.4 4.41391--------- -------- -------- --------- -------- -------- -------- -------- -------- --------1392Income before income taxes $ 1,772 $ 3,913 $ 3,758 $ 3,177 $ 12,620 9.1 % 28.8 % 29.7 % 14.9 % 18.8 %1393========= ======== ======== ========= ======== ======== ======== ======== ======== ========1394</PRE></FONT>13951396<P><FONT Size="2"><B>1999 Compared to 1998</B></FONT></P>13971398<P ALIGN="justify"><FONT Size="2"> <I>Net Sales.</I> Net sales were $46.1 million for 1999 compared to $53.61399million for 1998. While sales were down for the year, fourth quarter sales1400increased to $15.5 million for 1999 from $14.4 million for 1998 due to increased1401advertising expenditures. For the year 1999, domestic sales declined to $45.11402million from $51.9 for 1998. Slower sales for 1999 reflect both a lower level of1403advertising during the previous cough/cold season and the presence of1404competition. Retailer returns of product in conjunction with our introduction of1405new packaging also reduced sales.</FONT></P>14061407<P ALIGN="justify"><FONT Size="2"> The Company has experienced in the past, and expects that it will1408continue to experience in the future, quarterly fluctuations in both domestic1409and international sales and earnings. These fluctuations are due in part to1410advertising levels and seasonality of sales as described below, as well as1411increases and decreases in purchases by distributors and retailers in1412anticipation of future demand by consumers.</FONT></P>14131414<P ALIGN="justify"><FONT Size="2"> International sales decreased to $988,000 for 1999 from $1.8 million1415for 1998. The lower level of international sales for 1999 is attributable in1416large part to disappointing marketing results and continued high inventory1417levels at the Company's international distributor 3M. The distribution agreement1418with 3M has been terminated effective June 30, 2000. The Company is currently1419adding distributors who will reintroduce nasal strips to Europe, Japan and1420Australia. In addition the Company will take a more active role in international1421advertising and promotion.</FONT></P>14221423<P ALIGN="justify"><FONT Size="2"> <I>Gross Profit.</I> Gross profit was $27.7 million for 1999 compared to $35.11424million for 1998. Gross profit as a percentage of net sales was 60.1% for 19991425compared to 65.5% for 1998. The lower gross profit as a percentage of net sales1426was primarily due to costs of the transition to new product packaging, lower1427sales and product mix.</FONT></P>14281429<P ALIGN="justify"><FONT Size="2"> <I>Marketing and Selling Expenses.</I> Marketing and selling expenses were1430$33.4 million for 1999 compared to $28.8 million for 1998. This increase1431resulted primarily from a resumption in national television advertising during14321999 after no significant advertising in the fourth quarter of</FONT></P>14331434<CENTER><FONT Size="2">22</FONT></CENTER>1435<HR SIZE=5 COLOR=GRAY NOSHADE>14361437<P ALIGN="justify"><FONT SIZE="2">1998. Marketing1438and selling expenses as a percentage of net sales increased to 72.4% in 19991439from 53.7% in 1998 reflecting the planned investment in advertising needed to1440return the Breathe Right brand to growth in the fourth quarter of 1999.</FONT></P>14411442<P ALIGN="justify"><FONT Size="2"> <I>General and Administrative Expenses.</I> General and administrative1443expenses were $3.4 million for 1999 comparable to $3.6 million for 1998. General1444and administrative expenses as a percentage of net sales increased to 7.3% in14451999 from 6.7% in 1998 primarily as a result of the lower level of sales in14461999.</FONT></P>14471448<P ALIGN="justify"><FONT Size="2"> <I>Product Development Expenses.</I> Product development expenses were $3.31449million for 1999 compared to $2.0 million for 1998. This increase resulted1450primarily from costs related to evaluation and testing of potential new1451products, including FLAIR equine nasal strips and FiberChoice chewable fiber1452tablets. Product development expenses as a percentage of net sales increased to14537.2% in 1999 from 3.8% in 1998.</FONT></P>14541455<P ALIGN="justify"><FONT Size="2"> <I>Contract Termination Fee.</I> Contract termination fee of $6.3 million1456represents a one-time payment to 3M, the Company's international distributor, to1457terminate the international distribution agreement. The amount paid was1458negotiated, and is less than the amount called for in the original contract. The1459agreement allows the Company to regain control of the international business on1460a phased schedule that will be completed by June 30, 2000.</FONT></P>14611462<P ALIGN="justify"><FONT Size="2"> <I>Investment Income.</I> Investment income was $2.8 million for 1999 and 1998.</FONT></P>14631464<P ALIGN="justify"><FONT Size="2"> <I>Income Tax Benefit (Expense).</I> Income tax provision for 1999 was a1465benefit of $2.1 million compared to an expense of $510,000 for 1998. Due to tax1466loss carryforwards the income tax benefit for 1999 represents the remaining tax1467benefit available from carrying back current year losses, offset by a reserve1468against net deferred income tax assets. A high level of tax-exempt interest1469income impacted the effective income tax rate in 1998.</FONT></P>14701471<P><FONT Size="2"><B>1998 Compared to 1997</B></FONT></P>14721473<P ALIGN="justify"><FONT Size="2"> <I>Net Sales.</I> Net sales were $53.6 million for 1998 compared to $67.01474million for 1997. For the year 1998, domestic sales decreased to $51.9 million1475from $60.6 million for 1997. The decrease was primarily due to the failure of1476marketing efforts to generate the anticipated volume of new Breathe Right nasal1477strip users in the first quarter of 1998, a planned reduction in advertising1478expenditures during the fourth quarter of 1998 and the entry of a competitor at1479the end of 1998.</FONT></P>14801481<P ALIGN="justify"><FONT Size="2"> International sales decreased to $1.8 million for 1998 from $6.41482million for 1997. The lower level of international sales in 1998 reflects1483continued high inventory levels at 3M.</FONT></P>14841485<P ALIGN="justify"><FONT Size="2"> <I>Gross Profit.</I> Gross profit was $35.1 million for 1998 compared to $45.71486million for 1997. Gross profit as a percentage of net sales was 65.5% for 19981487compared to 68.2% for 1997. The lower gross profit as a percentage of net sales1488in 1998 was due primarily to a write off of inventory in anticipation of the1489introduction of new packaging, the inclusion of "20% More Free" Breathe Right1490nasal strips in packages for part of the year and the introduction of new1491products with lower gross profit margins.</FONT></P>14921493<P ALIGN="justify"><FONT Size="2"> <I>Marketing and Selling Expenses.</I> Marketing and selling expenses were1494$28.8 million for 1998 compared to $31.6 million for 1997. This decrease1495resulted primarily from a planned</FONT></P>14961497<CENTER><FONT Size="2">23</FONT></CENTER>1498<HR SIZE=5 COLOR=GRAY NOSHADE>14991500<P ALIGN="justify"><FONT SIZE="2">reduction in national television advertising1501during the fourth quarter of 1998 and lower than expected coupon redemption.1502Marketing and selling expenses as a percentage of net sales increased to 53.7%1503in 1998 from 47.3% in 1997, reflecting the lower level of sales in 1998.</FONT></P>15041505<P ALIGN="justify"><FONT Size="2"> <I>General and Administrative Expenses.</I> General and administrative1506expenses were $3.6 million for 1998 compared to $3.3 million for 1997. This1507increase resulted primarily from personnel expenses, including costs associated1508with the change of the Company's President, offset by a decrease in expenses1509from patent litigation that was settled during 1998. General and administrative1510expenses as a percentage of net sales increased to 6.7% in 1998 from 4.9% in15111997 primarily as a result of the lower level of sales in 1998.</FONT></P>15121513<P ALIGN="justify"><FONT Size="2"> <I>Product Development Expenses.</I> Product development expenses were $2.01514million for 1998 compared to $1.1 million for 1997. This increase resulted1515primarily from costs related to evaluation and testing of potential new1516products. Product development expenses as a percentage of net sales increased to15173.8% in 1998 from 1.6% in 1997.</FONT></P>15181519<P ALIGN="justify"><FONT Size="2"> <I>Investment Income.</I> Investment income was $2.8 million for 1998 compared1520to $3.0 million for 1997. This decrease resulted primarily from a higher level1521of investment in tax exempt municipal bonds in 1998.</FONT></P>15221523<P ALIGN="justify"><FONT Size="2"> <I>Income Tax Expense.</I> Income tax expense for 1998 was $510,000 or 14.6%1524of income before income taxes compared to $3.9 million or 30.5% for 1997. The1525lower effective income tax rate was due primarily to the higher level of tax1526exempt interest income as a percentage of income before income taxes.</FONT></P>15271528<P><FONT Size="2"><B>Seasonality</B></FONT></P>15291530<P ALIGN="justify"><FONT Size="2"> The Company believes that approximately 50% of Breathe Right nasal1531strip users currently use the product for the temporary relief of nasal1532congestion or congestion related to snoring. Sales of nasal congestion remedies1533are higher during the fall and winter seasons because of increased use during1534the cold season.</FONT></P>15351536<P><FONT Size="2"><B>Liquidity and Capital Resources</B></FONT></P>15371538<P ALIGN="justify"><FONT Size="2"> At December 31, 1999, the Company had cash, cash equivalents and1539marketable securities of $38.9 million and working capital of $50.2 million.</FONT></P>15401541<P ALIGN="justify"><FONT Size="2"> <I>Operating Activities.</I> The Company used cash in operations of1542approximately $12.1 million in 1999. The decreased cash flow in 1999 was1543primarily due to the net loss for the year. The Company generated cash from1544operations of $9.3 million in 1998 and $8.0 million in 1997. The increased cash1545flow in 1998 was primarily due to a change in operating assets and liabilities1546offset by a decrease in net income.</FONT></P>15471548<P ALIGN="justify"><FONT Size="2"> <I>Investing Activities.</I> Sales and maturities of marketable securities1549exceeded purchases by $21.1 million in 1999. Net proceeds were used to fund the1550cash used in operations and purchase treasury shares. The Company's purchases of1551marketable securities equaled sales and maturities of marketable securities in15521998. Marketable securities purchased consisted of cash equivalents, corporate1553bonds, U.S. Government obligations and municipal bonds.</FONT></P>15541555<CENTER><FONT Size="2">24</FONT></CENTER>1556<HR SIZE=5 COLOR=GRAY NOSHADE>15571558<P ALIGN="justify"><FONT Size="2"> The Company purchased $331,000 of property and equipment in 1999 and1559$1.1 million in 1998, primarily associated with the upgrade of management1560information systems.</FONT></P>15611562<P ALIGN="justify"><FONT Size="2"> <I>Financing Activities.</I> The Company purchased 2.3 million shares of its1563common stock for $8.6 million in 1999 and purchased 1.9 million shares for $8.31564million in 1998. These treasury shares are to be used to meet the Company's1565obligations under its employee stock ownership plan and stock option plans, and1566for possible future acquisitions. The Company received $446,000 in 1999 and1567$239,000 in 1998 from the exercise of stock options.</FONT></P>15681569<P ALIGN="justify"><FONT Size="2"> The Company believes that its existing funds will be sufficient to1570support its planned operations for the foreseeable future, including capital1571expenditures and possible future acquisitions of products that would complement1572existing operations.</FONT></P>15731574<P><FONT Size="2"><B>Year 2000</B></FONT></P>15751576<P ALIGN="justify"><FONT Size="2"> The Company evaluated the potential impact of what is commonly referred1577to as the Year 2000 issue, concerning the inability of certain information1578systems to properly recognize and process dates containing the year 2000 and1579beyond. The Company identified and tested its systems, and the test results1580indicated that these systems were Year 2000 compliant. The Company has1581experienced no Year 2000 system issues in 2000.</FONT></P>15821583<P ALIGN="justify"><FONT Size="2"> The Company's direct costs for Year 2000 compliance were not1584significant and consisted primarily of costs related to the staff time devoted1585to Year 2000 compliance.</FONT></P>15861587<P><FONT Size="2"><B>Recent Accounting Pronouncements</B></FONT></P>15881589<P ALIGN="justify"><FONT Size="2"> In 1998, the Financial Accounting Standards Board issued SFAS No. 133,1590Accounting for Derivative Instruments and Hedging Activities. SFAS No. 1331591establishes new standards for recognizing all derivatives as either assets or1592liabilities, and measuring those instruments at fair value. The Company plans to1593adopt the new standard in 2001. The Company is in the process of evaluating SFAS1594No. 133 and its potential impact.</FONT></P>15951596<P ALIGN="justify"><FONT Size="2"> In 1998, the Accounting Standards Executive Committee issued Statement1597of Position ("SOP") 98-1, Accounting for the Costs of Computer Software1598Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting1599for the costs of computer software developed or obtained for internal use and1600does not require additional disclosures. The Company adopted SOP 98-1 in 1999.1601Costs incurred prior to the initial application of the SOP were not adjusted to1602conform with SOP 98-1. The adoption did not have a material impact on the1603Company's financial position or results of operations.</FONT></P>16041605<CENTER><FONT Size="2">25</FONT></CENTER>1606<HR SIZE=5 COLOR=GRAY NOSHADE>16071608<P><FONT Size="2"><U><B><A NAME="Item7A">Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></B></U></FONT></P>16091610<P ALIGN="justify"><FONT Size="2"> The Company's market risk exposure is primarily interest rate risk related to its cash and cash1611equivalents and investments in marketable securities. The Company has investment guidelines which limit the1612types of securities in which it may invest as well as the length of maturities. No investment may exceed 361613months in maturity and the weighted average life of the portfolio may not exceed 18 months.</FONT></P>16141615<P ALIGN="justify"><FONT Size="2"> The table below provides information about the Company's cash and cash equivalents and marketable1616securities as of December 31, 1999:</FONT></P>16171618<FONT SIZE="2"><PRE>1619(In thousands)16201621Cost Fair Value1622---- ----------16231624Due within one year $19,137 $19,0911625Due after one year1626through two years 16,207 15,9901627Due after two years1628through three years 2,973 2,9161629------- -------1630$38,317 $37,9971631======= =======1632</PRE></FONT>16331634<P><FONT Size="2"><U><B><A NAME="Item8">Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</A></B></U></FONT></P>16351636<P ALIGN="justify"><FONT Size="2"> The Consolidated Balance Sheets of the Company as of December 31, 1999 and 1998, and the related1637Consolidated Statements of Operations, Stockholders' Equity and Comprehensive Income (Loss), and Cash1638Flows for each of the years in the three-year period ended December 31, 1999, the Notes to the Consolidated1639Financial Statements and the Report of KPMG LLP, independent certified public accountants, are listed under1640Item 14 of this Report.</FONT></P>16411642<P><FONT Size="2"><U><B><A NAME="Item9">Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE</A></B></U></FONT></P>16431644<P><FONT Size="2"> None.</FONT></P>16451646<CENTER><FONT Size="2">26</FONT></CENTER>1647<HR SIZE=5 COLOR=GRAY NOSHADE>16481649<CENTER><P><FONT Size="2"><B><A NAME="PARTIII">PART III</A></B></FONT></P></CENTER>16501651<P><FONT Size="2"><U><B><A NAME="Item10">Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</A></B></U></FONT></P>16521653<P ALIGN="justify"><FONT Size="2"> Certain information required under this Item with respect to directors is contained in the Section1654"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's1655Proxy Statement for the Annual Meeting of Stockholders to be held on May 3, 2000 (the "2000 Proxy1656Statement"), a definitive copy of which will be filed with the Commission within 120 days of the close of the1657last fiscal year, and is incorporated herein by reference.</FONT></P>16581659<P ALIGN="justify"><FONT Size="2"> Information concerning executive officers is set forth in the Section entitled "Executive Officers of1660the Company" in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation1661S-K.</FONT></P>16621663<P><FONT Size="2"><U><B><A NAME="Item11">Item 11. EXECUTIVE COMPENSATION</A></B></U></FONT></P>16641665<P ALIGN="justify"><FONT Size="2"> Information required under this item is contained in the section entitled "Executive Compensation"1666in the Company's 2000 Proxy Statement and is incorporated herein by reference.</FONT></P>16671668<P><FONT Size="2"><U><B><A NAME="Item12">Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</A></B></U></FONT></P>16691670<P ALIGN="justify"><FONT Size="2"> Information required under this item is contained in the section entitled "Security Ownership of1671Principal Stockholders and Management" in the Company's 2000 Proxy Statement and is incorporated herein1672by reference.</FONT></P>16731674<P><FONT Size="2"><U><B><A NAME="Item13">Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</A></B></U></FONT></P>16751676<P><FONT Size="2"> Not Applicable.</FONT></P>16771678<CENTER><FONT Size="2">27</FONT></CENTER>1679<HR SIZE=5 COLOR=GRAY NOSHADE>16801681<P><CENTER><B><A NAME="PARTIV">PART IV</A></B></CENTER></P>16821683<P><FONT Size="2"><U><B><A NAME="Item14">Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K</A></B></U></FONT></P>16841685<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0">1686<TR>1687<TD WIDTH="5%" VALIGN="TOP"><FONT Size="2">(a)</FONT></TD>1688<TD WIDTH="5%"><FONT Size="2"> </FONT></TD>1689<TD COLSPAN="4" VALIGN="TOP"><P ALIGN="justify"><FONT Size="2">Documents filed as part of this Report:</FONT></P></TD>1690</TR>1691<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1692<TR>1693<TD COLSPAN="5" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1694<TD WIDTH="14%" VALIGN="TOP"><CENTER><FONT Size="2"><B>Form 10-K<BR><U>Page Reference</U></B></CENTER></FONT></TD>1695</TR>1696<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1697<TR>1698<TD COLSPAN="2" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1699<TD WIDTH="3%" VALIGN="TOP"><FONT Size="2">1.</FONT></TD>1700<TD WIDTH="3%" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1701<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Financial Statements.</FONT></TD>1702</TR>1703<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1704<TR>1705<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1706<TD WIDTH="70%" VALIGN="TOP"><FONT Size="2">Independent Auditors' Report</FONT></TD>1707<TD VALIGN="TOP"><CENTER><FONT Size="2">F-1</FONT></CENTER></TD>1708</TR>1709<TR>1710<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1711<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Operations for the Years Ended<BR>1712 December 31, 1999, 1998 and 1997</FONT></TD>1713<TD VALIGN="TOP"><CENTER><FONT Size="2">F-2</FONT></CENTER></TD>1714</TR>1715<TR>1716<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1717<TD VALIGN="TOP"><FONT Size="2">Consolidated Balance Sheets as of December 31, 1999 and 1998</FONT></TD>1718<TD VALIGN="TOP"><CENTER><FONT Size="2">F-3</FONT></CENTER></TD>1719</TR>1720<TR>1721<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1722<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Stockholders' Equity and Comprehensive<BR>1723 Income (Loss) for the Years Ended December 31, 1999, 1998 and 1997</FONT></TD>1724<TD VALIGN="TOP"><CENTER><FONT Size="2">F-4</FONT></CENTER></TD>1725</TR>1726<TR>1727<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1728<TD VALIGN="TOP"><FONT Size="2">Consolidated Statements of Cash Flows for the Years Ended<BR>1729 December 31, 1999, 1998 and 1997</FONT></TD>1730<TD VALIGN="TOP"><CENTER><FONT Size="2">F-5</FONT></CENTER></TD>1731</TR>1732<TR>1733<TD COLSPAN="4" VALIGN="TOP"><FONT SIZE="2"> </FONT></TD>1734<TD VALIGN="TOP"><FONT Size="2">Notes to Consolidated Financial Statements</FONT></TD>1735<TD VALIGN="TOP"><CENTER><FONT Size="2">F-6</FONT></CENTER></TD>1736</TR>1737<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1738<TR>1739<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1740<TD VALIGN="TOP"><FONT Size="2">2.</FONT></TD>1741<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1742<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Financial Statement Schedules.</FONT></TD>1743</TR>1744<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1745<TR>1746<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1747<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">None.</FONT></TD>1748</TR>1749<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1750<TR>1751<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1752<TD VALIGN="TOP"><FONT Size="2">3.</FONT></TD>1753<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1754<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">Exhibits.</FONT></TD>1755</TR>1756<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1757<TR>1758<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2"> </FONT></TD>1759<TD COLSPAN="2" VALIGN="TOP"><FONT Size="2">See "Exhibit Index" on the page following the Signature Page.</FONT></TD>1760</TR>1761<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1762<TR>1763<TD VALIGN="TOP"><FONT Size="2">(b)</FONT></TD>1764<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1765<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2">Reports on Form 8-K.</FONT></TD>1766</TR>1767<TR><TD COLSPAN="6" VALIGN="TOP"> </TD></TR>1768<TR>1769<TD COLSPAN="2" VALIGN="TOP"> </TD>1770<TD COLSPAN="4" VALIGN="TOP"><FONT Size="2">The Company did not file a report on Form 8-K during the fourth quarter ended December 31, 1999.</FONT>1771</TR>1772</TABLE>17731774<CENTER><FONT Size="2">28</FONT></CENTER>1775<HR SIZE=5 COLOR=GRAY NOSHADE>17761777<CENTER><P><FONT Size="2"><B><A NAME="SIGNATURES">SIGNATURES</A></B></FONT></P></CENTER>17781779<P ALIGN="justify"><FONT Size="2"> Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the1780Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.</FONT></P>17811782<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="2" WIDTH="100%">1783<TR>1784<TD VALIGN="TOP" WIDTH="50%"><FONT Size="2"> </FONT></TD>1785<TD VALIGN="TOP" COLSPAN="2"><FONT Size="2">CNS, INC.<BR>("Registrant")</FONT></TD>1786</TR>1787<TR>1788<TD VALIGN="TOP"><FONT Size="2"> <BR> </FONT></TD>1789<TD VALIGN="TOP" WIDTH="2%"><FONT Size="2"> <BR> </FONT></TD>1790<TD VALIGN="TOP" WIDTH="48%"><FONT Size="2"> <BR> </FONT></TD>1791</TR>1792<TR>1793<TD VALIGN="TOP"><FONT Size="2">Dated: March 27, 2000</FONT></TD>1794<TD VALIGN="TOP" COLSPAN="2"><FONT Size="2">By <U>/s/ Daniel E. Cohen 1795 </U></FONT></TD>1796</TR>1797<TR>1798<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1799<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>1800<TD VALIGN="TOP"><FONT Size="2">Daniel E. Cohen<BR>Chairman of the Board, Chief Executive<BR>Officer and Director</FONT></TD>1801</TR>1802</TABLE>18031804<P ALIGN="justify"><FONT Size="2"> Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by1805the following persons on March 27, 2000 on behalf of the Registrant in the capacities indicated.</FONT></P>18061807<CENTER><P><FONT Size="2"><B>(POWER OF ATTORNEY)</B></FONT></P></CENTER>18081809<P ALIGN="justify"><FONT Size="2"> Each person whose signature appears below constitutes and appoints DANIEL E. COHEN and1810PATRICK DELANEY as his or her true and lawful attorneys-in-fact and agents, each acting alone, with the full1811power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all1812capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all1813exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,1814granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform1815each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents1816and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and1817agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.</FONT></P>1818<BR>18191820<P><FONT Size="2"><U>/s/ Daniel E. Cohen </U><BR>1821Daniel E. Cohen<BR>1822Chairman of the Board, Chief Executive Officer<BR>1823and Director<BR>1824(Principal Executive Officer)</P></FONT>1825<BR>18261827<P><FONT Size="2"><U>/s/ Marti Morfitt </U><BR>1828Marti Morfitt<BR>1829President, Chief Operating Officer and Director</P></FONT>1830<BR>18311832<P><FONT Size="2"><U>/s/ David J. Byrd </U><BR>1833David J. Byrd<BR>1834Vice President of Finance, Chief<BR>1835Financial Officer and Treasurer<BR>1836(Principal Financial and Accounting Officer)</P></FONT>1837<BR>18381839<P><FONT Size="2"><U>/s/ Patrick Delaney </U><BR>1840Patrick Delaney<BR>1841Director</P></FONT>1842<BR>18431844<CENTER><FONT Size="2">29</FONT></CENTER>1845<HR SIZE=5 COLOR=GRAY NOSHADE>18461847<P><FONT Size="2"><U>/s/ H. Robert Hawthorne </U><BR>1848H. Robert Hawthorne<BR>1849Director</P></FONT>1850<BR>18511852<P><FONT Size="2"><U>/s/ R. Hunt Greene </U><BR>1853R. Hunt Greene<BR>1854Director</P></FONT>1855<BR>18561857<P><FONT Size="2"><U>/s/ Andrew J. Greenshields </U><BR>1858Andrew J. Greenshields<BR>1859Director</P></FONT>1860<BR>18611862<P><FONT Size="2"><U>/s/ Richard W. Perkins </U><BR>1863Richard W. Perkins<BR>1864Director</P></FONT>18651866<CENTER><FONT Size="2">30</FONT></CENTER>1867<HR SIZE=5 COLOR=GRAY NOSHADE>18681869<CENTER><P><FONT Size="2"><A NAME="EXHIBIT_INDEX">CNS, INC.<BR>1870<U>EXHIBIT INDEX</A></U></FONT></P></CENTER>18711872<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">1873<TR>1874<TD VALIGN="TOP" WIDTH="15%"><FONT Size="2"><U><B>Exhibit No.</B></U></FONT></TD>1875<TD VALIGN="TOP" WIDTH="85%"><FONT Size="2"><U><B>Description</B></U></FONT></TD>1876</TR>1877<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1878<TR>1879<TD VALIGN="TOP"><FONT Size="2">3.1</FONT></TD>1880<TD VALIGN="TOP"><FONT Size="2">Company's Certificate of Incorporation as amended to date (incorporated by reference to1881Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December188231, 1995 (the "1995 Form 10-K")).</FONT></TD>1883</TR>1884<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1885<TR>1886<TD VALIGN="TOP"><FONT Size="2">3.2</FONT></TD>1887<TD VALIGN="TOP"><FONT Size="2">Company's Amended and Restated By-Laws.</FONT></TD>1888</TR>1889<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1890<TR>1891<TD VALIGN="TOP"><FONT Size="2">10.1*</FONT></TD>1892<TD VALIGN="TOP"><FONT Size="2">CNS, Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to1893Exhibit 10.1 to the Company's Registration Statement on Form S-18, Commission File No.189433-14052C).</FONT></TD>1895</TR>1896<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1897<TR>1898<TD VALIGN="TOP"><FONT Size="2">10.2*</FONT></TD>1899<TD VALIGN="TOP"><FONT Size="2">CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.91900to the Company's Registration Statement on Form S-8, Commission File No. 33-29454).</FONT></TD>1901</TR>1902<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1903<TR>1904<TD VALIGN="TOP"><FONT Size="2">10.3*</FONT></TD>1905<TD VALIGN="TOP"><FONT Size="2">CNS, Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company's1906Annual Report on Form 10-K for the year ended December 31, 1990).</FONT></TD>1907</TR>1908<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1909<TR>1910<TD VALIGN="TOP"><FONT Size="2">10.4*</FONT></TD>1911<TD VALIGN="TOP"><FONT Size="2">CNS, Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the1912Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "19971913Form 10-K")).</FONT></TD>1914</TR>1915<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1916<TR>1917<TD VALIGN="TOP"><FONT Size="2">10.5**</FONT></TD>1918<TD VALIGN="TOP"><FONT Size="2">License Agreement dated January 30, 1992 between the Company and Creative Integration1919and Design, Inc. (incorporated by reference to Exhibit 10.11 to the 1992 Form S-2).</FONT></TD>1920</TR>1921<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1922<TR>1923<TD VALIGN="TOP"><FONT Size="2">10.6</FONT></TD>1924<TD VALIGN="TOP"><FONT Size="2">Distribution Agreement dated August 2, 1995 between the Company and Minnesota1925Mining and Manufacturing ("3M") incorporated by reference to Exhibit 10.11 to the1926Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "19951927Form 10-K").</FONT></TD>1928</TR>1929<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1930<TR>1931<TD VALIGN="TOP"><FONT Size="2">10.7</FONT></TD>1932<TD VALIGN="TOP"><FONT Size="2">Amendment to August 2, 1995 Distribution Agreement between the Company and1933Minnesota Mining and Manufacturing company ("3M") dated effective September 30,19341999.</FONT></TD>1935</TR>1936<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1937<TR>1938<TD VALIGN="TOP"><FONT Size="2">10.8</FONT></TD>1939<TD VALIGN="TOP"><FONT Size="2">Supply Agreement dated May 17, 1995 between the Company and Minnesota Mining and1940Manufacturing Company ("3M") (incorporated by reference to Exhibit 10.12 to the 19951941Form 10-K).</FONT></TD>1942</TR>1943<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1944<TR>1945<TD VALIGN="TOP"><FONT Size="2">10.9**</FONT></TD>1946<TD VALIGN="TOP"><FONT Size="2">License Agreement dated November 10, 1997 between the Company and Onesta Nutrition,1947Inc.</FONT></TD>1948</TR>1949<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1950<TR>1951<TD VALIGN="TOP"><FONT Size="2">10.10**</FONT></TD>1952<TD VALIGN="TOP"><FONT Size="2">License Agreement dated March 12, 1999 between the Company and WinEase LLC.</FONT></TD>1953</TR>1954<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1955<TR>1956<TD VALIGN="TOP"><FONT Size="2">10.11**</FONT></TD>1957<TD VALIGN="TOP"><FONT Size="2">License Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen1958Cronk.</FONT></TD>1959</TR>1960<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1961<TR>1962<TD VALIGN="TOP"><FONT Size="2">10.12*</FONT></TD>1963<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Daniel E. Cohen dated February 12,19641999 (incorporated by referenced to Exhibit 10.9 to the Company's Annual Report on Form196510-K for the year ended December 31, 1998 (the "1998 Form 10-K")).</FONT></TD>1966</TR>1967</TABLE>19681969<CENTER><FONT Size="2">31</FONT></CENTER>1970<HR SIZE=5 COLOR=GRAY NOSHADE>19711972<TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%">1973<TR>1974<TD VALIGN="TOP" WIDTH="15%"><FONT Size="2">10.13*</FONT></TD>1975<TD VALIGN="TOP" WIDTH="85%"><FONT Size="2">Employment Agreement between the Company and Marti Morfitt dated February 12,19761999 (incorporated by referenced to Exhibit 10.10 to the 1998 Form 10-K).</FONT></TD>1977</TR>1978<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1979<TR>1980<TD VALIGN="TOP"><FONT Size="2">10.14*</FONT></TD>1981<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Kirk P. Hodgdon dated February 12,19821999 (incorporated by referenced to Exhibit 10.11 to the 1998 Form 10-K).</FONT></TD>1983</TR>1984<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1985<TR>1986<TD VALIGN="TOP"><FONT Size="2">10.15*</FONT></TD>1987<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and David J. Byrd dated February 12, 19991988(incorporated by referenced to Exhibit 10.12 to the 1998 Form 10-K).</FONT></TD>1989</TR>1990<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1991<TR>1992<TD VALIGN="TOP"><FONT Size="2">10.16*</FONT></TD>1993<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and John J. Keppeler dated February 12,19941999 (incorporated by referenced to Exhibit 10.13 to the 1998 Form 10-K).</FONT></TD>1995</TR>1996<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>1997<TR>1998<TD VALIGN="TOP"><FONT Size="2">10.17*</FONT></TD>1999<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Teri P. Osgood dated February 12,20001999 (incorporated by referenced to Exhibit 10.14 to the 1998 Form 10-K).</FONT></TD>2001</TR>2002<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2003<TR>2004<TD VALIGN="TOP"><FONT Size="2">10.18*</FONT></TD>2005<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Carol J. Watzke dated February 12,20061999 (incorporated by referenced to Exhibit 10.15 to the 1998 Form 10-K).</FONT></TD>2007</TR>2008<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2009<TR>2010<TD VALIGN="TOP"><FONT Size="2">10.19*</FONT></TD>2011<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and Douglas G. Austin dated February 12,20121999 (incorporated by referenced to Exhibit 10.16 to the 1998 Form 10-K).</FONT></TD>2013</TR>2014<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2015<TR>2016<TD VALIGN="TOP"><FONT Size="2">10.20*</FONT></TD>2017<TD VALIGN="TOP"><FONT Size="2">Employment Agreement between the Company and M. W. Anderson dated February 12,20181999 (incorporated by referenced to Exhibit 10.17 to the 1998 Form 10-K).</FONT></TD>2019</TR>2020<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2021<TR>2022<TD VALIGN="TOP"><FONT Size="2">21.1</FONT></TD>2023<TD VALIGN="TOP"><FONT Size="2">Subsidiaries of the Company.</FONT></TD>2024</TR>2025<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2026<TR>2027<TD VALIGN="TOP"><FONT Size="2">23.1</FONT></TD>2028<TD VALIGN="TOP"><FONT Size="2">Consent of KPMG LLP.</FONT></TD>2029</TR>2030<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2031<TR>2032<TD VALIGN="TOP"><FONT Size="2">24.1</FONT></TD>2033<TD VALIGN="TOP"><FONT Size="2">Powers of Attorney (included on the signature page hereof).</FONT></TD>2034</TR>2035<TR><TD COLSPAN="2"><FONT SIZE="2"> </FONT></TD></TR>2036<TR>2037<TD VALIGN="TOP"><FONT Size="2">27.1</FONT></TD>2038<TD VALIGN="TOP"><FONT Size="2">Financial Data Schedule.</FONT></TD>2039</TR>2040</TABLE>2041<BR>2042<HR ALIGN="LEFT" WIDTH="25%" SIZE="1" NOSHADE COLOR="000000">2043<FONT Size="2">*Indicates Compensatory Agreement</FONT>20442045<P><FONT Size="2">**Certain portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a2046request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are2047represented by brackets with asterisks.</FONT></P>20482049<CENTER><FONT Size="2">32</FONT></CENTER>2050<HR SIZE=5 COLOR=GRAY NOSHADE>20512052<A NAME="FINANCIAL_STATEMENTS"></A>20532054<CENTER><P><FONT Size="2"><B>Independent Auditors' Report</B></FONT></P></CENTER>2055<BR>2056<BR>2057<BR>20582059<P><FONT Size="2">The Board of Directors and Stockholders<BR>2060CNS, Inc.:</FONT></P>2061<BR>20622063<P ALIGN="justify"><FONT Size="2">We have audited the accompanying consolidated balance sheets of CNS, Inc. and2064subsidiaries as of December 31, 1999 and 1998 and the related consolidated2065statements of operations, stockholders' equity and comprehensive income (loss),2066and cash flows for each of the years in the three-year period ended December 31,20671999. These financial statements are the responsibility of the Company's2068management. Our responsibility is to express an opinion on these consolidated2069financial statements based on our audits.</FONT></P>20702071<P ALIGN="justify"><FONT Size="2">We conducted our audits in accordance with generally accepted auditing2072standards. Those standards require that we plan and perform the audit to obtain2073reasonable assurance about whether the financial statements are free of material2074misstatement. An audit includes examining, on a test basis, evidence supporting2075the amounts and disclosures in the financial statements. An audit also includes2076assessing the accounting principles used and significant estimates made by2077management as well as evaluating the overall financial statement presentation.2078We believe that our audits provide a reasonable basis for our opinion.</FONT></P>20792080<P ALIGN="justify"><FONT Size="2">In our opinion, the consolidated financial statements referred to above present2081fairly, in all material respects, the financial position of CNS, Inc. and2082subsidiaries as of December 31, 1999 and 1998 and the results of their2083operations and their cash flows for each of the years in the three-year period2084ended December 31, 1999 in conformity with generally accepted accounting2085principles.</FONT></P>2086<BR>2087<BR>20882089<P><FONT Size="4">/s/ KPMG LLP</FONT></P>2090<BR>2091<BR>20922093<P><FONT Size="2">Minneapolis, Minnesota<BR>2094January 19, 2000</FONT></P>20952096<CENTER><FONT Size="2">F-1</FONT></CENTER>2097<HR SIZE=5 COLOR=GRAY NOSHADE>20982099<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>2100Consolidated Statements of Operations<BR>2101Years ended December 1999, 1998, and 1997</FONT></P></CENTER>2102<FONT SIZE="2"><PRE>21031999 1998 19972104- -------------------------------------------------------------------------------------------------------------21052106Net sales $ 46,050,208 $ 53,622,803 $ 66,957,1342107Cost of goods sold 18,358,435 18,484,608 21,292,9952108- -------------------------------------------------------------------------------------------------------------2109Gross profit 27,691,773 35,138,195 45,664,1392110- -------------------------------------------------------------------------------------------------------------21112112Operating expenses:2113Marketing and selling 33,353,549 28,777,148 31,638,5182114General and administrative 3,382,897 3,620,752 3,275,6362115Product development 3,306,162 2,039,411 1,105,7902116Contract termination fee 6,345,000 0 02117- -------------------------------------------------------------------------------------------------------------2118Total operating expenses 46,387,608 34,437,311 36,019,9442119- -------------------------------------------------------------------------------------------------------------21202121Operating income (loss) (18,695,835) 700,884 9,644,19521222123Interest income 2,595,779 2,790,780 2,976,1212124Gain on sales of marketable securities 242,567 0 02125- -------------------------------------------------------------------------------------------------------------21262127Income (loss) before income taxes (15,857,489) 3,491,664 12,620,31621282129Income tax benefit (expense) 2,101,138 (510,000) (3,850,000)2130- -------------------------------------------------------------------------------------------------------------21312132Net income (loss) $ (13,756,351) $ 2,981,664 $ 8,770,3162133=============================================================================================================213421352136Basic net income (loss) per share $ (.89) $ .16 $ .462137=============================================================================================================21382139Weighted average number of common shares outstanding 15,435,000 18,079,000 19,119,0002140=============================================================================================================214121422143Diluted net income (loss) per share $ (.89) $ .16 $ .442144=============================================================================================================2145Weighted average number of common2146and assumed conversion shares outstanding 15,435,000 18,249,000 19,802,0002147=============================================================================================================2148</PRE></FONT>21492150<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>21512152<CENTER><FONT Size="2">F-2</FONT></CENTER>2153<HR SIZE=5 COLOR=GRAY NOSHADE>21542155<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>2156Consolidated Balance Sheets<BR>2157December 31, 1999 and 1998</FONT></P></CENTER>21582159<FONT SIZE="2"><PRE>2160Assets 1999 19982161- -------------------------------------------------------------------------------------------------------21622163Current assets:2164Cash and cash equivalents $ 859,852 $ 584,7182165Marketable securities 37,997,409 59,796,9522166Accounts receivable, net of allowance for doubtful accounts2167of $280,000 in 1999 and $210,000 in 1998 11,369,815 7,790,9522168Income taxes receivable 3,177,771 02169Inventories 4,905,449 8,823,1932170Prepaid expenses and other current assets 3,625,373 2,794,5582171Deferred income taxes 0 1,332,0002172- -------------------------------------------------------------------------------------------------------2173Total current assets 61,935,669 81,122,37321742175Property and equipment, net 2,010,059 2,406,4882176Product rights, net 1,391,107 1,434,5662177- -------------------------------------------------------------------------------------------------------21782179$ 65,336,835 $ 84,963,4272180=======================================================================================================218121822183Liabilities and Stockholders Equity2184- -------------------------------------------------------------------------------------------------------21852186Current liabilities:2187Accounts payable $ 5,422,031 $ 4,993,4622188Accrued expenses 6,330,730 3,419,1872189Accrued income taxes 0 684,9372190- -------------------------------------------------------------------------------------------------------2191Total current liabilities 11,752,761 9,097,5862192- -------------------------------------------------------------------------------------------------------21932194Stockholders equity:2195Preferred stock - authorized 8,483,589 shares;2196none issued or outstanding 0 02197Common stock - $.01 par value; authorized 50,000,000 shares;2198issued and outstanding 19,294,570 shares in 1999 and 1998 192,946 192,9462199Additional paid-in capital 61,530,522 61,932,5292200Treasury shares - at cost; 4,838,098 shares in 19992201and 2,692,144 shares in 1998 (22,220,537) (14,670,128)2202Retained earnings 14,401,143 28,157,4942203Accumulated other comprehensive income (loss) (320,000) 253,0002204- -------------------------------------------------------------------------------------------------------2205Total stockholders equity 53,584,074 75,865,84122062207Commitments (notes 9 and 10)2208- -------------------------------------------------------------------------------------------------------22092210$ 65,336,835 $ 84,963,4272211=======================================================================================================2212</PRE></FONT>22132214<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>22152216<CENTER><FONT Size="2">F-3</FONT></CENTER>2217<HR SIZE=5 COLOR=GRAY NOSHADE>22182219<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>2220Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)<BR>2221Years ended December 31, 1999, 1998, and 1997</FONT></P></CENTER>22222223<FONT SIZE="2"><PRE>2224Common stock Treasury shares Accumulated2225-------------------------- Additional -------------------------- other Total2226Number Par paid-in Number Retained comprehensive stockholders'2227of shares value capital of shares Cost earnings income (loss) equity2228- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------22292230Balance at December 31, 1996 19,145,445 $ 191,454 $63,177,939 0 $ 0 $16,405,514 $ 0 $ 79,774,90722312232Stock issued in connection with2233Employee Stock Purchase Plan 927 10 7,180 (1,489) 8,464 0 0 15,6542234Stock options exercised 77,300 773 241,308 (37,000) 50,062 0 0 292,1432235Tax benefit from stock options2236exercised 0 0 70,000 0 0 0 0 70,0002237Warrants exercised 70,898 709 (709) 0 0 0 0 02238Treasury shares purchased 0 0 0 1,000,000 (8,278,519) 0 0 (8,278,519)2239Comprehensive income:2240Net income for the year 0 0 0 0 0 8,770,316 0 8,770,3162241-----------2242Total comprehensive income 8,770,3162243- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------22442245Balance at December 31, 1997 19,294,570 192,946 63,495,718 961,511 (8,219,993) 25,175,830 0 80,644,50122462247Stock issued in connection with2248Employee Stock Purchase Plan 0 0 (25,349) (5,467) 43,141 0 0 17,7922249Stock options exercised 0 0 (1,537,840) (171,500) 1,776,871 0 0 239,0312250Treasury shares purchased 0 0 0 1,907,600 (8,270,147) 0 0 (8,270,147)2251Comprehensive income:2252Net income for the year 0 0 0 0 0 2,981,664 0 2,981,6642253Unrealized gains on marketable securities2254net of income tax effect of $154,000 0 0 0 0 0 0 253,000 253,0002255-----------2256Total comprehensive income 3,234,6642257- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------22582259Balance at December 31, 1998 19,294,570 192,946 61,932,529 2,692,144 (14,670,128) 28,157,494 253,000 75,865,84122602261Stock issued in connection with2262Employee Stock Purchase Plan 0 0 (98,185) (18,381) 151,404 0 0 53,2192263Stock options exercised 0 0 (413,822) (108,065) 860,103 0 0 446,2812264Warrants issued 0 0 110,000 0 0 0 0 110,0002265Treasury shares purchased 0 0 0 2,272,400 (8,561,916) 0 0 (8,561,916)2266Comprehensive loss:2267Net loss for the year 0 0 0 0 0 (13,756,351) 0 (13,756,351)2268Unrealized losses on marketable securities2269net of income tax effect of $154,000 0 0 0 0 0 0 (573,000) (573,000)2270-----------2271Total comprehensive loss (14,329,351)2272- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------22732274Balance at December 31, 1999 19,294,570 $ 192,946 $61,530,522 4,838,098 $(22,220,537) $ 14,401,143 $ (320,000) $53,584,0742275========================================================================================================================================================================2276</PRE></FONT>22772278<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>22792280<CENTER><FONT Size="2">F-4</FONT></CENTER>2281<HR SIZE=5 COLOR=GRAY NOSHADE>22822283<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>2284Consolidated Statements of Cash Flows<BR>2285Years ended December 31, 1999, 1998, and 1997</FONT></P></CENTER>22862287<FONT SIZE="2"><PRE>22881999 1998 19972289- ----------------------------------------------------------------------------------------------------------------------------------22902291Operating activities:2292Net income (loss) $ (13,756,351) $ 2,981,664 $ 8,770,3162293Adjustments to reconcile net income (loss) to net cash2294provided by (used in) operating activities:2295Depreciation and amortization 1,029,148 854,702 460,0442296Warrants issued 110,000 0 02297Deferred income taxes 1,486,000 284,000 (809,000)2298Changes in operating assets and liabilities:2299Accounts receivable (3,578,863) 3,601,049 3,273,7302300Inventories 3,917,744 (198,530) (309,837)2301Prepaid expenses and other current assets (4,008,586) 500,443 (1,647,946)2302Accounts payable and accrued expenses 2,655,175 1,247,114 (1,783,688)2303- ----------------------------------------------------------------------------------------------------------------------------------23042305Net cash provided by (used in) operating activities (12,145,733) 9,270,442 7,953,6192306- ----------------------------------------------------------------------------------------------------------------------------------23072308Investing activities:2309Purchases of marketable securities (97,157,463) (43,428,987) (99,045,360)2310Sales and maturities of marketable securities 118,230,006 43,497,271 89,926,3172311Payments for purchases of property and equipment (330,538) (1,101,403) (1,239,918)2312Payments for product rights (258,722) (228,826) (1,553,605)2313Redemption (purchase) of certificate of deposit, restricted 0 359,898 (19,834)2314- ----------------------------------------------------------------------------------------------------------------------------------23152316Net cash provided by (used in) investing activities 20,483,283 (902,047) (11,932,400)2317- ----------------------------------------------------------------------------------------------------------------------------------23182319Financing activities:2320Proceeds from the issuance of common stock2321under Employee Stock Purchase Plan 53,219 17,792 15,6542322Proceeds from the exercise of stock options 446,281 239,031 362,1432323Purchase of treasury shares (8,561,916) (8,270,147) (8,278,519)2324- ----------------------------------------------------------------------------------------------------------------------------------23252326Net cash used in financing activities (8,062,416) (8,013,324) (7,900,722)2327- ----------------------------------------------------------------------------------------------------------------------------------23282329Net increase (decrease) in cash and cash equivalents 275,134 355,071 (11,879,503)23302331Cash and cash equivalents:2332Beginning of year 584,718 229,647 12,109,1502333- ----------------------------------------------------------------------------------------------------------------------------------23342335End of year $ 859,852 $ 584,718 $ 229,6472336==================================================================================================================================23372338Supplemental disclosure of cash flow information:2339Cash paid during the year for interest $ 0 $ 0 $ 02340Cash paid during the year for income taxes 344,000 700,000 4,750,0002341==================================================================================================================================2342</PRE></FONT>23432344<P><FONT Size="2">The accompanying notes are an integral part of the consolidated financial statements.</FONT></P>23452346<CENTER><FONT Size="2">F-5</FONT></CENTER>2347<HR SIZE=5 COLOR=GRAY NOSHADE>23482349<CENTER><P><FONT Size="2"><B>CNS, INC.</B><BR>2350Notes to Consolidated Financial Statements<BR>2351December 31, 1999, 1998 and 1997</FONT></P></CENTER>23522353<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2354<TR>2355<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(1)</B></FONT></TD>2356<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Summary of Significant Accounting Policies</B></FONT></TD>2357</TR>2358<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2359<TR>2360<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2361<TD VALIGN="TOP"><FONT Size="2"><B>Principles of Consolidation </B> The accompanying consolidated financial statements2362include the accounts of CNS, Inc. and its subsidiaries ("the Company"). All material intercompany2363accounts and transactions have been eliminated in consolidation.</FONT></TD>2364</TR>2365<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2366<TR>2367<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2368<TD VALIGN="TOP"><FONT Size="2"><B>Business </B> The Company designs, manufactures and markets consumer2369products, primarily the Breathe Right® nasal strip. The Breathe2370Right nasal strip is a nonprescription, single use, disposable2371device that can temporarily relieve nasal congestion and reduce or2372eliminate snoring by improving nasal breathing. The Breathe Right2373nasal strip is sold over-the-counter in retail outlets, including2374mass merchant, drug, grocery and club stores. The Company has an2375international distribution agreement with 3M Company ("3M") to2376market Breathe Right nasal strips outside the U.S. and Canada,2377which was amended in 1999 to allow the Company to regain control2378of its international business on a phased schedule. The Company's2379agreement with 3M will terminate on June 30, 2000.</TD>2380</TR>2381<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2382<TR>2383<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2384<TD VALIGN="TOP"><FONT Size="2"><B>Revenue Recognition </B> Revenue from sales is recognized at the time2385products are shipped.</TD>2386</TR>2387<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2388<TR>2389<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2390<TD VALIGN="TOP"><FONT Size="2"><B>Accounting Estimates </B> The preparation of financial statements in2391conformity with generally accepted accounting principles requires2392management to make estimates and assumptions that affect the2393reported amounts of assets and liabilities and disclosure of2394contingent assets and liabilities at the date of the financial2395statements and the reported amounts of revenues and expenses2396during the reporting period. Actual results could differ from2397those estimates.</TD>2398</TR>2399<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2400<TR>2401<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2402<TD VALIGN="TOP"><FONT Size="2"><B>FairValue of Financial Instruments </B> All financial instruments are2403carried at amounts that approximate fair value.</TD>2404</TR>2405<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2406<TR>2407<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2408<TD VALIGN="TOP"><FONT Size="2"><B>Cash Equivalents </B> Cash equivalents consist primarily of money market2409funds.</TD>2410</TR>2411<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2412<TR>2413<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2414<TD VALIGN="TOP"><FONT Size="2"><B>Marketable Securities </B> The Company classifies its marketable debt2415securities as available-for-sale and records these securities at2416fair market value. Net realized and unrealized gains and losses2417are determined on the specific identification cost basis. Any2418unrealized gains and losses are reflected as a separate component2419of stockholders' equity. A decline in the market value of any2420available-for-sale security below cost that is deemed other than2421temporary, results in a charge to operations resulting in the2422establishment of a new cost basis for the security.</TD>2423</TR>2424<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2425<TR>2426<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2427<TD VALIGN="TOP"><FONT Size="2"><B>Inventories </B> Inventories are valued at the lower of cost (determined on2428a first-in, first-out basis) or market.</TD>2429</TR>2430<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2431<TR>2432<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2433<TD VALIGN="TOP"><FONT Size="2"><B>Property and Equipment </B> Property and equipment are stated at cost.2434Equipment is depreciated using the straight-line method over five2435years. Leasehold improvements are amortized over the lesser of the2436estimated useful life of the improvement or the term of the lease.</TD>2437</TR>2438<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2439<TR>2440<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2441<TD VALIGN="TOP"><FONT Size="2"><B>Product Rights </B> Product rights, consisting of patents, trademarks and2442other product rights, are stated at cost and are amortized over2443three to seven years using the straight-line method.</TD>2444</TR>2445</TABLE>24462447<CENTER><FONT Size="2">F-6</FONT></CENTER>2448<HR SIZE=5 COLOR=GRAY NOSHADE>24492450<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2451<TR>2452<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>2453<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Stock Based Compensation </B> The Company follows the disclosure2454requirements for employee stock based compensation plans and,2455accordingly, no compensation expense has been recognized.</TD>2456</TR>2457<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2458<TR>2459<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2460<TD VALIGN="TOP"><FONT Size="2"><B>Foreign Sales </B> Foreign sales are made in U.S. dollars only. There are no currency conversions.</TD>2461</TR>2462<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2463<TR>2464<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2465<TD VALIGN="TOP"><FONT Size="2"><B>Advertising </B> The Company expenses the production costs of advertising2466the first time the advertising runs.</TD>2467</TR>2468<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2469<TR>2470<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2471<TD VALIGN="TOP"><FONT Size="2"><B>Income Taxes </B> Deferred tax assets and liabilities and the resultant2472provision for income taxes are determined based on the difference2473between the financial statement and tax bases of assets and2474liabilities using enacted tax rates in effect for the year in2475which the differences are expected to reverse.</TD>2476</TR>2477<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2478<TR>2479<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2480<TD VALIGN="TOP"><FONT Size="2"><B>Net Income Per Share </B> Basic net income (loss) per share and diluted net2481(loss) per share have been computed based upon the weighted2482average number of common shares outstanding during the year.2483Assumed conversion shares were excluded from the net loss per2484share computation as their effect is antidilutive. Common stock2485options could potentially dilute basic earnings per share in2486future periods if the Company generates net income. Diluted net2487income per share has been computed based upon the weighted average2488number of common and assumed conversion shares outstanding during2489the year.</TD>2490</TR>2491<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2492<TR>2493<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2494<TD VALIGN="TOP"><FONT Size="2"><B>Comprehensive Income (Loss) </B> Comprehensive income (loss) consists of2495the Company's net income (loss) and unrealized gains (losses) on2496marketable securities and is presented in the consolidated2497statements of stockholders' equity and comprehensive income2498(loss). Comprehensive income (loss) is an additional disclosure in2499the consolidated financial statements; it does not affect the2500Company's financial position or results of operations.</TD>2501</TR>2502<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2503<TR>2504<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2505<TD VALIGN="TOP"><FONT Size="2"><B>New Accounting Standards </B> In 1998, the Financial Accounting Standards Board issued Statement of2506Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging2507Activities. SFAS No. 133 establishes new standards for recognizing all derivatives as either2508assets or liabilities, and measuring those instruments at fair value. The Company plans to adopt2509the new standard in 2001. The Company is in the process of evaluating SFAS No. 133 and its2510potential impact.</TD>2511</TR>2512<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2513<TR>2514<TD VALIGN="TOP"><FONT Size="2"><B>(2)</B></FONT></TD>2515<TD VALIGN="TOP"><FONT Size="2"><B>Marketable Securities</B></FONT></TD>2516</TR>2517<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2518<TR>2519<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2520<TD VALIGN="TOP"><FONT Size="2">Marketable securities, including estimated fair value based on quoted2521market prices or valuation models, are summarized as follows (in2522thousands):</FONT></TD>2523</TR>2524<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2525<TR>2526<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2527<TD VALIGN="TOP">2528<FONT SIZE="2"><PRE>2529December 312530-------------------------------------------------------------------------25311999 19982532-------------------------------------------------------------------------2533Cost Fair Value Cost Fair Value2534- ----------------------------------------------------------------------------------------------------------------25352536Cash equivalents $ 659 $ 659 $ 1,145 $ 1,1452537Certificates of deposit 5,500 5,493 0 02538Corporate bonds 24,088 23,879 1,754 1,7722539U.S. Government obligations 8,070 7,966 1,309 1,3162540Municipal bonds 0 0 55,182 55,5642541- ----------------------------------------------------------------------------------------------------------------25422543Total marketable securities $ 38,317 $ 37,997 $ 59,390 $ 59,7972544================================================================================================================2545</PRE></FONT>2546</TD>2547</TR>2548</TABLE>25492550<CENTER><FONT Size="2">F-7</FONT></CENTER>2551<HR SIZE=5 COLOR=GRAY NOSHADE>25522553<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2554<TR>2555<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>2556<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">Maturities of marketable securities at December 31, 1999 are as2557follows (in thousands):</FONT></TD>2558</TR>2559<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2560<TR>2561<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2562<TD VALIGN="TOP">2563<FONT SIZE="2"><PRE>2564Cost Fair Value2565- ----------------------------------------------------------------25662567Due within one year $ 19,137 $ 19,0912568Due after one year through three years 19,180 18,9062569- ----------------------------------------------------------------25702571Total marketable securities $ 38,317 $ 37,9972572================================================================2573</PRE></FONT>2574</TD>2575</TR>2576<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2577<TR>2578<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2579<TD VALIGN="TOP"><FONT Size="2">There were realized gains of $243,000 during 1999 and no realized2580gains or losses in 1998 or 1997.</FONT></TD>2581</TR>2582<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2583<TR>2584<TD VALIGN="TOP"><FONT Size="2"><B>(3)</B></FONT></TD>2585<TD VALIGN="TOP"><FONT Size="2"><B>Advertising</B></FONT></TD>2586</TR>2587<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2588<TR>2589<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2590<TD VALIGN="TOP"><FONT Size="2">At December 31, 1999 and 1998, $1,762,000 and $445,000, respectively,2591of advertising costs were reported as assets. Advertising expense2592was $17,669,000 in 1999, $15,783,000 in 1998, and $21,160,000 in25931997.</FONT></TD>2594</TR>2595<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2596<TR>2597<TD VALIGN="TOP"><FONT Size="2"><B>(4)</B></FONT></TD>2598<TD VALIGN="TOP"><FONT Size="2"><B>Details of Selected Balance Sheet Accounts</B></FONT></TD>2599</TR>2600<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2601<TR>2602<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2603<TD VALIGN="TOP"><FONT Size="2">Details of selected balance sheet accounts are as follows (in2604thousands):</FONT></TD>2605</TR>2606<TR>2607<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2608<TD VALIGN="TOP">2609<FONT SIZE="2"><PRE>261026111999 1998 19972612- -------------------------------------------------------------------------------------26132614Allowance for doubtful accounts:2615Balance beginning of year $ 210 $ 210 $ 2102616Plus provision for doubtful accounts 96 43 52617Less charge offs 26 43 52618- -------------------------------------------------------------------------------------26192620Balance end of year $ 280 $ 210 $ 2102621=====================================================================================26222623December 312624---------------------26251999 19982626- -------------------------------------------------------------------------------------26272628Inventories:2629Finished goods $ 2,935 $ 6,3642630Work in process 21 1832631Raw materials and component parts 1,949 2,2762632- -------------------------------------------------------------------------------------26332634Total inventories $ 4,905 $ 8,8232635=====================================================================================26362637Property and equipment:2638Production equipment $ 408 $ 4102639Office equipment and information systems 3,330 3,0962640- -------------------------------------------------------------------------------------26413,738 3,5062642Less accumulated depreciation 1,728 1,1002643- -------------------------------------------------------------------------------------26442645Property and equipment, net $ 2,010 $ 2,4062646=====================================================================================26472648Product rights:2649Product rights $ 2,407 $ 2,1482650Less accumulated amortization 1,016 7132651- -------------------------------------------------------------------------------------26522653Product rights, net $ 1,391 $ 1,4352654=====================================================================================2655</PRE></FONT>2656</TD>2657</TR>2658</TABLE>26592660<CENTER><FONT Size="2">F-8</FONT></CENTER>2661<HR SIZE=5 COLOR=GRAY NOSHADE>26622663<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2664<TR>2665<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2666<TD VALIGN="TOP"><FONT SIZE="2"><PRE>2667Accrued expenses:2668Promotions and allowances $ 3,106 $ 1,6322669Royalties and commissions 678 6652670Salaries, incentives and paid time off 991 1,0162671Packaging transition 1,426 02672Other 130 1062673- -------------------------------------------------------------------------------------26742675Total accrued expenses $ 6,331 $ 3,4192676=====================================================================================2677</PRE></FONT>2678</TD>2679</TR>2680<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2681<TR>2682<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(5)</B></FONT></TD>2683<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Stockholders' Equity</B></FONT></TD>2684</TR>2685<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2686<TR>2687<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2688<TD VALIGN="TOP"><FONT Size="2"><B>Stock Options </B> The Company's stock option plans allow for the grant of2689options to officers, directors, and employees to purchase up to26902,950,000 shares of common stock at exercise prices not less than2691100% of fair market value on the dates of grant. The term of the2692options may not exceed ten years and vest in increments over 1 to26935 years from the grant date. The plans allow for the grant of2694shares of restricted common stock. No shares of restricted common2695stock have been granted under these plans as of December 31, 1999.</FONT></TD>2696</TR>2697<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2698<TR>2699<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2700<TD VALIGN="TOP"><FONT Size="2">Stock option activity under these plans is summarized as follows:</FONT></TD>2701</TR>2702<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2703<TR>2704<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2705<TD VALIGN="TOP">2706<FONT SIZE="2"><PRE>2707Weighted-average Shares2708Exercise Price Shares Available2709Per Share Outstanding For Grant2710- -------------------------------------------------------------------------------27112712Balance at December 31, 1996 $ 5.65 1,451,600 67,0522713Granted 7.13 110,000 (110,000)2714Exercised 2.56 (114,300) 02715Canceled 16.79 (90,000) 90,0002716Unused 1987 expired - 0 (31,702)2717Amend 1994 Plan - 0 750,0002718- -------------------------------------------------------------------------------27192720Balance at December 31, 1997 5.29 1,357,300 765,3502721Granted 4.92 634,700 (634,700)2722Exercised 1.39 (171,500) 02723Canceled 10.71 (240,000) 240,0002724- -------------------------------------------------------------------------------27252726Balance at December 31, 1998 4.74 1,580,500 370,6502727Granted 3.05 353,000 (353,000)2728Exercised 4.16 (115,010) 02729Canceled 4.00 (47,100) 47,1002730- -------------------------------------------------------------------------------27312732Balance at December 31, 1999 $ 4.47 1,771,390 64,7502733===============================================================================2734</PRE></FONT>2735</TD>2736</TR>2737</TABLE>27382739<CENTER><FONT Size="2">F-9</FONT></CENTER>2740<HR SIZE=5 COLOR=GRAY NOSHADE>27412742<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2743<TR>2744<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>2745<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">Information on outstanding and currently exercisable options by price2746range as of December 31, 1999, is summarized as follows:</FONT></TD>2747</TR>2748<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2749<TR>2750<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2751<TD VALIGN="TOP">2752<FONT SIZE="2"><PRE>2753Weighted- Weighted- Weighted-2754Total average average Exercisable average2755Price Range Number of Remaining Exercise Number of Exercise2756Per Share Shares Life (Years) Price Shares Price2757- ---------------------------------------------------------------------------------------2758$ 1.69 - 2.31 37,100 1.8 $ 1.97 37,100 $ 1.9727592.81 - 3.94 719,000 7.0 3.12 369,400 3.2027604.13 - 5.00 309,590 8.5 4.70 102,456 4.6927615.44 - 7.25 697,700 5.6 5.81 574,200 5.80276211.38 8,000 .3 11.38 8,000 11.382763------------- ---------------27641,771,390 1,091,1562765============= ===============2766</PRE></FONT>2767</TD>2768</TR>2769<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2770<TR>2771<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2772<TD VALIGN="TOP"><FONT Size="2">At December 31, 1999, the weighted-average remaining contractual life2773of outstanding options was 6.6 years. At December 31, 1999, 19982774and 1997, currently exercisable options aggregated 1,091,156,27751,051,800 and 958,100 shares of common stock, respectively and the2776weighted-average exercise price of those options was $4.73, $4.622777and $3.87, respectively.</FONT></TD>2778</TR>2779<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2780<TR>2781<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2782<TD VALIGN="TOP"><FONT Size="2">The per share weighted-average fair value of stock options granted2783during 1999, 1998 and 1997 is estimated as $1.98, $3.20 and $2.38,2784respectively on the date of grant using the Black-Scholes option2785pricing model with the following assumptions: volatility of 65%;2786risk-free interest rate of 6.00% in 1999, 6.00% in 1998 and 6.25%2787in 1997; and an expected life of 6 years.</FONT></TD>2788</TR>2789<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2790<TR>2791<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2792<TD VALIGN="TOP"><FONT Size="2">The Company applies APB No. 25, Accounting for Stock Issued to2793Employees, and related interpretations in accounting for its stock2794compensation plans. Accordingly, no compensation expense has been2795recognized for its stock-based compensation plans. Had the Company2796determined compensation cost based on the fair value at the grant2797date for its stock options under SFAS No. 123, Accounting for2798Stock-Based Compensation, the Company's net income and diluted2799earnings per share would have been reduced by approximately2800$950,000, or $.06 per share in 1999, $1,300,000, or $.07 per share2801in 1998 and $530,000, or $.03 per share in 1997.</FONT></TD>2802</TR>2803<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2804<TR>2805<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2806<TD VALIGN="TOP"><FONT Size="2">Pro forma net income reflects only options granted since 1995.2807Therefore, the full impact of calculating compensation cost for2808stock options under SFAS No. 123 is not reflected in the pro forma2809net income amounts presented because compensation cost is2810reflected over the options' vesting period and compensation cost2811for options granted prior to January 1, 1995 is not considered.</FONT></TD>2812</TR>2813<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2814<TR>2815<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2816<TD VALIGN="TOP"><FONT Size="2"><B>Employee Stock Purchase Plan </B> The Employee Stock Purchase Plan allows2817eligible employees to purchase shares of the Company's common2818stock through payroll deductions. The purchase price is the lower2819of 85% of the fair market value of the stock on the first or last2820day of each six-month period during which an employee participated2821in the plan. The Company has reserved 200,000 shares under the2822plan of which employees as of December 31, 1999 have purchased2823162,650 shares.</FONT></TD>2824</TR>2825<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2826<TR>2827<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2828<TD VALIGN="TOP"><FONT Size="2"><B>Warrants </B> During 1997 and 1995, warrants to purchase a total of 100,0002829shares at $2.75 were exercised. The warrants had been issued in2830connection with an agreement to license a product.</FONT></TD>2831</TR>2832</TABLE>28332834<CENTER><FONT Size="2">F-10</FONT></CENTER>2835<HR SIZE=5 COLOR=GRAY NOSHADE>28362837<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2838<TR>2839<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>2840<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">In connection with agreements to license certain intellectual2841property rights to potential products, licensers were issued2842warrants. During 1999, warrants were issued to purchase 50,0002843shares of the Company's common stock exercisable at a price of2844$3.44 per share exercisable evenly over the next three years and2845for a period of 10 years. The issuance of the warrants resulted in2846an expense of $110,000. Warrants were issued during 1997 to2847purchase 25,000 shares at a price of $8.00 per share exercisable2848when the potential products are marketed and for a period of five2849years. None of these warrants are currently exercisable.</FONT></TD>2850</TR>2851<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2852<TR>2853<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2854<TD VALIGN="TOP"><FONT Size="2"><B>Preferred Stock </B> At December 31, 1999, the Company is authorized to2855issue 1,000,000 shares of Series A Junior Participating Preferred2856Stock upon a triggering event under the Company's stockholders'2857rights plan and is authorized to issue up to an additional28587,483,589 shares of undesignated preferred stock.</FONT></TD>2859</TR>2860<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2861<TR>2862<TD VALIGN="TOP"><FONT Size="2"><B>(6)</B></FONT></TD>2863<TD VALIGN="TOP"><FONT Size="2"><B>Income Taxes</B></FONT></TD>2864</TR>2865<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2866<TR>2867<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2868<TD VALIGN="TOP"><FONT Size="2">Income tax expense (benefit) for the three years ended December 31,28691999, is as follows (in thousands):</FONT></TD>2870</TR>2871<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2872<TR>2873<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2874<TD VALIGN="TOP">2875<FONT SIZE="2"><PRE>2876Current Deferred Total2877- -----------------------------------------------------------------------------28781999:2879Federal $ (3,917) $ 1,816 $ (2,101)2880State 0 0 02881- -----------------------------------------------------------------------------28822883Income tax expense (benefit) $ (3,917) $ 1,816 $ (2,101)2884=============================================================================288528861998:2887Federal $ 128 $ 184 $ 3122888State 98 100 1982889- -----------------------------------------------------------------------------28902891Income tax expense $ 226 $ 284 $ 5102892=============================================================================289328941997:2895Federal $ 4,154 $ (728) $ 3,4262896State 505 (81) 4242897- -----------------------------------------------------------------------------28982899Income tax expense (benefit) $ 4,659 $ (809) $ 3,8502900=============================================================================2901</PRE></FONT>2902</TD>2903</TR>2904<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2905<TR>2906<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2907<TD VALIGN="TOP"><FONT Size="2">Income tax expense (benefit) differed from the amounts computed by2908applying the U.S. federal income tax rate of 35% as a result of2909the following (in thousands):</FONT></TD>2910</TR>2911<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2912<TR>2913<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2914<TD VALIGN="TOP">2915<FONT SIZE="2"><PRE>29161999 1998 19972917- -----------------------------------------------------------------------------------29182919Computed tax expense (benefit) $ (5,550) $ 1,222 $ 4,4172920State taxes, net of federal benefit (431) 64 3312921Tax exempt interest (178) (789) (765)2922Benefit of foreign sales corporation 0 0 (127)2923Change in deferred tax valuation allowance 3,932 0 02924Other 126 13 (6)2925- -----------------------------------------------------------------------------------29262927Actual tax expense (benefit) $ (2,101) $ 510 $ 3,8502928===================================================================================2929</PRE></FONT>2930</TD>2931</TR>2932</TABLE>29332934<CENTER><FONT Size="2">F-11</FONT></CENTER>2935<HR SIZE=5 COLOR=GRAY NOSHADE>29362937<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">2938<TR>2939<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"> </FONT></TD>2940<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2">The tax effects of temporary differences that give rise to significant2941portions of the deferred tax assets and deferred tax liabilities2942for 1999 and 1998 are presented below (in thousands):</FONT></TD>2943</TR>2944<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2945<TR>2946<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2947<TD VALIGN="TOP">2948<FONT SIZE="2"><PRE>2949December 312950------------------------29511999 19982952- --------------------------------------------------------------------------29532954Deferred tax assets:2955Inventory items $ 677 $ 6592956Accounts receivable allowance 104 782957Product rights 181 1132958Accrued expenses 1,835 7102959Net operating loss and credit carryforwards 1,124 02960Unrealized loss on marketable securities 122 02961- --------------------------------------------------------------------------29624,043 1,5602963Less valuation allowance 3,932 02964- --------------------------------------------------------------------------2965111 1,5602966- --------------------------------------------------------------------------29672968Deferred tax liabilities:2969Unrealized gains on marketable securities 0 (154)2970Property and equipment (111) (74)2971- --------------------------------------------------------------------------2972(111) (228)2973- --------------------------------------------------------------------------29742975Net deferred tax assets $ 0 $ 1,3322976==========================================================================2977</PRE></FONT>2978</TD>2979</TR>2980<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2981<TR>2982<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2983<TD VALIGN="TOP"><FONT Size="2">In assessing the realization of deferred tax assets, management2984considers whether it is more likely than not that some portion or2985all of the deferred tax assets will not be realized. The ultimate2986realization of deferred tax assets is dependent upon the2987generation of future taxable income during the periods in which2988those temporary differences become deductible. Based on the level2989on historical taxable income and projections of future taxable2990income over the periods in which the deferred tax assets are2991deductible, management does not believe that it is more likely2992than not the Company will realize the benefits of these deductible2993differences. Accordingly, the Company has provided a valuation2994allowance against the net deferred assets as of December 31, 1999.</FONT></TD>2995</TR>2996<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>2997<TR>2998<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>2999<TD VALIGN="TOP"><FONT Size="2">As of December 31, 1999, the Company has reported federal net3000operating loss carryforwards of approximately $1,700,000. The3001federal net operating loss carryforwards expire in 2009.</FONT></TD>3002</TR>3003<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3004<TR>3005<TD VALIGN="TOP"><FONT Size="2"><B>(7)</B></FONT></TD>3006<TD VALIGN="TOP"><FONT Size="2"><B>Sales</B></FONT></TD>3007</TR>3008<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3009<TR>3010<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3011<TD VALIGN="TOP"><FONT Size="2">The Company had one significant customer who accounted for3012approximately 24% of total sales in 1999 and 20% of total sales in30131998 and two significant customers, including 3M Company, who3014accounted for approximately 28% of total sales in 1997. Accounts3015receivable from this customer as of December 31, 1999 and 19983016were $4,330,000 and $1,013,000, respectively. Sales by geographic3017area are as follows (in thousands):</FONT></TD>3018</TR>3019<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3020<TR>3021<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3022<TD VALIGN="TOP">3023<FONT SIZE="2"><PRE>30241999 1998 19973025- -----------------------------------------------------------30263027Domestic $ 45,062 $ 51,855 $ 60,6023028International 988 1,768 6,3553029- -----------------------------------------------------------30303031Total sales $ 46,050 $ 53,623 $ 66,9573032===========================================================3033</PRE></FONT>3034</TD>3035</TR>3036</TABLE>30373038<CENTER><FONT Size="2">F-12</FONT></CENTER>3039<HR SIZE=5 COLOR=GRAY NOSHADE>30403041<TABLE BORDER="0" CELLPADDING="0" CELLPADDING="2" WIDTH="100%">3042<TR>3043<TD VALIGN="TOP" WIDTH="5%"><FONT Size="2"><B>(8)</B></FONT></TD>3044<TD VALIGN="TOP" WIDTH="95%"><FONT Size="2"><B>Contract Termination Fee</B></FONT></TD>3045</TR>3046<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3047<TR>3048<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3049<TD VALIGN="TOP"><FONT Size="2">On September 30, 1999, the Company and 3M amended the international3050distribution agreement in a manner that allows the Company to3051regain control of its international business on a phased schedule.3052In exchange for the 1999 payment of a one-time contract3053termination fee of $6,345,000, the international distribution3054agreement with 3M will terminate on June 30, 2000.</FONT></TD>3055</TR>3056<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3057<TR>3058<TD VALIGN="TOP"><FONT Size="2"><B>(9)</B></FONT></TD>3059<TD VALIGN="TOP"><FONT Size="2"><B>License Agreements</B></FONT></TD>3060</TR>3061<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3062<TR>3063<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3064<TD VALIGN="TOP"><FONT Size="2">The Company has agreements to exclusively license intellectual3065property rights to certain products. Royalties due under these3066agreements are based on various percentages of net sales. To3067maintain the Company's licenses, it must make minimum royalty3068payments of $1,250,000 each year until patents for the products3069expire. Royalty expense was $1,477,000 in 1999, $1,509,000 in 19983070and $1,995,000 in 1997.</FONT></TD>3071</TR>3072<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3073<TR>3074<TD VALIGN="TOP"><FONT Size="2"><B>(10)</B></FONT></TD>3075<TD VALIGN="TOP"><FONT Size="2"><B>Operating Leases</B></FONT></TD>3076</TR>3077<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3078<TR>3079<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3080<TD VALIGN="TOP"><FONT Size="2">The Company leases equipment and office space under noncancelable3081operating leases that have initial or noncancelable lease terms in3082excess of one year. Future minimum lease payments due in3083accordance with these leases as of December 31, 1999 are as3084follows (in thousands):</FONT></TD>3085</TR>3086<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3087<TR>3088<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3089<TD VALIGN="TOP">3090<FONT SIZE="2"><PRE>3091Year ending December 31, Amount3092- ---------------------------------------------------------309330942000 $ 48130952001 69730962002 71130972003 72530982004 7273099Later years 4,5993100- ---------------------------------------------------------31013102Future minimum lease payments $ 7,9403103=========================================================3104</PRE></FONT>3105</TD>3106</TR>3107<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3108<TR>3109<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3110<TD VALIGN="TOP"><FONT Size="2">Total rental expense for operating leases was $555,000 in 1999,3111$564,000 in 1998, and $471,000 in 1997.</FONT></TD>3112</TR>3113<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3114<TR>3115<TD VALIGN="TOP"><FONT Size="2"><B>(11)</B></FONT></TD>3116<TD VALIGN="TOP"><FONT Size="2"><B>Earnings Per Share</B></FONT></TD>3117</TR>3118<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3119<TR>3120<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3121<TD VALIGN="TOP"><FONT Size="2">A reconciliation of basic and diluted weighted average common shares3122outstanding is as follows (in thousands):</FONT></TD>3123</TR>3124<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3125<TR>3126<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3127<TD VALIGN="TOP">3128<FONT SIZE="2"><PRE>31291999 1998 19973130- ----------------------------------------------------------------------------------31313132Weighted average common shares outstanding 15,435 18,079 19,1193133Assumed conversion of stock options 0 170 6823134Assumed conversion of warrants 0 0 13135- ----------------------------------------------------------------------------------3136Average common and assumed Conversion shares 15,435 18,249 19,8023137==================================================================================3138</PRE></FONT>3139</TD>3140</TR>3141<TR><TD VALIGN="TOP" COLSPAN="2"><FONT Size="2"> </FONT></TD></TR>3142<TR>3143<TD VALIGN="TOP"><FONT Size="2"> </FONT></TD>3144<TD VALIGN="TOP"><FONT Size="2">Options and warrants to purchase 1,846,390 shares of common stock with3145a range of exercise prices from $1.69 to $11.38 per share were3146outstanding during 1999 but were not included in the computation3147of 1999 diluted earnings per share because the effect would be3148anti-dilutive. The options expire from 2000 to 2009.</FONT></TD>3149</TR>3150</TABLE>31513152<CENTER><FONT Size="2">F-13</FONT></CENTER>3153<HR SIZE=5 COLOR=GRAY NOSHADE>31543155</body>3156</HTML>31573158</TEXT>3159</DOCUMENT>3160<DOCUMENT>3161<TYPE>EX-3.23162<SEQUENCE>23163<DESCRIPTION>AMENDED AND RESTATED BY-LAWS3164<TEXT>316531663167Exhibit 3.231683169317031713172317331743175AMENDED AND RESTATED BY-LAWS3176317731783179OF31803181318231833184CNS, INC.3185318631873188318931903191DATED MARCH 13, 200031923193<PAGE>319431953196CONTENTS OF AMENDED AND RESTATED BY-LAWS3197OF3198CNS, INC.31993200ARTICLE 1 - OFFICES............................................................132011.1) Registered Offices.............................................132021.2) Offices........................................................132033204ARTICLE 2 - CORPORATE SEAL.....................................................132053206ARTICLE 3 - SHAREHOLDERS.......................................................132073.1) Regular Meeting................................................132083.2) Special Meetings...............................................232093.3) Quorum.........................................................232103.4) Voting.........................................................232113.5) Notice of Meeting..............................................332123.6) Proxies........................................................332133.7) Closing Transfer Books.........................................332143.8) Record Date....................................................332153.9) Presiding Officer..............................................332163.10) Conduct of Meetings of Shareholders............................432173.11) Order of Business..............................................432183.12) Inspectors of Election.........................................532193.13) Informal Action by Shareholders................................532203221ARTICLE 4 - DIRECTORS..........................................................532224.1) General Powers.................................................532234.2) Number.........................................................532244.3) Qualifications and Term of Office..............................532254.4) Quorum.........................................................532264.5) Regular Meetings...............................................632274.6) Telephonic Meetings............................................632284.7) Special Meetings...............................................632294.8) Compensation...................................................632304.9) Salaries.......................................................632314.10) Committees.....................................................632324.11) Committee of Disinterested Persons.............................732334.12) Vacancies......................................................732344.13) Order of Business..............................................732354.14) Written Consent or Opposition in Advance of Meeting............732364.15) Informal Action by Directors...................................832374.16) Removal of Directors...........................................832383239ARTICLE 5 - OFFICERS...........................................................832405.1) Number.........................................................832415.2) Election, Term of Office and Qualifications....................832425.3) Chairman of the Board..........................................832435.4) President and Chief Executive Officer..........................832445.5) Chief Operating Officer........................................832455.6) Vice President.................................................932465.7) Secretary......................................................932473248<PAGE>3249325032515.8) Treasurer and Chief Financial Officer..........................932525.9) Assistant Officers.............................................932535.10) Officers Shall Not Lend Corporate Credit.......................932543255ARTICLE 6 - INDEMNIFICATION...................................................1032563257ARTICLE 7 - SHARES AND THEIR TRANSFER.........................................1032587.1) Certificates of Stock.........................................1032597.2) Facsimile Signature...........................................1032607.3) Issuance of Shares............................................1032617.4) Transfer of Shares............................................1032627.5) Lost Certificates.............................................1132637.6) Treasury Stock................................................1132647.7) Indebtedness of Shareholders..................................1132657.8) Transfer Agent and Registrar..................................1132663267ARTICLE 8 - BOOKS AND RECORDS.................................................1132688.1) Share Register; Dates of Issuance.............................1132698.2) Other Documents Required......................................1132708.3) Financial Records.............................................1232718.4) Right to Inspect..............................................1232728.5) Cost of Copies................................................1232738.6) Computerized Records..........................................1232748.7) Financial Statements..........................................1232753276ARTICLE 9 - DISTRIBUTIONS.....................................................1332779.1) Distributions.................................................1332789.2) Record Date...................................................1332799.3) Restrictions..................................................1332803281ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................13328210.1) Fiscal Year...................................................13328310.2) Audit of Books and Accounts...................................13328410.3) Contracts.....................................................14328510.4) Checks........................................................14328610.5) Deposits......................................................14328710.6) Voting Securities Held by Corporation.........................1432883289ARTICLE 11 - WAIVER OF NOTICE.................................................1432903291ARTICLE 12 - AMENDMENTS.......................................................1432923293<PAGE>329432953296AMENDED AND RESTATED BY-LAWS32973298OF32993300CNS, INC.33013302ARTICLE 133033304OFFICES330533061.1) Registered Offices - The address of the registered office of the3307corporation shall be established and maintained at the office of the Corporation3308Trust Center, 1209 Orange Street, in the City of Wilmington, County of New3309Castle, State of Delaware and the Corporation Trust Company shall be the3310registered agent of the corporation. The Board of Directors shall have authority3311to change the registered office of the corporation from time to time, and any3312such change shall be registered by the secretary with the Secretary of State of3313Delaware.331433151.2) Offices - The corporation may have such other offices, including3316its principal business office, either within or without the State of Delaware,3317as the Board of Directors may designate or as the business of the corporation3318may require from time to time.33193320ARTICLE 233213322CORPORATE SEAL33233324The corporate seal shall have thereon the name of the corporation,3325and the words "Corporate Seal" and when so directed by the Board of Directors a3326duplicate of the seal may be kept and used by the secretary or treasurer or by3327an assistant secretary or assistant treasurer.33283329ARTICLE 333303331SHAREHOLDERS333233333.1) Regular Meeting - The regular meeting of the shareholders of the3334corporation shall be an annual meeting held at the principal business office of3335the corporation, or at such place as is designated by the Board of Directors or3336by written consent of all the shareholders entitled to vote thereat, at which3337time the shareholders, voting as provided in the Articles of Incorporation,3338shall elect a Board of Directors for the ensuing year, and shall transact such3339other business as shall properly come before them. In the event the regular3340meeting is not held for a period of thirteen (13) months or more, a shareholder3341or director may apply to the Court of Chancery to summarily order a meeting to3342be held. To be properly brought before the annual meeting, business must be of a3343nature that is appropriate for consideration at an annual meeting and must be3344(i) specified in the notice of meeting (or any supplement thereto) given by or3345at the direction of the Board of Directors, (ii) otherwise properly brought3346before the meeting by a shareholder. In addition to any other applicable3347requirements, for business to be properly brought before the annual meeting by a3348shareholder, the shareholder must have given timely notice thereof in writing to3349the Secretary of the corporation. To be timely, each such notice must be given,3350either by personal delivery or by United States mail, postage prepaid, to the3351Secretary of the corporation, not less than 45 days nor more than 60 days prior3352to the date the proxy materials for the previous year's annual meeting were3353mailed to shareholders of the corporation. Each such notice to the Secretary3354shall set forth as to each matter the shareholder proposes to bring before the3355annual33563357<PAGE>335833593360meeting (w) a brief description of the business desired to be brought before the3361annual meeting and the reasons for conducting such business at the annual3362meeting, (x) the name and address of record of the shareholders proposing such3363business, (y) the class or series (if any) and the number of shares of the3364corporation which are owned by the shareholder, and (z) any material interest of3365the shareholder in such business. Notwithstanding anything in these By-laws to3366the contrary, no business shall be transacted at the annual meeting except in3367accordance with the procedures set forth in this Article; provided, however,3368that nothing in this Article shall be deemed to preclude discussion by any3369shareholder of any business properly brought before the annual meeting, in3370accordance with these By-Laws.337133723.2) Special Meetings - Special meetings of the shareholders shall be3373called by the Secretary at any time upon request of the President, a3374Vice-President acting in the capacity of the President, the Treasurer or two (2)3375or more members of the Board of Directors, or upon a written request of3376shareholders holding ten percent (10%) or more of the capital stock entitled to3377vote. Notice shall be given in accordance with the provisions of Article 3.53378hereof.337933803.3) Quorum - The holders of fifty (50%) percent of the outstanding3381shares entitled to vote, represented either in person or by proxy, shall3382constitute a quorum for the transaction of business. The shareholders present at3383a duly called or held meeting, at which a quorum of the shareholders is present,3384may continue to transact business until adjournment notwithstanding the3385withdrawal of enough shareholders to leave less than a quorum. In case a quorum3386is not present at any meeting, those present shall have the power to adjourn the3387meeting from time to time, without notice or other announcement at the meeting,3388until the requisite number of voting shares shall be represented. Any business3389may be transacted at such reconvened meeting which might have been transacted at3390the meeting which was adjourned.339133923.4) Voting - At each meeting of the shareholders, every shareholder3393having the right to vote shall be entitled to vote in person or by proxy duly3394appointed by an instrument in writing subscribed by such shareholder. Each3395shareholder shall have one (1) vote for each share having voting power standing3396in his name on the books of the corporation. Shares owned by two (2) or more3397shareholders may be voted by any one of them unless the corporation receives3398written notice from any one of them denying the authority of that person to vote3399those shares. A holder of voting shares may vote any portion of the shares in3400any way the shareholder chooses. If a shareholder votes without designating the3401proportion or number of shares voted in a particular way, the shareholder is3402deemed to have voted all the shares in that way. Upon the demand of any3403shareholder, the vote for director, or the vote upon any question before the3404meeting shall be by ballot. All elections shall be had and all questions decided3405by a majority vote of the number of shares entitled to vote and represented at3406any meeting at which there is a quorum, except in such cases as shall otherwise3407be required or permitted by statute, the Certificate of Incorporation, these3408By-Laws or by agreement approved by a majority vote of the number of shares3409entitled to vote.341034113.5) Notice of Meeting - There shall be mailed to each shareholder3412shown by the books of the corporation to be a holder of record of voting shares,3413at his address as shown by the books of the corporation, a notice setting out3414the time and place of the regular meeting or any special meeting, which notice3415shall be mailed at least ten (10) days and not more than sixty (60) days prior3416thereto. Every notice of any special meeting shall state the purpose or purposes3417of the proposed meeting, and the business transacted at all special meetings3418shall be confined to purposes stated in the call. A shareholder may waive notice3419of a meeting of shareholders. A waiver of notice by a shareholder entitled to3420notice is effective whether given before, at, or after the meeting, or whether3421given in writing, orally, or by attendance. Attendance by a shareholder at a3422meeting is a waiver of notice of that meeting, except where the shareholder3423objects at the beginning of the meeting to the transaction of business because3424the meeting is not lawfully called or convened, or objects before a vote on an3425item of business because the item may not lawfully be considered at that meeting3426and does not participate in the consideration of the item at that meeting.34273428<PAGE>3429343034313.6) Proxies - At all meetings of shareholders, a shareholder may3432vote by proxy executed in writing by the shareholder or by his duly authorized3433attorney-in-fact. Such proxies shall be filed with the Secretary of the3434corporation before or at the time of the meeting. No proxy shall be valid after3435eleven (11) months from the date of its execution, unless otherwise provided in3436the proxy. No appointment of a proxy is irrevocable unless the appointment is3437coupled with an interest in the shares of the corporation.343834393.7) Closing Transfer Books - The Board of Directors may close the3440stock transfer books for a period of time not exceeding sixty (60) days3441preceding the date of any meeting of shareholders, payment of dividend,3442allotment of rights, change, conversion or exchange of capital stock or the date3443of obtaining consent of shareholders for any purpose.344434453.8) Record Date - In lieu of closing the stock record books the3446Board of Directors may fix in advance a date, not exceeding sixty (60) days3447preceding the date of any of the aforesaid events, as a record date for the3448determination of shareholders entitled to notice of and to vote at any such3449meeting and any adjournment thereof, or to receive any such dividend or3450allotment or rights, or to exercise the rights in respect to any change,3451conversion or exchange of capital stock or to give such consent, and in such3452case only such shareholders on the record date so fixed shall be entitled to3453notice of and to vote at such meeting and any adjournment thereof, or to receive3454such dividend or allotment of rights, or to exercise such rights, or to give3455such consent, as the case may be, notwithstanding any transfer of any stock on3456the books of the corporation after any such record date so fixed. If the stock3457transfer books are not closed and no record date is fixed for such determination3458of the shareholders of record, the date on which notice of the meeting is3459mailed, or the date of adoption of a resolution of the Board of Directors3460declaring a dividend, allotment of rights, change, conversion or exchange of3461capital stock or to give such consent, as the case may be, shall be the record3462date for such determination of shareholders. A determination of shareholders3463entitled to vote shall apply to any adjournment of such meeting except when the3464date of determination or the closing of the stock transfer book exceeds sixty3465(60) days preceding such adjourned meeting, in which event a new meeting must be3466called.346734683.9) Presiding Officer - The appropriate officers of the corporation3469shall preside over all meetings of the shareholders; provided, however, that in3470the absence of an appropriate corporate officer at any meeting of the3471shareholders, the meeting shall choose any person present to act as presiding3472officer of the meeting.347334743.10) Conduct of Meetings of Shareholders - Subject to the following,3475meetings of shareholders generally shall follow accepted rules of parliamentary3476procedure:347734781. The chairman of the meeting shall have absolute authority3479over matters of procedure and there shall be no appeal3480from the ruling of the chairman. If the chairman, in his3481absolute discretion, deems it advisable to dispense with3482the rules of parliamentary procedure as to any one meeting3483of shareholders or part thereof the chairman shall so3484state and shall clearly state the rules under which the3485meeting or appropriate part thereof shall be conducted.348634872. If disorder should arise which prevents continuation of3488the legitimate business of the meeting, the chairman may3489quit the chair and announce the adjournment of the3490meeting; and upon his so doing, the meeting is immediately3491adjourned.349234933. The chairman may ask or require that anyone not a bona3494fide shareholder or proxy leave the meeting.349534964. A resolution or motion shall be considered for vote only3497if proposed by a shareholder or duly authorized proxy, and3498seconded by an individual who is a shareholder or a duly34993500<PAGE>350135023503authorized proxy, other than the individual who proposed3504the resolution or motion; provided, however, that the3505chairman shall have the discretion to rule out of order3506any resolution or motion which seeks shareholder vote on a3507proposal that has failed to comply with the requirements3508of Article 3.1.350935103.11) Order of Business - The suggested order of business at the3511regular meeting of shareholders, and so far as possible at all other meetings of3512the shareholders, shall be:351335141. Calling of roll.351535162. Proof of due notice of meeting, or unanimous waiver.351735183. Reading and disposal of any unapproved minutes.351935204. Annual reports of all officers and committees.352135225. Election of directors.352335246. Unfinished business.352535267. New business properly presented.352735288. Adjournment.352935303.12) Inspectors of Election - The Board of Directors in advance of3531any meeting of shareholders may appoint inspectors to act at such meeting or any3532adjournment thereof. If inspectors of election are not so appointed, the officer3533or person acting as chairman of any such meeting may, and on the request of any3534shareholder or his proxy, shall make such appointment. In case any person3535appointed as inspector shall fail to appear or act, the vacancy may be filled by3536appointment made by the Board of Directors in advance of the meeting, or at the3537meeting by the officer or person acting as chairman. The inspectors of election3538shall determine the number of shares outstanding, the voting power of each, the3539shares represented at the meeting, the existence of a quorum, the authenticity,3540validity and effect of proxies, receive votes, ballots, assents or consents,3541hear and determine all challenges and questions in any way arising and announce3542the result, and do such acts as may be proper to conduct the election or vote3543with fairness to all shareholders.35443545No inspector whether appointed by the Board of Directors or by the3546officer or person acting as chairman need be a shareholder.354735483.13) Informal Action by Shareholders - Any action required to be3549taken at a meeting of the shareholders, or any other action which may be taken3550at a meeting of the shareholders, may be taken without a meeting and notice3551thereof if a consent in writing, setting forth the action so taken, shall be3552signed by the holders of outstanding stock having not less than the minimum3553number of votes that would be necessary to authorize or take such action at a3554meeting at which all shares entitled to vote thereon were present and voted. The3555written action is effective when it has been signed by all of those3556shareholders, unless a different effective time is provided in the written3557action.35583559ARTICLE 435603561DIRECTORS356235634.1) General Powers - The property, affairs, and business of the3564corporation shall be managed by the Board of Directors.35653566<PAGE>3567356835694.2) Number - The Board of Directors shall consist of such number of3570directors, not less than five (5) nor more than eight (8), the exact number to3571be fixed from time to time solely by resolution of the Board of Directors,3572acting by not less than a majority of the directors then in office.357335744.3) Qualifications and Term of Office - Directors need not be3575shareholders or residents of the State of Delaware. Directors shall be elected3576by the shareholders at the regular meeting for a term of one (1) year or until3577their successors are elected and qualified. Each of the directors of the3578corporation shall hold office until the regular meeting next following or3579closely coinciding with the expiration of his term of office and until his3580successor shall have been elected and shall qualify or until he shall resign, or3581shall have been removed as provided by statute.358235834.4) Quorum - A majority of the whole Board of Directors shall3584constitute a quorum for the transaction of business; provided, however, that if3585any vacancies exist by reason of death, resignation or otherwise, a majority of3586the remaining directors shall constitute a quorum for the conduct of business.3587If less than a quorum is present at any meeting, a majority of the directors3588present may adjourn the meeting from time to time without further notice. If a3589quorum is present when a duly called or held meeting is convened, the directors3590present may continue to transact business until adjournment, even though the3591withdrawal of a number of directors originally present leaves less than a3592majority.359335944.5) Regular Meetings - As soon as practical after each regular3595meeting of shareholders, the Board of Directors shall meet for the purposes of3596organization, choosing the officers of the corporation and for the transaction3597of other business at the place where the shareholders' meeting is held or at the3598place where regular meetings of the Board of Directors are held. No notice of3599such meeting need be given. Such first meeting may be held at any other time and3600place which shall be specified in a notice given as hereinafter provided for3601special meetings or in a consent and waiver of notice signed by all the3602directors.360336044.6) Telephonic Meetings - Any member or members of the Board of3605Directors, or any committee designated by such Board, may participate in a3606meeting of the Board of Directors or such committee by means of conference3607telephone or similar communications equipment by means of which all persons3608participating in the meeting can hear each other, and participation in a meeting3609pursuant to this paragraph shall constitute presence in person at such meeting.361036114.7) Special Meetings - Special meetings of the Board of Directors3612may be held at such time and place as may from time to time be designated in the3613notice or waiver of notice of the meeting. Special meetings of the Board of3614Directors may be called by the president, or by any director. Unless notice3615shall be waived by all directors entitled to notice, notice of the special3616meeting shall be given by the secretary, who shall give at least twenty-four3617(24) hours notice thereof to each director by mail, telegraph, telephone, or in3618person; provided, however, that meetings may be held without waiver of notice3619from or giving notice to any director while he is in the Armed Forces of the3620United States. Each director, by his attendance and his participation in the3621action taken at any directors' meeting, shall be deemed to have waived notice of3622such meeting.362336244.8) Compensation - Directors and any members of any committee of the3625corporation contemplated by these By-Laws or otherwise provided for by3626resolution of the Board of Directors, shall receive such compensation therefore3627as may be determined from time to time by resolution of the Board of Directors.3628Nothing herein contained shall be construed to preclude any director from3629serving the corporation in any other capacity and receiving proper compensation3630therefor.36313632<PAGE>3633363436354.9) Salaries - Salaries and other compensation of all officers and3636employees of the corporation shall be fixed by the Board of Directors. Nothing3637herein contained shall be construed to preclude any officer from serving the3638corporation as a director, consultant or in any other capacity and receiving3639proper compensation therefor. In the event that any authority, such as the3640Internal Revenue Service, determines, and such determination is ultimately3641accepted, that any compensation paid to a director, officer or employee of the3642corporation is excessive and disallows the corporate deduction therefor, the3643recipient of the amounts so determined to be excessive shall repay the3644corporation said amount.364536464.10) Committees - A resolution approved by the affirmative vote of a3647majority of the Board of Directors may establish committees having the authority3648of the Board in the management of the business of the corporation to the extent3649provided in the resolution. Committees are subject at all times to the direction3650and control of the Board of Directors except as provided in Article 4.11. A3651committee shall consist of one or more natural persons, who are directors,3652appointed by affirmative vote of a majority of the directors present. A majority3653of the members of the committee present at a meeting is a quorum for the3654transaction of business unless a larger or smaller proportion is provided in a3655resolution approved by the affirmative vote of a majority of the directors3656present.365736584.11) Committee of Disinterested Persons - The Board of Directors may3659establish a committee composed of two or more disinterested directors or other3660disinterested persons to determine whether it is in the best interests of the3661corporation to pursue a particular legal right or remedy of the corporation and3662whether to cause the dismissal or discontinuance of a particular proceeding that3663seeks to assert a right or remedy on behalf of the corporation. A director or3664other person is "disinterested" if he is not an owner of more than one percent3665of the outstanding shares of, or a present or former officer, employee or agent3666of the corporation or of a related corporation and has not been made or3667threatened to be made a party to the proceeding in question. The committee, once3668established, is not subject to the direction or control of, or termination by,3669the Board of Directors. A vacancy on the committee may be filled by a majority3670vote of the remaining members. The good faith determinations of the committee3671are binding upon the corporation and its directors, officers and shareholders.3672The committee terminates when it issues a written report of its determinations.367336744.12) Vacancies - Any vacancy in the Board of Directors shall be3675filled by an affirmative vote of a majority of the remaining directors of the3676Board, though less than a quorum, and each person so elected shall be a director3677until his successor is elected by the shareholders, who may make such election3678at their next annual meeting or any meeting duly called for that purpose.367936804.13) Order of Business - The meetings shall be conducted in3681accordance with Roberts Rules of Order, Revised, and the suggested order of3682business at any meeting of the directors shall be:368336841. Roll call.368536862. Proof of due notice of meeting, or unanimous consent, or3687unanimous presence and declaration by president.368836893. Reading and disposal of any unapproved minutes.369036914. Reports of officers and committees.369236935. Election of officers.369436956. Unfinished business.369636977. New business.36983699<PAGE>3700370137028. Adjournment.370337044.14) Written Consent or Opposition in Advance of Meeting - Any3705member of the Board of Directors or a committee thereof, may give advance3706written consent or opposition to a proposal or resolution stating an action to3707be taken by the Board or committee. Such consent or opposition shall be a vote3708in favor of or against the proposal or resolution if the proposal or resolution3709acted upon at the meeting is substantially the same or has substantially the3710same effect as the proposal or resolution to which the member of the Board or3711committee has consented or objected.371237134.15) Informal Action by Directors - Any action required or permitted3714to be taken at a meeting of the directors may be taken without a meeting and3715notice thereof if a consent in writing, setting forth the action so taken, shall3716be signed by all of the directors entitled to vote with respect to the subject3717matter set forth.371837194.16) Removal of Directors - The holders of a majority of the shares3720entitled to vote at an election of directors may remove at any time, for cause3721or without cause, any director of the corporation.37223723ARTICLE 537243725OFFICERS372637275.1) Number - The officers of the corporation shall include a3728president or chief executive officer, a treasurer or chief financial officer and3729a secretary and may include such other officers as may from time to time be3730chosen by the Board of Directors. Any two offices except those of president and3731vice- president may be held by one person.373237335.2) Election, Term of Office and Qualifications - At any regular3734meeting of the Board of Directors, the Board shall elect from their number a3735president or chief executive officer and shall, from within or without their3736number, elect a treasurer or chief financial officer and a secretary, and may,3737in addition, from within or without their number, elect one or more3738vice-presidents and such other officers and assistant officers as may be deemed3739advisable. Such officers shall hold office until the next regular meeting or3740until their successors are elected and qualified; provided, however, that any3741officer may be removed with or without cause by the affirmative vote of a3742majority of the whole Board of Directors.374337445.3) Chairman of the Board - The chairman of the board of directors3745shall preside at all meetings of shareholders and directors, and he shall have3746such other powers and perform such other duties as the Board of Directors may3747from time to time prescribe.374837495.4) President and Chief Executive Officer - The president shall have3750general and active management of the business under the supervision and3751direction of the Board of Directors, and he shall be responsible for carrying3752into effect all orders and resolutions of the Board of Directors. He shall be3753the chief executive officer of the corporation and shall perform all duties3754usually incident to the office of president and chief executive officer and such3755other duties as may be from time to time prescribed by the Board of Directors;3756except that if the Board of Directors elects a separate chief executive officer,3757then the president shall perform such duties usually incident to the office of3758president and the chief executive officer shall perform such duties usually3759incident to the office of the chief executive officer and each of them shall3760perform such duties as may be from time to time prescribed to each of them by3761the Board of Directors.376237635.5) Chief Operating Officer - The chief operating officer of the3764corporation shall be responsible for directing and supervising the corporation's3765overall business activities. He shall be the officer primarily responsible for3766planning and carrying out the business policies of the corporation and shall3767report37683769<PAGE>377037713772to the Board of Directors thereon at each meeting of the Board of Directors. He3773shall have such other responsibilities and shall exercise such additional3774authority as may from time to time be assigned to him by the Board.377537765.6) Vice President - Each vice-president shall have such powers and3777shall perform such duties as may be specified in these By-Laws or prescribed by3778the Board of Directors. In the event of absence or disability of the president,3779a vice-president shall succeed to his powers and duties in the order in which3780they are elected or as otherwise prescribed by the Board of Directors. A3781vice-president who is not a director shall not succeed to the office of3782president.378337845.7) Secretary - The secretary shall be secretary of and shall attend3785all meetings of the shareholders and Board of Directors. He shall act as clerk3786thereof and shall record all the proceedings of such meetings in the minute book3787of the corporation. He shall give proper notice of meetings of shareholders and3788directors. He shall keep the seal of the corporation and shall affix the same to3789any instrument requiring it and shall attest the seal by his signature. He3790shall, with the president or any vice-president, acknowledge all certificates3791for shares of the corporation and shall perform such other duties as may be3792prescribed from time to time by the Board of Directors.379337945.8) Treasurer and Chief Financial Officer - The treasurer shall keep3795accurate accounts of all moneys of the corporation received or disbursed. He3796shall deposit all moneys, drafts, and checks in the name and to the credit of3797the corporation in such banks and depositories as the Board of Directors shall3798designate from time to time. He shall endorse for deposit all notes, checks and3799drafts received by the corporation as ordered by the Board of Directors, making3800proper vouchers therefor. He shall disburse the funds of the corporation as3801authorized by the Board of Directors. He shall render to the president and the3802Board of Directors, whenever required, an account of all of his transactions as3803treasurer and of the financial condition of the corporation and shall perform3804such other duties as may be prescribed by the Board of Directors from time to3805time.380638075.9) Assistant Officers - In the event of absence or disability of3808any vice-president, secretary, or treasurer, such assistants to such officers3809shall succeed to the powers and duties of the absent officer in the order in3810which they are elected or as otherwise prescribed by the Board of Directors3811until such principal officer shall resume his duties or a replacement is elected3812by the Board of Directors. Such assistant officers shall exercise such other3813powers and duties as may be delegated to them from time to time by the Board of3814Directors, but they shall be subordinate to the principal officer they are3815designated to assist.381638175.10) Officers Shall Not Lend Corporate Credit - Except for the3818proper use of the corporation, no officer of this corporation shall sign or3819endorse in the name or on behalf of this corporation, or in his official3820capacity, any obligations for the accommodation of any other party or parties,3821nor shall any check, note, bond, stock certificate or other security or thing of3822value belonging to this company be used by any officer or director as collateral3823for any obligation other than valid obligations of this corporation.38243825ARTICLE 638263827INDEMNIFICATION38283829Any person who at any time shall serve or shall have served as a3830director, officer, employee or agent of the Corporation, and the heirs,3831executors and administrators of such person shall be indemnified by the3832Corporation in accordance with, and the fullest extent permitted by, the3833provisions of the Delaware General Corporation Law, as it may be amended from3834time to time.38353836<PAGE>383738383839ARTICLE 738403841SHARES AND THEIR TRANSFER384238437.1) Certificates of Stock - Every owner of stock of the corporation3844shall be entitled to a certificate, to be in such form as the Board of Directors3845prescribe, certifying the number of shares of stock of the corporation owned by3846him. The certificates for such stock shall be numbered in the order in which3847they shall be issued and shall be signed in the name of the corporation by the3848president, and by the secretary, or by any other two (2) proper officers of the3849corporation authorized by the Board of Directors. A record shall be kept of the3850name of the person, firm or corporation owning the stock represented by each3851such certificate, and the respective issue date thereof, and in the case of3852cancellation, the respective dates of cancellation. Every certificate3853surrendered to the corporation for exchange or transfer shall be canceled and no3854other certificate or certificates shall be issued in exchange for any existing3855certificates until such existing certificate shall have been so canceled except3856in cases provided for in Article 7.5.385738587.2) Facsimile Signature - Where any certificate is manually signed3859by a transfer agent, a transfer clerk or by a registrar appointed by the Board3860of Directors to perform such duties, a facsimile or engraved signature of the3861president and secretary or other proper officer of the corporation authorized by3862the Board of Directors may be inscribed on the certificate in lieu of the actual3863signature of such officer. The fact that a certificate bears the facsimile3864signature of an officer who has ceased to hold office shall not affect the3865validity of such certificate if otherwise validly issued.386638677.3) Issuance of Shares - Subject to the provisions and limitations3868of Article 4 of the Certificate of Incorporation, the Board of Directors is3869authorized to cause to be issued shares of the corporation, to the full amount3870of such authorized shares, and at such times as may be determined by the Board3871of Directors and as may be permitted by law.387238737.4) Transfer of Shares - Transfer of shares on the books of the3874corporation may be authorized only by the shareholder named in the certificate,3875or by the shareholder's legal representative, or duly authorized3876attorney-in-fact, and upon surrender for cancellation of the certificate or3877certificates for such shares. The shareholder in whose name shares of stock3878stand on the books of the corporation shall be deemed the owner thereof for all3879purposes as regards the corporation; provided, that when any transfer of shares3880shall be made as collateral security, and not absolutely, such facts, if known3881to the secretary of the corporation, or to the transfer agent, shall be so3882expressed in the entry of transfer.388338847.5) Lost Certificates - Any shareholder claiming a certificate of3885stock to be lost or destroyed shall make an affidavit or affirmation of that3886fact in such form as the Board of Directors may require, and shall, if the3887directors so require, give the corporation a bond of indemnity in form and with3888one or more sureties satisfactory to the Board, in an amount determined by the3889Board of Directors not exceeding double the value of the stock represented by3890such certificate to indemnify the corporation, against any claim that may be3891made against it on account of the alleged loss or destruction of such3892certificate; whereupon a new certificate may be issued in the same tenor and for3893the same number of shares as the one alleged to have been destroyed or lost.389438957.6) Treasury Stock - Treasury stock shall be held by the corporation3896subject to disposal by the Board of Directors, in accordance with the3897Certificate of Incorporation and these By-Laws, and shall not have voting rights3898nor participate in dividends.389939007.7) Indebtedness of Shareholders - The corporation shall have a3901first lien on all the shares of its capital stock and upon all dividends3902declared upon the same for any indebtedness of the respective holders thereof to3903the corporation.39043905<PAGE>3906390739087.8) Transfer Agent and Registrar - The Board of Directors may3909appoint one or more transfer agents or transfer clerks, and may require all3910certificates for shares to bear the signature or signatures of any of them.39113912ARTICLE 839133914BOOKS AND RECORDS391539168.1) Share Register; Dates of Issuance - The corporation shall keep3917at its principal business office, or at another place or places within the3918United States determined by the Board of Directors, a share register not more3919than one year old, containing the names and addresses of the shareholders and3920the number and classes of shares held by each shareholder. The corporation shall3921also keep, with the share register, a record of the dates on which certificates3922or transaction statements representing shares were issued.392339248.2) Other Documents Required - A corporation shall keep at its3925principal business office, or, if its principal business office is outside of3926this state, shall make available at its registered office within ten days after3927receipt by an officer of the corporation of a written demand for them made by a3928person described in Article 8.4, originals or copies of:392939301. Records of all proceedings of shareholders for the last3931three years;393239332. Records of all proceedings of the board for the last three3934years;393539363. Its articles and all amendments currently in effect;393739384. Its by-laws and all amendments currently in effect;393939405. Financial statements required by Article 8.7 and the3941financial statement for the most recent interim period3942prepared in the course of the operation of the corporation3943for distribution to the shareholders or to a governmental3944agency as a matter of public record;394539466. Reports made to shareholders generally within the last3947three years;394839497. A statement of the names and usual business addresses of3950its directors and principal officers;395139528. Voting trust agreements; and395339549. Shareholder control agreements.395539568.3) Financial Records - A corporation shall keep appropriate and3957complete financial records.395839598.4) Right to Inspect - A shareholder, beneficial owner, or a holder3960of a voting trust certificate has an absolute right, upon written demand, to3961examine and copy, in person or by a legal representative, during the usual hours3962for business, the share register and all documents referred to in Article 8.2. A3963shareholder, beneficial owner, or a holder of a voting trust certificate has a3964right, upon written demand, to examine and copy in person or by legal3965representative, other corporate records during the usual hours for business,3966only if the shareholder, beneficial owner, or holder of a voting trust3967certificate demonstrates a proper purpose for the examination. A "proper3968purpose" is one reasonably related to the person's interest as a shareholder,3969beneficial owner, or holder of a voting trust certificate of the corporation.39703971<PAGE>3972397339748.5) Cost of Copies - Copies of all documents referred to in Article39758.2 shall be furnished at the expense of the corporation. A copy of the most3976recently generated share register shall be furnished at the expense of the3977corporation if the requesting party shows a proper purpose. In all other cases,3978the corporation may charge the requesting party a reasonable fee to cover the3979expenses of providing the copy.398039818.6) Computerized Records - The records maintained by the3982corporation, including its share register, financial records, and minute books,3983may utilize any information storage technique, including, for example, punched3984holes, printed or magnetized spots, or microimages, even though that makes them3985illegible visually, if the records can be converted, by machine and within a3986reasonable time, into a form that is legible visually and whose contents are3987assembled by related subject matter to permit convenient use by people in the3988normal course of business. The corporation shall convert any of the records3989referred to in Articles 8.1 and 8.2 upon the request of a person entitled to3990inspect them, and the expense of the conversion shall be borne by the person who3991bears the expense of copying pursuant to Article 8.5. A copy of the conversion3992is admissible in evidence, and shall be accepted for all other purposes, to the3993same extent as the existing or original records would be if they were legible3994visually.399539968.7) Financial Statements - The corporation shall upon written3997request by a shareholder stating a proper purpose therefor, furnish annual3998financial statements, including at least a balance sheet as of the end of each3999fiscal year and a statement of income for the fiscal year, which shall be4000prepared on the basis of accounting methods reasonable in the circumstances and4001may be consolidated statements of the corporation and one or more of its4002subsidiaries. In the case of statements audited by a public accountant, each4003copy shall be accompanied by a report setting forth the opinion of the4004accountant on the statements; in other cases, each copy shall be accompanied by4005a statement of the president or other person in charge of the corporation's4006financial records stating the reasonable belief of the person that the financial4007statements were prepared in accordance with accounting methods reasonable in the4008circumstances, describing the basis of presentation, and describing any respects4009in which the financial statements were not prepared on a basis consistent with4010those prepared for the previous year.40114012ARTICLE 940134014DISTRIBUTIONS401540169.1) Distributions - The Board of Directors may authorize4017distributions by the corporation from funds legally available therefor at such4018times and in such amounts as the Board shall deem reasonable.401940209.2) Record Date - Subject to any provisions of the Certificate of4021Incorporation, the Board of Directors may fix a date preceding the date fixed4022for the payment of any distribution or allotment of other rights as the record4023date for the determination of the shareholders entitled to receive payment of4024such distribution or allotment notwithstanding any transfer of shares on the4025books of the Corporation after such record date.402640279.3) Restrictions - A distribution may be made to the holders of a4028class or series of shares only if:402940301. All amounts payable to the holders of shares having a4031preference for the payment of that kind of distribution4032are paid; and403340342. The payment of the distribution does not reduce the4035remaining net assets of the corporation below the4036aggregate preferential amount payable in the event of4037liquidation to the holders of shares having preferential4038rights, unless the distribution is made to those4039shareholders in the order and to the extent of their4040respective priorities.40414042<PAGE>4043404440453. The money or property available for distribution is4046insufficient to satisfy all preferences, the distributions4047shall be made pro rate according to the order of priority4048of preferences by classes and by series within those4049classes.40504051ARTICLE 1040524053FINANCIAL AND PROPERTY MANAGEMENT4054405510.1) Fiscal Year - The fiscal year of the corporation shall be set4056by the Board of Directors.4057405810.2) Audit of Books and Accounts - The books and accounts of the4059corporation shall be audited at such times as may be ordered by the Board of4060Directors.4061406210.3) Contracts - The Board of Directors may authorize any officer or4063officers, agent or agents, to enter into any contract or execute and deliver any4064instrument in the name of and on behalf of the corporation, and such authority4065may be general or confined to specific instances.4066406710.4) Checks - All checks, drafts, or other orders for the payment of4068money, notes, or other evidences of indebtedness issued in the name of the4069corporation shall be signed by the treasurer or such other officer or officers,4070agent or agents of the corporation and in such manner as shall from time to time4071be determined by resolution of the Board of Directors.4072407310.5) Deposits - All funds of the corporation not otherwise employed4074shall be deposited from time to time to the credit of the corporation in such4075banks, trust companies, or other depositories as the Board of Directors may4076select.4077407810.6) Voting Securities Held by Corporation - The president or other4079agent designated by the Board of Directors, shall have full power and authority4080on behalf of the corporation to attend, act and vote at any meeting of security4081holders of other corporations in which this corporation may hold securities. At4082such meeting the president, or such other agent, shall possess and exercise any4083and all rights and powers incident to the ownership of such securities which the4084corporation might possess and exercise.40854086ARTICLE 1140874088WAIVER OF NOTICE40894090Whenever any notice whatsoever is required to be given by these4091By-Laws or the Certificate of Incorporation of the corporation or any of the4092corporate laws of the State of Delaware, a waiver thereof in writing, signed by4093the person or persons entitled to said notice, either before, at, or after the4094time stated therein, shall be deemed equivalent thereto.40954096ARTICLE 1240974098AMENDMENTS40994100Subject to the limitations set forth in the Delaware General4101Corporation Law, these By-Laws may be amended by a vote of the majority of the4102whole Board of Directors at any meeting, provided that notice of such proposed4103amendment shall have been included in the notice of such meeting given to the4104directors.41054106The undersigned Secretary hereby certifies that the foregoing Amended4107and Restated By-Laws were adopted as the complete By-Laws of the corporation by4108the Board of Directors on this 13th day of March, 2000.410941104111Patrick Delaney, Secretary41124113</TEXT>4114</DOCUMENT>4115<DOCUMENT>4116<TYPE>EX-10.74117<SEQUENCE>34118<DESCRIPTION>AGREEMENT4119<TEXT>412041214122Exhibit 10.7412341244125AGREEMENT412641274128This Agreement is entered into between Minnesota Mining and4129Manufacturing Company ("3M") and CNS, Inc. ("CNS").41304131RECITALS41324133WHEREAS, 3M and CNS entered into a Distribution Agreement with an4134effective date of August 2, 1995, ("the 1995 Agreement") and41354136WHEREAS, under the terms of the 1995 Agreement, 3M became CNS's4137exclusive distributor of CNS's nasal dilator outside of the United States and4138Canada, CNS provided product to 3M with 3M's label, either in bulk or through4139packaging by CNS, and 3M licensed the Breathe Right(R) trademark from CNS, but4140agreed to use 3M's trade dress, and41414142WHEREAS, certain disputes and disagreements have arisen between 3M and4143CNS, and 3M and CNS wish to finally resolve any such disputes or disagreements,4144and41454146WHEREAS, the parties now desire to amend the 1995 Agreement and change4147their business relationship, and41484149WHEREAS, the purpose of this new Agreement is to allow CNS to assume4150the international sales and distribution of nasal dilators from 3M, to provide4151for an orderly transition process for doing so, and to provide compensation to41523M for doing so, releasing certain of its rights under the 1995 Agreement.41534154NOW, THEREFORE, the parties agree as follows:415541561. Effective Date. The effective date of this Agreement is September415730, 1999.415841592. Amendment. This Agreement modifies and amends the 1995 Agreement,4160and the parties deem this Agreement to be sufficient written amendment to meet4161the requirements of paragraph 17G of the 1995 Agreement. The terms of this4162Agreement control to the extent they are inconsistent with the terms of the 19954163Agreement.416441653. Nonexclusive Distribution. Effective on the date hereof, 3M is4166authorized by CNS to continue to distribute CNS's nasal dilator strips outside4167of the United States and Canada, but its distribution41684169<PAGE>417041714172shall no longer be exclusive. Notwithstanding the foregoing, 3M shall be the4173exclusive distributor of CNS nasal dilators to its current drug store and4174pharmacy customers outside the United States and Canada and to Boots, Migros and4175Franklin's (Australia) provided 3M maintains distribution at those customers4176through March 1, 2000. 3M's exclusive distribution rights for such customers4177will terminate on March 1, 2000. On that date, 3M's rights will be nonexclusive4178until the termination of 3M's distribution rights on June 30, 2000, as set forth4179in this Agreement. During the period from the date of this Agreement until June418030, 2000, 3M will sell no nasal dilator strips or dilators other than those4181supplied to it by CNS. CNS will not send any direct communications to 3M's4182exclusive customers (identified above) regarding the termination of the4183Distribution Agreement or the transfer of the business prior to the4184communication referenced in paragraph 13(a).418541864. Payment. Within ten business days of the effective date of this4187Agreement, CNS shall pay to 3M $6,345,000.418841895. End of Sales and Distribution. On June 30, 2000, all 3M's rights of4190any sort to sell or distribute CNS nasal dilators shall terminate.419141926. Non-Competition. 3M will not sell any nasal dilator devices during4193the period beginning July 1, 2000 and ending June 30, 2002.419441957. Fulfillment of Orders. CNS will continue to fill orders for nasal4196dilators to be sold by 3M between the date of this Agreement and June 30, 2000,4197and will cooperate to minimize ending inventory while assuring supply. Beginning4198January 1, 2000, CNS will supply nasal dialators to fill orders received by 3M4199in generic cold seal wrappers ("packaging") on a consignment basis. 3M will pay4200for the nasal dilators upon 3M's sale of the nasal dilators to its customers.420142028. Remaining Inventory. To the extent any inventory of 3M packaged4203dilators is left in 3M's possession or control on June 30, 2000, such inventory4204shall be the sole responsibility of 3M and 3M shall destroy that inventory and4205shall have no rights to sell such inventory or return such inventory to CNS. The4206parties recognize and agree that the purpose of this provision is to provide an4207incentive to 3M to meet its responsibilities to continue its marketing and4208distribution responsibilities until the termination of its distribution rights4209and responsibilities, as set forth below. By September 30, 2000, 3M will return4210unsold nasal dilators in generic packaging to CNS.42114212<PAGE>4213421442159. Excessive Sales and Prices. In the period before June 30, 2000, 3M4216shall not sell 'excessive' amounts of inventory to customers by offering prices4217below 3M's original cost of CNS nasal dilators in local currency. For the4218purposes of this paragraph, 'excessive' means amounts substantially in excess of4219a reasonable forecast of sales by the customer. Nothing in this paragraph limits42203M's ability to promote CNS nasal dilators to consumers, for example, by4221offering 'buy one get two free' or by offering a fee nasal dilator with the4222purchase of other 3M products.4223422410. Product Returns. Customer returns of nasal strip product will be4225the responsibility of the Company -- 3M or CNS -- who originally sold that4226product.4227422811. Trade Fund Resolution. 3M will be responsible for any trade funding4229commitments that it enters with customers for nasal strips purchased from 3M,4230for example, promotional allowances, and volume incentives.4231423212. License. CNS hereby licenses to 3M the use of the CNS Breathe4233Right(R) trademark or trade name for use outside of the United States and Canada4234for sales of products provided or to be provided to 3M by CNS for sale and4235distribution. This license and 3M's use of the Breathe Right(R) trademark and4236trade name shall cease on June 30, 2000.4237423813. Business Transition. 3M shall make the following reasonable efforts4239to arrange for the transition to CNS of its business relationships concerning4240nasal dilators and of its sales and distribution of nasal dilators. To that end,42413M shall perform the following:42424243a) Provide to 3M's customers, and others assisting 3M in4244distributing nasal dilators, a written communication concerning the4245transfer of the nasal dilator business from 3M to CNS. The4246communication shall be in the form of a letter, the text of which shall4247be prepared by 3M and approved by CNS. CNS will not withhold its4248approval unreasonably. The letter will be sent by March 1, 2000 and4249will state that after June 30, 2000, Breathe Right(R) nasal dilators,4250or whatever nasal dilator strips are being sold by 3M to customers,4251shall thereafter be available from 3M's former licensor, CNS, and its4252distributor specified by CNS.42534254<PAGE>425542564257b) Provide to CNS by January 1, 2000, 3M's customer lists and4258a two year sales history ending September 30, 1999. 3M will not be4259obligated to provide such customer lists and sales history if, prior to4260January 1, 2000, CNS announces an intent to be acquired or is acquired4261by a competitor of any of 3M's First Aid Dressing and First Aid4262Supplies businesses.4263426414. Release. CNS and 3M hereby release each other, as well as the4265directors, officers, employees and agents of the other from all claims up to the4266date of this Agreement which the parties have against each other, known or4267unknown, including, but not limited to, claims relating to the parties'4268performance or lack thereof under the 1995 Agreement. This release does not4269excuse 3M from paying for any products that have been ordered or delivered to4270date, or excuse CNS from delivering ordered products.4271427215. Independent Contractors. 3M and CNS are independent contractors.4273They are not agents of each other, partners, joint ventures or4274franchisor/franchisee. Neither has the right to bind or act on the other's4275behalf.4276427716. No Assignment. Neither party will assign this Agreement without the4278consent of the other, except for an assignment by CNS to a successor of CNS's4279nasal dilator business.4280428117. No Waiver. Neither 3M nor CNS waives any of its rights provided by4282this Agreement because it fails to enforce them.4283428418. Entire Agreement. This Agreement is the entire agreement between 3M4285and CNS regarding the amendment of the 1995 Agreement. This Agreement supersedes4286any other agreement concerning such amendment and may be modified only by a4287written agreement.4288428919. Governing Law. This Agreement shall be governed by Minnesota law.4290429120. Dispute Resolution. Any controversy or claim arising out of or4292relating to this Agreement or the 1995 Agreement, or the breach, termination or4293validity thereof, shall be settled by arbitration in accordance with the rules4294of the Center of Public Resources by a single arbitrator selected by mutual4295agreement of the parties from the panel of the Center for Public Resources. The4296arbitration will be governed by the United States Arbitration Act.42974298a) The arbitrator shall apply Minnesota law and shall have the4299power to require specific performance, issue injunctions, declare the4300rights of the parties and award damages.43014302b) Judgment of the arbitrator may be entered by any court with4303appropriate jurisdiction.43044305<PAGE>430643074308c) The arbitration hearing shall begin no more than 120 days4309from the date Notice of Arbitration is delivered to the respondent.431043114312MINNESOTA MINING AND MANUFACTURING COMPANY4313431443154316By Dated:43174318Its4319432043214322CNS, INC.4323432443254326By Dated:43274328Its43294330</TEXT>4331</DOCUMENT>4332<DOCUMENT>4333<TYPE>EX-10.94334<SEQUENCE>44335<DESCRIPTION>LICENSE AGREEMENT4336<TEXT>433743384339Exhibit 10.9434043414342[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY4343WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]43444345LICENSE AGREEMENT434643474348THIS AGREEMENT is made and effective as of this 10th day of November,43491997 by and between CNS, Inc., a Delaware corporation ("Licensee"), and Onesta4350Nutrition, Inc., a Minnesota corporation ("Licensor").43514352RECITALS43534354WHEREAS, Licensor is now and has been engaged in developing certain4355Products (as defined in Subsection 1.1) for use in providing dietary fiber in4356tablet form.43574358WHEREAS, the Products embody inventions and designs owned exclusively by4359Licensor and Licensor has available certain Know-how relating to the manufacture4360of the Products;43614362WHEREAS, Licensor owns or controls, or may hereafter own or control,4363certain Know-how, patents or patent applications relating to the Products;43644365WHEREAS, Licensee desires to obtain an exclusive worldwide license from4366Licensor of certain Know-how, patents and patent applications of Licensor4367relating to the manufacture and use of the Products for providing dietary fiber4368and Licensor is willing to grant such a license to Licensee.43694370NOW, THEREFORE, in consideration of the premises, the mutual covenants4371and agreements hereinafter set forth and other good consideration, the receipt4372and sufficiency of which are hereby acknowledged, the parties agree as follows:437343741. GENERAL DEFINITIONS. As used herein, the following terms shall be4375defined in the manner set forth below:437643771.1 Products. The term "Products" shall mean the soluble fiber4378supplement product described on Schedule 1.1 attached hereto, the manufacture,4379use or sale of which is covered by the Licensed Patents or is made or developed4380through the use of the Know-How, including all improvements thereto, and any4381other inulin-based soluble fiber supplement products developed by Licensor or4382any of its employees, consultants, agents or representatives during the term of4383this Agreement using any Licensed Patents or Know-how; provided, however, that4384for any such improvement or enhancement or similar product developed by Licensor4385to be included within the license herein granted, Licensor shall notify Licensee4386of any such improvement or enhancement and Licensee shall at its option make an4387election to include such improvement or enhancement in this License by providing4388written notice of such election to Licensor within thirty (30) days after4389Licensee learns of such improvement, enhancement or similar product. If Licensee4390shall make an such election, Licensee shall reimburse Licensor for reasonable4391expenses incurred in developing such improvement or enhancement or similar4392product.439343941.2 Know-how. The term "Know-how" shall mean any and all4395tangible and intangible information, technology, documents and materials in the4396possession and control of Licensor, and necessary in order to enable Licensee to4397utilize fully the rights granted by Licensor to Licensee hereunder and shall4398include, without limiting the foregoing, the ideas, concepts, confidential4399information, trade secrets and techniques, as well as all the materials,4400documents, manuals, specifications, patterns, art work, bills of materials and4401other information of Licensor relating to the Products.44024403<PAGE>4404440544061.3 Licensed Patents. The term "Licensed Patents" shall mean the4407following: (i) the United States and foreign patent(s) and patent application(s)4408to the Products listed on Schedule 1.3 attached hereto; (ii) all future United4409States or foreign patent applications related to the Products and any patents4410arising therefrom; (iii) the rights, patents and patent applications, if any, in4411any country or jurisdiction in the world corresponding to the United States4412patent applications; and (iv) any division, continuation, continuation-in-part,4413divisional, re-examined, reissued or extended letters patent, applications and4414petty patents, utility models, utility model conversions, inventor's4415certificates relating to the inventions claimed in any of the foregoing United4416States patents and patents pending and foreign patent rights, which may be4417developed, acquired or controlled by Licensor during the term of this Agreement4418and with respect to which Licensor shall have the right to grant the license4419hereinafter provided.442044211.4. Contract Year and Quarter. The term "Contract Year" shall4422mean each period following October 1 of 1998, 1999 and 2000. The term "Contract4423Quarter" shall mean each period of three consecutive months commencing January44241, April 1, July 1 and October 1.442544261.5. Gross Revenues. The term "Gross Revenues" shall mean the4427gross amounts collected by Licensee from any end-user, sublicensee, assignee or4428other person or entity relating to or arising from the sale of Products after4429the deduction of (i) any amounts repaid or credited by reason of rejections or4430returns, and (ii) trade and quantity discounts actually allowed and taken.443144321.6. Earned Royalty . The term "Earned Royalty" shall mean the4433royalty payable to Licensor on Products.443444352. GRANT OF LICENSES.443644372.1 Patent and Know-how License. Licensor hereby grants to4438Licensee a sole and exclusive, worldwide, transferable right and license under4439the Licensed Patents and Know-How to make, have made, use, import, offer for4440sale and sell the Products and to practice worldwide any process claimed or4441disclosed in the Licensed Patents and Know-how. Without limiting the foregoing,4442the Licensed Products may be distributed as a product to consumers, retailers,4443wholesalers or otherwise.444444452.2 Sublicenses and Assignments. Licensee may sublicense and/or4446assign to any third party, including affiliates of Licensee, any and all rights4447granted hereunder. In the event of an assignment, Licensee shall enter into a4448written agreement with the assignee pursuant to which the assignee shall assume4449all of the obligations of Licensee under this Agreement and this Agreement shall4450be binding upon and inure to the benefit of such assignee. In the event of a4451sub-license, Licensee shall enter into a written agreement with sub-licensee (i)4452with a term no greater than the term of this Agreement, (ii) with rights granted4453to sub- licensee which are no greater than the terms of this Agreement, and4454(iii) pursuant to which Licensee shall use reasonable business efforts to impose4455upon sub-licensees similar obligations as Licensor has imposed upon Licensee4456under this Agreement.445744582.3 Patent Procurement and Costs. Licensee shall be responsible4459for and pay all patent costs and expenses (including reasonable attorneys' fees)4460incurred by Licensor in obtaining, prosecuting, owning and maintaining any of4461the Licensed Patents issued or to be issued under the law of any country or4462jurisdiction, including filing, prosecution, working and maintenance costs and4463taxes. Licensee shall have the right to review and comment on Licensor's filings4464with respect to the Licensed Patents, at Licensee's own expense. Notwithstanding4465the above, Licensor shall direct and control the procurement of the Licensed4466Patents using patent counsel of its own choosing for such procurement (the4467choice and which counsel is subject to the reasonable consent of Licensee). Such4468patent costs and expenses incurred by Licensor and reimbursed by Licensee4469hereunder may be offset against the royalties payable under excess of running4470royalties payable under Section 4.1 over the minimum royalties payable under4471Section 4.3 in any Contract Quarter to the extent that such excess arises from4472sales of Licensed Products in the country or region in which such patent costs4473and expenses were incurred.44744475<PAGE>4476447744782.4 Exploitation. Licensee hereby agrees that during the term of4479this Agreement it will use its reasonable best efforts to manufacture, sell and4480market the Products, and will exert its reasonable best efforts to create a4481demand for the Products worldwide, and to increase and extend its business in4482the manufacture, sale and marketing of the Products worldwide.448344843. REPRESENTATIONS AND WARRANTIES.448544863.1 Licensor hereby warrants and represents to Licensee as4487follows:44884489(a) Licensor is a corporation duly organized, validly existing4490and in good standing under the laws of the State of Minnesota.44914492(b) This Agreement has been duly authorized, executed and4493delivered by Licensor and constitutes a valid and binding obligation of4494Licensor, enforceable in accordance with its terms, except as rights to4495indemnification thereunder may be limited by applicable law and except4496as the enforcement thereof may be limited by bankruptcy, insolvency,4497reorganization, moratorium or other similar laws relating to or4498affecting creditors' rights generally or by general equitable4499principles. The execution, delivery and performance of this Agreement by4500Licensor and the consummation of the transactions contemplated hereby do4501not and will not conflict with or result in any material breach of any4502of the provisions of, or constitute a material default under, or result4503in a material violation of, or require any authorization, consent or4504approval, under the provisions of such party's Articles of Incorporation4505or Bylaws or any other agreement or instrument to which such party is4506bound or affected, or to he best of Licensor's knowledge, any law,4507statute, rule, regulation, judgment order or decree to which such party4508is subject.45094510(c) Licensor owns all the rights of Jerome J. Licari, Ph-D and4511all other employees, agents, consultants or representatives of Licensor4512with respect to the Products, Licensed Patents and Know-how.45134514(d) Licensor has filed the patent applications listed on4515Schedule 1.3.45164517(e) To Licensor's knowledge, the Products, Licensed Patents and4518Know-how do not infringe on any patent, copyright or other intellectual4519property right of any third party.45204521(f) Licensor has not received notice of any claims, actions,4522suits or proceedings pending or threatened effecting Licensor, the4523Licensed Patents or Know-how which, if adversely determined, would have4524a material adverse effect upon Licensee's ability to manufacture, have4525manufactured, use or sell the Products or otherwise practice the rights4526and technology licensed to Licensee by Licensor under this Agreement4527and, to the best of Licensor's knowledge, there is no reasonable basis4528for anyone to bring such claims, actions, suits or proceedings.45294530(g) Licensor has not received any claim from any third-party4531proceedings relating to the Licensed Patents, Know-how, or the Products4532which are based upon infringement of any patent or misappropriation or4533misuse of trade secrets.45344535(h) Licensor represents that the product, in its current form,4536is manufacturable in quantities sufficient enough to meet the sales4537levels required for the minimum guaranteed royalties.45384539(i) That certain License Agreement between Licensor and Johnson4540& Johnson/Merck Consumer Pharmaceuticals Company ("JJMCP"), dated March454131, 1997, was terminated effective June 25, 1997, and Licensor retains a4542royalty-free unrestricted right to use any information concerning the4543manufacture, formulation and use of the Licensed Products not generally4544known to the public, and developed by JJMCP during the term of such4545agreement (other than information covered by any published patent or4546patent application).45474548<PAGE>4549455045513.2 Licensee hereby warrants and represents to Licensor as4552follows:45534554(a) Licensee is a corporation duly organized, validly existing4555and in good standing under the laws of the State of Delaware.45564557(b) This Agreement has been duly authorized, executed and4558delivered by Licensee and constitutes a valid and binding obligation of4559Licensee, enforceable in accordance with its terms, except as rights to4560indemnification thereunder may be limited by applicable law and except4561as the enforcement thereof may be limited by bankruptcy, insolvency,4562reorganization, moratorium or other similar laws relating to or4563affecting creditors' rights generally or by general equitable4564principles. The execution, delivery and performance of this Agreement by4565Licensee and the consummation of the transactions contemplated hereby do4566not and will not conflict with or result in any material breach of any4567of the provisions of, or constitute a material default under, or result4568in a material violation of, or require any authorization consent or4569approval, under the provisions of Licensee's Certificate of4570Incorporation or Bylaws or, to the best of Licensee's knowledge, any4571other agreement or instrument to which such party is bound or affected,4572or any law, statute, rule, regulation, judgment order or decree to which4573such party is subject.457445754. CONSIDERATION AND REPORTS.457645774.1 Royalties. Licensee agrees to pay to Licensor royalties as4578follows based on the Gross Revenues from the sale of Products: (a) [CONFIDENTIAL4579TREATMENT REQUESTED]% of Gross Revenues until royalties have been paid on an4580aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross Revenues, then4581(b) [CONFIDENTIAL TREATMENT REQUESTED]% of Gross Revenues until royalties have4582been paid on an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED] of Gross4583Revenues, and then (c) [CONFIDENTIAL TREATMENT REQUESTED]% of all Gross Revenues4584in excess of an aggregate total of $[CONFIDENTIAL TREATMENT REQUESTED]. The4585royalty provided for in this Subsection 4.1 shall be reduced to [CONFIDENTIAL4586TREATMENT REQUESTED]% of the otherwise applicable rate, on a country-by-country4587basis if no Licensed Patent issues in such country.458845894.2 Quarterly Payments. All royalties due Licensor from Licensee4590hereunder shall be payable on a Contract Quarterly basis. Within forty-five (45)4591days after the end of each Contract Quarter during the term of this Agreement,4592Licensee shall pay to Licensor, by wire transfer to an account designated4593pursuant to Section 10.4, the royalty due Licensor under Subsection 4.1 through4594the end of the preceding Contract Quarter and shall furnish Licensor with a4595written statement setting forth the number of Products sold and the Gross4596Revenues received during such Contract Quarter, and the resulting amount of the4597royalty due Licensor under Subsection 4.1.459845994.3 Minimum Royalties.46004601(a) To maintain its rights hereunder, Licensee shall pay to4602Licensor minimum royalties as follows in the event that the Products may4603be marketed and sold without a prescription:46044605<TABLE>4606<CAPTION>4607Minimum Royalty Payment Minimum Royalty Payment4608Contract Year* Per Contract Year per Contract Quarter4609- -------------- ----------------------- -----------------------4610<S> <C> <C>4611Year 1 $[CONFIDENTIAL TREATMENT REQUESTED] $[CONFIDENTIAL TREATMENT REQUESTED]4612Year 2 [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]4613Year 3** [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]4614</TABLE>46154616* Twelve-month periods beginning on the Contract Year.4617** Through the Contract Year of the expiration date of the last of the4618Licensed Patents or if no Licensed Patent issues, December 26, 2015.46194620<PAGE>462146224623(b) In the event the royalty is reduced pursuant to Subsection46244.1 above, the minimum royalties provided for in Subsection 4.3(a) shall4625be reduced by [CONFIDENTIAL TREATMENT REQUESTED] in each Contract Year,4626pro rata on a country-by-country basis.462746284.4 Minimum Royalty Payment. Licensee shall pay Licensor within4629forty-five (45) days after the end of each Contract Quarter, by wire transfer to4630an account designated pursuant to Section 10.4, an amount equal to the minimum4631royalties payable pursuant to the terms of Subsection 4.3 for the Contract4632Quarter then ended, less: (a) the aggregate amount of Earned Royalties actually4633paid to Licensor pursuant to the terms of Subsections 4.1 and 4.2 for the4634Contract Quarter then ended; and (b) any Earned Royalties paid to Licensor4635during the prior Contract Quarters in the current Contract Year that exceed the4636amount of cumulative minimum royalties payable for those Contract Quarters;4637provided that in no event shall such deductions reduce the payment to Licensor4638in any Contract Year below the then applicable minimum annual royalty payable4639under 4.3 of this Agreement. Licensee's failure to pay any and all amounts4640payable under the preceding sentence within thirty (30) days after receipt of4641written notice from Licensor that such amounts have not been timely paid shall4642render the licenses granted hereunder void and thereupon, Licensee shall have no4643further rights or interests of any kind or nature with respect to the Products,4644Know-how, License or Patents and Licensee shall take any and all action that4645Licensor may request to further document the provisions hereof. In the event4646that any law, statute, regulation, rule, guideline, ruling or decision of any4647governmental or regulatory agency prevents Licensee from marketing or offering4648Products for sale, the minimum royalty payment will be suspended until such time4649that Licensee is no longer prevented from marketing or offering Products for4650sale, such suspension to be determined pro rata on a country-by-country basis.465146524.5 Late Payment. Licensee shall have ten (10) days to make any4653late payments hereunder, without interest. Thereafter, Licensee shall pay a late4654payment fee to Licensor calculated at a variable rate of 2% over the prime per4655annum interest rate as set from time to time by Norwest Bank Minneapolis, N.A. ,4656Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that are at4657any time overdue and payable to Licensor under this Agreement, such interest4658being calculated on each such overdue amount from the date when such amount4659became due to the date of actual payment thereof. Such late payment fee shall be4660in addition to and not in lieu of any and all other rights or remedies that4661Licensor may have under this Agreement or law relating to a default by Licensee4662under this Agreement.466346644.6 Records. During the term of this Agreement and for three (3)4665years after termination of this Agreement, Licensee shall at all times maintain4666accurate and up-to-date records containing complete data from which amounts due4667to Licensor under this Agreement may be readily calculated. Further, Licensee4668shall preserve and permit examination of such records by Licensor's4669representatives at reasonable intervals and under reasonable conditions during4670the term of this Agreement and for three (3) years thereafter and, upon request,4671shall supply to Licensor's representatives all information useful in making a4672proper audit and verification of Licensee's performance of its obligations under4673this Agreement.467446754.7 Underpayment. If Licensor determines by audit and inspection4676of Licensee's books and records that Licensee has failed to pay all royalties4677due under Subsection 4.1, Licensee shall pay Licensor 105% of such additional4678royalties as may be due, plus interest thereon. If the amount of underpayment4679exceeds 5% of the royalties due under Subsection 4.1, then Licensor shall, in4680addition to any other remedies available to it, recover from Licensee the4681reasonable costs incurred in making any such audit and inspection pursuant to4682Subsection 4.6 hereof which revealed such shortfall and Licensee shall pay4683Licensor 105% of such additional royalties, plus interest thereon.468446855. INDEMNIFICATION.468646875.1 Indemnification by Licensor. Licensor shall indemnify and4688hold Licensee harmless from and against any and all claims, damages, costs4689(including reasonable attorneys' fees), judgments and liabilities of any kind or4690nature arising out of any third party claim of (a) any breach by Licensor of any4691of its warranties, representations and covenants under this Agreement or (b) any4692misuse by Licensor of the patent process or fraud by Licensor on the patent4693office or notice by Licensor before the date hereof of a claim by any party of a4694prior or superseding right to practice the art of and commercialize the4695Products.46964697<PAGE>4698469947005.2 Indemnification by Licensee. Licensee shall indemnify and4701hold Licensor harmless from and against any and all claims, damages, costs4702(including reasonable attorneys'.fees), judgments -and liabilities of any kind4703or nature: (a) arising out of any third party claim of the breach by Licensee of4704any of its warranties, representations and covenants under this Agreement; or4705(b) arising out of any actual or alleged defect in a Product.470647076. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes4708aware of activity on the part of any third party which may constitute4709infringement of the Licensed Patents, or any other intellectual property rights4710with respect to which Licensee is granted a license hereunder, Licensee shall4711give Licensor written notice thereof. Upon reasonable request by Licensor,4712Licensee shall, at its sole expense, initiate and thereafter diligently maintain4713reasonable efforts to prevent and abate such infringement, including the4714initiation of an appropriate civil action for infringement and the taking of4715such other action as may be necessary or appropriate, to enforce the Licensed4716Patents or other intellectual property rights with respect to -which Licensee is4717granted a license hereunder. In such event, (i) Licensor will permit the use of4718its name in, and as a party to, all such suits and execute all pleadings,4719documents and other papers necessary or appropriate in conjunction therewith and4720(ii) Licensee shall receive the full benefits of any action it takes pursuant to4721this subsection, including retaining all sums recovered in any such suit or in4722settlement thereof after paying Licensor the Earned Royalties which shall be4723calculated from the amount of Gross Revenues, if any, asserted by Licensee to4724support any award of compensatory damages (as opposed to punitive or any other4725damages). Licensor may, at its option and its cost and expense, participate in4726meetings with Licensee and/or its counsel and receive all pleadings, documents4727and other related papers useful for the purpose of keeping Licensor informed of4728the status of any proceedings commenced by Licensee pursuant to this Section 6.472947307. TERM AND TERMINATION.473147327.1 Term. This Agreement shall commence on the effective date4733hereof and shall expire, unless earlier terminated pursuant to Subsections 4.8,47347.2 or 7.3 of this Agreement, upon the later of (a) the expiration of the last4735of the Licensed Patents to expire or (b) December 26, 2015.473647377.2 Termination by Licensor. If Licensee defaults in any of its4738obligations under this Agreement, Licensor shall have the right to terminate4739this Agreement by giving thirty (30) days' written notice of termination4740specifying the reason for termination, provided that such notice will be of no4741effect and termination will not occur if the specified default is cured prior to4742the expiration of said thirty (30) day notice period.474347447.3 Termination by Licensee. (a) This Agreement may be4745terminated by Licensee at any time at will, with or without cause, by the giving4746of at least ninety (90) days' written notice to Licensor by Licensee, in which4747event such license shall terminate upon the effective date stated in any such4748notice. In the event of the termination of any such license, neither Licensor4749nor Licensee shall have any further obligation to the other party hereunder4750except as expressly provided in Sections 7.4 and 8.1 below.47514752(b) Upon the termination of any license granted under this4753Agreement, Licensee may, after the effective date of such termination,4754sell any of its (i) completed Products, (ii) Products then in the4755process of manufacture and (iii) Products with respect to which4756manufacture has been committed at the time of termination by reason of4757either (x) any contracts for the purchase of materials to be used in the4758manufacture of such Products or (y) any contract for the sale of such4759Products. All such sales and uses shall be subject to the royalty4760provisions of Section 4 of this Agreement as though the termination of4761this Agreement had not occurred.47624763<PAGE>476447654766(c) Except as expressly provided in Subsection 7.3(b), after4767termination of this Agreement, Licensee may not use develop, market or4768sell the Products, Know-how, or Licensed Patents in any way or manner4769that would violate any rights of Licensor and all rights with respect to4770the Licensed Products, Know-how or Licensed Patents shall revert to4771Licensor. In addition, Licensee shall assign to Licensor, and hereby4772does, effective only upon such termination, any and all (i) improvements4773to the Licensed Products, Know-how or Licensed Patents conceived or4774reduced to practice during the term of this Agreement and (ii)4775trademarks for the Licensed Products (other than master brand trademarks4776of Licensee which shall be retained by Licensee). Licensee shall take4777any and all steps reasonably requested by Licensor to fully document the4778complete vesting of such rights in Licensor upon any such termination.477947807.4 Continued Obligations. Termination shall not relieve or4781release either party from its obligations to make any payment which may be owing4782to the other under the terms of this Agreement or from any other liability which4783either party may have to the other arising out of the terms of this Agreement.4784Additionally, notwithstanding anything contained herein to the contrary,4785Sections 3, 4 (including Subsection 4.8 to the extent then exercised), 5 and 8.24786shall survive termination of this Agreement and remain in full force and effect;4787provided, that Licensor and Licensee hereby acknowledge that they may not bring4788claims against one another based upon the representations and warranties4789contained in Section 3, except to the extent such representations and warranties4790are not accurate as of the date hereof.479147928. LICENSEE'S UNDERTAKINGS.479347948.1 Licensing Fee and Payment. Licensee will pay to Licensor the4795sum of $[CONFIDENTIAL TREATMENT REQUESTED] as a license fee. The license fee4796will be payable to, Licensee, by wire transfer to an account designated pursuant4797to Section 10.4, as follows:47984799(a) $[CONFIDENTIAL TREATMENT REQUESTED] at the time of execution4800of this License Agreement.48014802(b) $[CONFIDENTIAL TREATMENT REQUESTED] at the beginning of each4803of the next three calendar quarters. If this Agreement is terminated by4804Licensee prior to the payment of all license fees under this Section48058.1, the remaining payments shall be paid on or before the effective4806date of such termination. All license fees shall be non-refundable. Of4807the total $[CONFIDENTIAL TREATMENT REQUESTED] license fee,4808$[CONFIDENTIAL TREATMENT REQUESTED] shall be set off against and reduce4809the royalty payments to be made to Licensor under Section 4 of this4810Agreement. Such credit shall be applied at the rate of [CONFIDENTIAL4811TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of4812the excess of running royalties payable under Section 4.1 over the4813minimum royalties payable under Section 4.3 in any Contract Quarter.481448158.2 Confidentiality. Licensee shall maintain the confidentiality4816of Licensor's confidential information, both during and after the term of this4817Agreement. After this Agreement is terminated, Licensee shall not use any of4818Licensor's confidential information for any purpose that is not specifically4819provided for in Subsection 7.3(b) of this Agreement.482048218.3 Press Release. Upon launch of the first Licensed Product,4822Licensee shall issue a press release, reasonably satisfactory to Licensor, which4823shall, in part, acknowledge Onesta's and/or Licari's role in developing the4824Licensed Products.482548269. LICENSOR'S UNDERTAKINGS.482748289.1 Disclosure of Improvements. Licensor agrees to promptly4829disclose to Licensee any improvement, enhancement or modification to the4830Products that Licensor may develop during the term of this Agreement or any4831other inulin-based soluble fiber supplement products.48324833<PAGE>48344835483610. MISCELLANEOUS.4837483810.1 Force majeure. Neither party shall be responsible for any4839delay or failure in the performance of any obligation hereunder due to strikes,4840lockouts, fires, floods, acts of God, embargoes, wars, riots, or act or order of4841any government or governmental agency; provided, however, nothing set forth in4842this Subsection 10.1 shall be construed to relieve Licensee of the requirement4843that it pay minimum royalties pursuant to Subsections 4.3 and 4.4 hereof.4844484510.2 Waiver. The waiver or failure of either party to enforce4846the terms of this Agreement in one instance shall not constitute a waiver of4847said party's right under this Agreement with respect to other violations.4848484910.3 Remedies. The election by either party of any particular4850right or remedy shall not be deemed to exclude any other right or remedy and all4851rights and remedies of either party shall be cumulative. The parties agree that,4852in addition to any other relief afforded under the terms of this Agreement or by4853law, each party shall have the right to enforce this Agreement by injunctive or4854mandatory relief to be issued against the other party, it being understood that4855both damages and specific performance shall be proper modes of relief and are4856not to be considered as alternative remedies.4857485810.4 Notices. All notices and replies thereto required hereunder4859shall be in writing, signed by the party giving notice, placed in an envelope4860and either delivered by hand or sent by facsimile or registered mail, postage4861prepaid, return receipt requested, and properly addressed to the other party.4862Notices sent by mail shall be deemed received on the date of receipt indicated4863by the receipt verification provided by the United States Postal Service.4864Notices sent by facsimile shall be deemed received on the date indicated on the4865sender's confirmation report. Notice shall be given, mailed or sent to the other4866party at the following addresses or at such other address as may be given by4867proper notice:48684869If to Licensor: Onesta Nutrition, Inc.4870[CONFIDENTIAL TREATMENT REQUESTED]4871[CONFIDENTIAL TREATMENT REQUESTED]4872Attn: Jerome J. Licari, Ph.D4873Fax No.: [CONFIDENTIAL TREATMENT REQUESTED]48744875Wire transfer4876information: Anchor Bank of Wayzata48771055 Wayzata Boulevard4878Wayzata, MN 553914879ABA Routing No: [CONFIDENTIAL TREATMENT4880REQUESTED]4881Account No: [CONFIDENTIAL TREATMENT4882REQUESTED]48834884With a copy to: Dorsey & Whitney LLP4885220 South Sixth Street4886Minneapolis, MN 55402-14984887Attn: Karin A. Keitel4888Fax No.: 612-340-882748894890If to Licensee: CNS, Inc.48914400 West 78th Street4892Minneapolis, MN 554354893Attn: Daniel E. Cohen, M.D.4894Fax No.: 612-820-669748954896<PAGE>489748984899With a copy to: Lindquist & Vennum P.L.L.P.49004200 IDS Center490180 South 8th Street4902Minneapolis, MN 55402-22054903Attn: Patrick Delaney4904Fax No.: 612-371-320749054906Either party hereto may designate any other address for notices or account for4907wire transfer given hereunder by written notice to the other party given at4908least ten (10) days prior to the effective date of such change.4909491010.5 Entire Agreement. This Agreement represents the entire4911agreement between the parties with respect to the subject matter hereof; there4912are no oral promises, representations or warranties. No modification of this4913Agreement or waiver of any of its terms shall be binding upon the parties unless4914said modification or waiver is in writing, signed by both parties, and states4915that it is an amendment to this Agreement.4916491710.6 Parties in Interest. This Agreement shall inure to the4918benefit of, be binding upon, and be enforceable against the parties hereto,4919their respective successors and assigns.4920492110.7 Governing Law. This Agreement shall be governed by,4922construed and enforced under the internal laws (and not the laws of conflicts)4923of the State of Minnesota. Licensee irrevocably submits to the jurisdiction of4924the Minnesota state courts and federal courts sitting in Minneapolis or St.4925Paul, Minnesota in connection with any action or proceeding arising out of or4926relating to this Agreement and agrees that all claims in respect of such action4927or proceeding shall be heard and determined in any such court.4928492910.8 Severability. If any portion of this Agreement is held4930invalid by the final judgment of any court of competent jurisdiction, such4931portion shall be deemed revised or "blue lined" so that it is enforceable to the4932fullest extent possible under applicable law and the remaining provisions shall4933remain in full force and effect as if such invalid provision had not been4934included herein.49354936IN WITNESS WHEREOF, the parties hereto have executed this Agreement as4937of the day and year first above written.49384939CNS, INC.494049414942By4943--------------------------------------4944Its:4945----------------------------------49464947ONESTA NUTRITION, INC.494849494950By4951--------------------------------------4952Its:4953----------------------------------49544955<PAGE>495649574958LIST OF SCHEDULES495949604961Number Description4962------ -----------496349641.1 Products496549661.3 Licensed Patents49674968<PAGE>496949704971SCHEDULE 1.149724973DESCRIPTION OF PRODUCTS49744975Soluble fiber supplement product covered by the Licensed Patents or made4976or developed through the use of Know-How.49774978<PAGE>497949804981SCHEDULE 1.349824983DESCRIPTION OF LICENSED PATENTS49844985U.S. Patent Application Serial No. 60/009,231 filed December 26, 1995, "Dietary4986Fiber Delivery System"49874988U.S. Patent Application Serial No. 08/771,960 filed December 23, 1995, "Dietary4989Fiber Delivery System"49904991PCT Patent Application PCT/US 96/20245 filed December 23, 1996, "Dietary Fiber4992Delivery System"49934994</TEXT>4995</DOCUMENT>4996<DOCUMENT>4997<TYPE>EX-10.104998<SEQUENCE>54999<DESCRIPTION>LICENSE AGREEMENT5000<TEXT>500150025003Exhibit 10.10500450055006[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY5007WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]50085009LICENSE AGREEMENT50105011THIS AGREEMENT (the "Agreement") is made and effective as of this 12th5012day of March, 1999 by and between CNS, Inc., a Delaware corporation5013("Licensee"), and WinEase, L.L.C., a Minnesota limited liability company5014("Licensor").50155016RECITALS50175018WHEREAS, Licensor is now and has been engaged in developing certain5019technology related to animal care and specifically has developed products and5020methods directed to the support of nasal passages for animals, including the5021"Products" (as defined in Paragraph 1.1 below);50225023WHEREAS, Licensor owns certain patents, pending patent applications and5024Know-how (as defined in Paragraph 1.4) related to the Products and methods,5025these patents and pending applications listed in the attached Schedule 1.5, and5026Licensor is willing to license such patents, pending applications and Know-how5027to Licensee exclusively and in accordance with the terms of this Agreement;50285029WHEREAS, Licensor has also developed certain trademarks related to the5030Products and owns certain trademark registrations and pending trademark5031applications as listed in the attached Schedule 1.6, and Licensor is willing to5032license such trademarks including the trademark registrations and pending5033applications in accordance with the terms of the Trademark License Agreement5034attached hereto as Exhibit A;50355036WHEREAS, Licensee desires to obtain an exclusive, worldwide,5037royalty-bearing license from Licensor under all of those certain patents, patent5038applications, Know-how, Product Improvements (as defined in Paragraph 1.3),5039trademarks, and trademark applications relating to the development, manufacture,5040sale and use of the Products and Licensed Methods (as defined in Paragraph 1.2).50415042NOW, THEREFORE, in consideration of these premises, and the mutual5043covenants and agreements hereinafter set forth and other good and valuable5044consideration, the receipt and sufficiency of which are hereby acknowledged, the5045parties agree as follows:504650471. GENERAL DEFINITIONS. As used herein, the following terms shall be5048defined in the manner set forth below:504950501.1 Products. The term "Products" shall mean the nasal support devices5051for animals and parts and components thereof and related thereto and any other5052products similar in function and purpose developed by Licensor or any of its5053employees, consultants, agents or representatives prior to or during the term of5054this Agreement based upon or using the Know-how or any claim within Patent5055Rights. The term Products also specifically includes any product that is made by5056a Licensed Method or is intended to be used in accordance with a Licensed5057Method.505850591.2 Licensed Methods. The term "Licensed Methods" shall mean any5060methods or techniques developed by Licensor of making or using the nasal support5061devices for animals and parts and components thereof and related thereto and any5062other products similar in function and purpose developed by Licensor or any of5063its employees, consultants, agents or representatives prior to or during the5064term of this Agreement based upon or using the Know-how or any claim within the5065Patent Rights.506650671.3 Product Improvements. The term "Product Improvements" shall mean5068any improvement or enhancement to the Products or any similar product conceived5069of by Licensor or any of its officers, employees, consultants, agents or5070representatives after the effective date of this Agreement which utilize any of5071the Know-how, Patent Rights or Licensed Methods.50725073<PAGE>5074507550761.4 Know-how. The term "Know-how" shall mean any and all of the5077information of any description directly relating to the Products and Licensed5078Methods developed by or for Licensor at any time prior to or after the effective5079date of this Agreement and connected or associated with the Patent Rights,5080including, but not limited to, any and all tangible and intangible information,5081technology, documents and materials in the possession and control of Licensor5082(prior to the term of this Agreement), necessary or desirable in order to enable5083Licensee to utilize fully the rights granted by Licensor to Licensee hereunder5084and shall include, without limiting the foregoing, the ideas, concepts,5085confidential information, trade secrets and techniques, as well as all the5086materials, documents, manuals, schematics, blueprints, specifications, patterns,5087art work, bills of materials and technical specifications and other information5088owned or controlled by Licensor relating to the Products, Patent Rights and5089Licensed Methods.509050911.5 Patent Rights. The term "Patent Rights" shall mean the following:5092(i) the United States and foreign patent(s) and patent application(s) listed on5093the attached Schedule 1.5 relating to the Products and Licensed Methods; (ii)5094all future United States or foreign patent applications related to the Products,5095Product Improvements and Licensed Methods and any patents arising therefrom;5096(iii) the rights, patents and patent applications, if any, in any country or5097jurisdiction in the world corresponding to the United States patents or patent5098applications; and (iv) any division, continuation, continuation-in-part,5099divisional, re-examined, reissued or extended letters patent, applications and5100petty patents, utility models, utility model conversions, inventor's5101certificates relating to the inventions claimed in any of the foregoing United5102States patents and patents pending and foreign patent rights, which may be5103developed, acquired or controlled by Licensor during the term of this Agreement5104and with respect to which Licensor has or shall have the right to grant the5105license hereinafter provided.510651071.6 Trademark Rights. The term "Trademark Rights" shall mean those5108trademarks procured by Licensor and listed on the attached Schedule 1.6 for use5109in connection with Products and Licensed Methods, including all current and5110future registrations and pending trademark applications in the United States and5111foreign countries that are related to those trademarks listed in Schedule 1.6.5112The term Trademark Rights also includes any new trademarks that may be developed5113by Licensor for application to the Products or the Licensed Methods.511451151.7 Contract Year and Quarter. The term "Contract Year" shall mean each5116period of twelve (12) consecutive months commencing on the first day of the5117first month of the Contract Quarter following the date Licensee elects, in its5118sole discretion, to commercially introduce the Products (the "Product Acceptance5119Date"); provided, however, the Product Acceptance Date shall in no event be5120later than September 1, 1999 unless otherwise agreed by both parties. The term5121"Contract Quarter" shall mean each period of three (3) consecutive months5122commencing on the first day of (i) July, 1999 in the event that the Product5123Acceptance Date occurs on or before August 15, 1999; or (ii) October, 1999 in5124the event that the Product Acceptance Date occurs after August 15, 1999.512551261.8 Net Sales The term "Net Sales" shall mean the total amount5127collected by Licensee or any sublicensee for sales of the Products to third5128parties after a deduction of any: (i) sales, use or excise taxes; (ii) freight5129or shipping charges; (iii) duty or insurance included therein; (iv) credits or5130prepayments due to rejections; (v) defects or returns; and (vi) amounts for5131trade and quantity discounts actually allowed and taken.513251331.9 Earned Royalty. The term "Earned Royalty" shall mean the royalty5134payable to Licensor on the Net Sales from the sale of the Products.513551362. LICENSING AND COMMERCIALIZATION.513751382.1 Patent Rights and Know-how License. Licensor hereby grants to5139Licensee a sole and exclusive, worldwide, royalty-bearing license, subject to5140Paragraph 2.3 below, to manufacture, have others manufacture for it, use, sell,5141distribute, export, or otherwise dispose of the Products and to practice the5142Licensed Methods to make or use the Products under the Patent Rights and the5143Know-how of Licensor.51445145<PAGE>5146514751482.2 Confidentiality of Know-how. Except as required by law or by a5149governmental agency or as may otherwise be necessary or desirable for Licensee5150to fully utilize the rights granted under this Agreement, Licensee agrees that5151it will not, directly or indirectly, disseminate, disclose or otherwise make5152available to any third party Know-how without the prior consent of Licensor and5153will take all steps reasonably necessary to carry out this obligation so long as5154Licensor has a reversionary right to such Know- how by the terms of this5155Agreement, or unless such Know-how is already known to Licensee or until such5156Know-how is, or becomes, generally known to the public or is subsequently5157received by Licensee in good faith and without any restrictions as to disclosure5158from a third party which has the right to make such disclosure. Notwithstanding5159the foregoing, Licensee may disclose any Know-how to its directors, officers,5160employees, representatives and agents who may need to know such information.516151622.3 Sublicenses. Except as may be otherwise necessary or desirable to5163manufacture or have manufactured the Products or any components therefore,5164Licensee may not sublicense to any third party, including affiliates of5165Licensee, any rights granted by Licensor to Licensee hereunder in the United5166States. Licensee may, however, sublicense any such rights to a third party or5167affiliates outside the United States for selling the Products outside the United5168States and without the right to import the Products into the United States. In5169the event of any sublicense granted under this Paragraph 2.3, Licensee shall (1)5170retain all rights and be responsible for all obligations under this Agreement,5171and (2) enter into a written agreement with any such sublicensee (x) with a term5172no greater than the term of this Agreement, (y) with rights granted to any such5173sublicensee which are no greater than the terms of this Agreement, and (z)5174pursuant to which Licensee shall use reasonable business efforts to impose upon5175such sublicensees similar obligations as Licensor has imposed upon Licensee5176under this Agreement.517751782.4 Assignments. Licensee may assign, convey or transfer any and all of5179its rights under this Agreement ("Transfer") to a successor in interest of5180substantially all of the assets or capital stock of Licensee (the "Acquirer").5181In the event of such a Transfer, any such Acquirer shall assume all of the5182obligations of Licensee hereunder and this Agreement shall be binding upon and5183inure to the benefit of such Acquirer. Except as otherwise set forth in or5184contemplated by Paragraph 2.3 above, no other Transfer may be made by Licensee5185or the Acquirer unless Licensee or the Acquirer grants Licensor an exclusive5186right of first refusal to purchase all of the rights conferred under this5187Agreement in accordance with the following procedure:51885189(a) First, Licensee or the Acquirer, as the case may be, shall5190give Licensor written notification of its intention to enter5191into a transaction which operates to effectuate a Transfer (a5192"Transaction") and shall not enter into any such Transaction5193without first disclosing all material information about the5194proposed Transaction to Licensor and offering to enter into a5195Transaction on substantially identical terms with Licensor;5196and then51975198(b) Second, Licensor shall, unless otherwise waived in writing by5199Licensor, have a period of thirty (30) days after receipt of5200written notification of any proposed Transaction to exercise5201its right of first refusal and enter into a Transaction on5202substantially identical terms. The right of first refusal5203procedure outlined in this Paragraph 2.4 shall be repeated5204prior to entering into by Licensee or the Acquirer of any5205Transaction that is (a) on terms less favorable in a material5206respect to the Licensee or the Acquirer than specified in an5207earlier written notice to Licensor, or (b) with a party other5208than that specified in an earlier written notice.520952102.5 Option for Product Improvements. Licensor shall own all of its5211Product Improvements. Upon Licensor's conception and reduction to practice of5212any Product Improvement, Licensor will disclose such Product Improvement to5213Licensee in writing within a reasonable period of time, and subsequently,5214Licensee shall have the first option to include any such Product Improvement5215within the exclusive license granted above in Paragraph 2.1. Licensee shall make5216its election under this option within thirty (30) days after disclosure from5217Licensor.521852192.6 Patent Procurement and Costs. Licensee shall be solely responsible5220for and pay all patent costs and expenses (including reasonable attorneys' fees)5221to be incurred during the term of this Agreement in obtaining, prosecuting, and5222maintaining any of the Patent Rights issued or to be issued under the law of any5223country or jurisdiction identified on Schedule 2.6, including filing,5224prosecution, working and maintenance costs and taxes. Notwithstanding the above,5225Licensor shall direct and control the procurement and maintenance of the Patent5226Rights and shall select patent counsel for such procurement or maintenance5227(which counsel is subject to the reasonable consent of Licensee); provided,5228however, that Licensee shall have52295230<PAGE>523152325233the right to terminate such patent counsel if Licensee has a reasonable basis5234for not being satisfied with such counsel's efforts or results, and in such5235event Licensee shall select a new patent counsel (which counsel is subject to5236the reasonable consent of Licensor). With respect to the procurement and5237maintenance of any of the Patent Rights in countries not identified on Schedule52382.6, Licensor shall not be responsible for or required to pay any patent costs5239or expenses unless it has given its prior written consent to the procurement of5240such Patent Rights in any such country.524152422.7 Trademark Licensing. The Trademark Rights are licensed pursuant to5243the "Trademark License Agreement" that is attached to this Agreement as Exhibit5244A and made a part hereof.524552463. REPRESENTATIONS AND WARRANTIES.524752483.1 Licensor hereby warrants and represents to Licensee as follows:52495250(a) Licensor is a limited liability company duly organized,5251validly existing and in good standing under the laws of the State of5252Minnesota.52535254(b) This Agreement has been duly authorized, executed and5255delivered by Licensor and constitutes a valid and binding obligation of5256Licensor, enforceable in accordance with its terms, except as rights to5257indemnification thereunder may be limited by applicable law and except5258as and to the extent that the enforcement thereof may be limited by5259bankruptcy, insolvency, reorganization, moratorium or other similar5260laws relating to or affecting creditors' rights generally or by general5261equitable principles. The execution, delivery and performance of this5262Agreement and the agreements attached hereto by Licensor and the5263consummation of the transactions contemplated thereby have been5264authorized by all necessary corporate action and do not and will not5265conflict with or result in any material breach of any of the provisions5266of, or constitute a material default under, or result in a material5267violation of, or require any authorization, consent or approval, under5268the provisions of any organizational charter, articles, bylaw, member5269control, operating or other agreement, contract or instrument to which5270Licensor is bound or affected, or any law, statute, rule, regulation,5271judgment order or decree to which Licensor is subject.52725273(c) Licensor is the sole and exclusive owner of all the rights5274of James R. Chiapetta, Edward L. Blach and all other employees, agents,5275consultants or representatives of Licensor with respect to the5276Products, Licensed Methods, Patent Rights, Know-how and Trademark5277Rights.52785279(d) Licensor has been allowed and the issue fee has been paid5280for the United States patent(s) as listed on Schedule 1.5 covering the5281Products or Licensed Methods. Additional United States and5282international patent applications that are directed to the Products and5283Licensed Methods are currently pending as set forth on Schedule 1.5.5284Licensor has no knowledge of information that would render any of the5285listed patent applications (or patents granted therefrom) invalid or5286unenforceable.52875288(e) Licensor has good and marketable title to the Trademark5289Rights, Patent Rights and Know-how, free and clear of any and all5290liens, pledges, claims, licenses, assignments, conditional sales5291contracts, agreements or encumbrances of any kind that would impair5292Licensor's ability to grant the licenses under this Agreement or the5293Trademark License Agreement.52945295(f) Licensor has no knowledge that any of the Trademark5296Rights, Products, Licensed Methods, Patent Right or Know-how infringes5297on any patent, copyright, trademark, trade secret, trade dress or any5298other intellectual property right of any third party.52995300(g) None of Licensor's undertakings or activities in5301connection with the development, manufacture and sale of the Products5302involve the wrongful use of the proprietary rights or assets of any5303third party or give rise to any claim by any third party of ownership5304or rights in the Trademark Rights, Patent Rights, Licensed Methods or5305Know-how.53065307<PAGE>530853095310(h) Licensor has not received notice of any claims, actions,5311suits or proceedings pending or threatened effecting Licensor, the5312Trademark Rights, the Patent Rights, the Licensed Methods or the5313Know-how, which, if adversely determined, would have a material adverse5314effect upon Licensee's ability to manufacture, have manufactured, use5315or sell the Products or otherwise practice the rights and technology5316licensed to Licensee by Licensor under this Agreement and, to5317Licensor's knowledge, there is no reasonable basis for anyone to bring5318such claims, actions, suits or proceedings.53195320(i) Licensor has not received any claim from any third-party5321proceedings relating to the Trademark Rights, Licensed Methods, Patent5322Rights or Know-how, or that the Products are based upon infringement of5323any patent or misappropriation or misuse of trade secrets or any other5324intellectual property right.532553263.2 Licensee hereby warrants and represents to Licensor as follows:53275328(a) Licensee is a corporation duly organized, validly existing5329and in good standing under the laws of the State of Delaware.53305331(b) This Agreement has been duly authorized, executed and5332delivered by Licensee and constitutes a valid and binding obligation of5333Licensee, enforceable in accordance with its terms, except as rights to5334indemnification thereunder may be limited by applicable law and except5335as the enforcement thereof may be limited by bankruptcy, insolvency,5336reorganization, moratorium or other similar laws relating to or5337affecting creditors' rights generally or by general equitable5338principles. The execution, delivery and performance of this Agreement5339and the agreements attached hereto by Licensee and the consummation of5340the transactions contemplated thereby do not and will not conflict with5341or result in any material breach of any of the provisions of, or5342constitute a material default under, or result in a material violation5343of, or require any authorization, consent or approval, under the5344provisions of Licensee's Certificate of Incorporation or Bylaws or5345other agreement, contract or instrument to which Licensee is bound or5346affected, or any law, statute, rule, regulation, judgment order or5347decree to which Licensee is subject.534853494. PAYMENTS, ROYALTIES AND REPORTS.535053514.1 Initial License Fee. On the date hereof, Licensee will pay to5352Licensor the sum of $[CONFIDENTIAL TREATMENT REQUESTED] as an initial license5353fee.535453554.2 Additional License Fees. Unless this Agreement is earlier5356terminated or notice of termination is furnished in accordance with Paragraph53577.3 hereof, Licensee will pay to Licensor additional license fees in accordance5358with the following:53595360(a) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the5361Product Acceptance Date;53625363(b) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the5364earlier of: (i) six (6) months after the Product Acceptance Date; or5365(ii) Net Sales from the sales of Products equal or exceed5366$[CONFIDENTIAL TREATMENT REQUESTED] in the aggregate; and53675368(c) the sum of $[CONFIDENTIAL TREATMENT REQUESTED] on the5369earlier of: (i) twelve (12) months after the Product Acceptance Date;5370or (ii) aggregate Net Sales from the sales of Products equal or exceed5371$[CONFIDENTIAL TREATMENT REQUESTED] U.S. in the aggregate.537253734.3 Royalties on Account of Net Sales.53745375(a) Licensee agrees to pay to Licensor royalties as follows5376based on the annual Net Sales from the sale of Products which are5377manufactured, used, sold or imported into a jurisdiction in which5378Licensor owns or controls an unexpired granted patent of Patent Rights5379containing a valid claim covering such manufacture, use, sale or5380importation: (a) [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales until5381royalties have been paid on a total of $[CONFIDENTIAL TREATMENT5382REQUESTED] U.S., then (b) [CONFIDENTIAL TREATMENT REQUESTED]% of Net5383Sales until royalties have been paid on a total of $[CONFIDENTIAL5384TREATMENT REQUESTED] U.S., then (c) [CONFIDENTIAL TREATMENT REQUESTED]%5385of Net Sales until royalties have been paid on a total of5386$[CONFIDENTIAL TREATMENT REQUESTED] U.S., and then (d) [CONFIDENTIAL5387TREATMENT REQUESTED]% of all Net Sales in excess of a total of5388$[CONFIDENTIAL TREATMENT REQUESTED] U.S.53895390<PAGE>539153925393(b) The royalty percentages provided for in Paragraph 4.3(a)5394above shall be reduced by [CONFIDENTIAL TREATMENT REQUESTED]5395([CONFIDENTIAL TREATMENT REQUESTED]) on account of Net Sales of5396Products which are manufactured, used, sold or imported into a5397jurisdiction in which Licensor does not own or control an unexpired5398granted patent of Patent Rights containing a valid claim covering such5399manufacture, use, sale or importation.54005401(c) In the event that any third party sells or markets a nasal5402support device that competes with the Products in a particular5403jurisdiction and Licensee is unable to prohibit such competitor from5404marketing or selling such a competitive product in the particular5405jurisdiction through patent proceedings or other measures set forth in5406or contemplated by Section 6, the royalties provided for hereunder5407shall be proportionately reduced such that the royalty percentages then5408in effect under either Paragraphs 4.3(a) and 4.3(b) above shall be5409multiplied by the market share held by Licensee in the particular5410jurisdiction as determined by Licensee every six (6) months in a good5411faith analysis of the relevant markets and the competitive effect of5412such products on Net Sales.54135414(d) It is further understood and agreed by the parties that a5415Product sold and subject to royalty under this Agreement shall not be5416subject to more than one royalty payment and that the royalties5417provided for under this Agreement shall in no event be reduced to less5418than [CONFIDENTIAL TREATMENT REQUESTED]% of Net Sales.541954204.4 Quarterly Payments. All royalties due Licensor from Licensee5421hereunder shall be payable on a Contract Quarterly basis. Within thirty (30)5422days after the end of each Contract Quarter during the term of this Agreement,5423Licensee shall pay to Licensor the royalty due Licensor under Paragraph 4.35424through the end of the preceding Contract Quarter and shall furnish Licensor5425with a written statement setting forth the number of Products sold and the Net5426Sales received during such Contract Quarter, and the resulting amount of the5427royalty due Licensor under Paragraph 4.3.542854294.5 Minimum Royalties. To maintain its rights hereunder, Licensee shall5430pay to Licensor minimum royalties after the Product Acceptance Date in5431accordance with Paragraph 4.4 and the following:54325433<TABLE>5434<CAPTION>5435Minimum Royalty Payment Minimum Royalty Payment5436Contract Year* Per Contract Year Per Contract Quarter5437- -------------- ----------------- --------------------5438<S> <C> <C>5439Year 1 $[CONFIDENTIAL TREATMENT REQUESTED] $[CONFIDENTIAL TREATMENT REQUESTED]5440Year 2** [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]5441</TABLE>54425443*Twelve-month periods beginning on the Contract Year.54445445**Unless earlier terminated in accordance with Section 7 of this Agreement,5446through the Contract Year of the expiration date of the last of the Patent5447Rights.544854494.7 Minimum Royalty Payment. Licensee shall pay Licensor within thirty5450(30) days after the end of each Contract Quarter, an amount equal to (i) the5451minimum royalties payable pursuant to the terms of Paragraph 4.5 for the5452Contract Quarter then ended, less (ii): (a) the aggregate amount of Earned5453Royalties actually paid to Licensor pursuant to the terms of Paragraphs 4.3 and54544.4 for the Contract Quarter then ended; and (b) any Earned Royalties paid to5455Licensor during the prior Contract Quarters in the current Contract Year that5456exceed the amount of cumulative minimum royalties payable for those Contract5457Quarters. Licensee's failure to pay any and all amounts payable under the5458preceding sentence within thirty (30) days after receipt of written notice from5459Licensor that such amounts have not been timely paid shall render the licenses5460granted hereunder void and thereupon, Licensee shall have no further rights or5461interests of any kind or nature with respect to the Products, Patent Rights and5462Know-how, and Licensee shall take any and all action that Licensor may5463reasonably request to further document the provisions hereof. In the event that5464any law, statute, regulation, rule, guideline, ruling, order or decision5465prevents Licensee from marketing or offering the Products for sale, the minimum5466royalty payment will be suspended until such time that Licensee is no longer5467prevented from marketing or offering the Products for sale.54685469<PAGE>5470547154724.8 Late Payment. Licensee shall pay a late payment fee to Licensor for5473any Contract Quarter when the royalty amount that is due and payable is not made5474within thirty (30) days after the end of that Contract Quarter. The late payment5475fee shall be calculated at a variable rate of two percent (2%) over the prime5476per annum interest rate as set from time to time by Norwest Bank Minneapolis,5477N.A., Minneapolis, Minnesota (the "Interest Rate"), on any and all amounts that5478are at any time overdue and payable to Licensor under this Agreement, such5479interest being calculated on each such overdue amount from the date when such5480amount became due to the date of actual payment thereof. Such late payment fee5481shall be in addition to and not in lieu of any and all other rights or remedies5482that Licensor may have under this Agreement or law relating to a default by5483Licensee under this Agreement.548454854.9 Records. During the term of this Agreement and for three (3) years5486after termination of this Agreement, Licensee shall at all times maintain5487accurate and up-to-date records containing complete data from which amounts due5488to Licensor under this Agreement may be readily calculated. Further, Licensee5489shall preserve and permit examination of such records by Licensor's5490representatives or independent auditors at reasonable intervals and under5491reasonable conditions during the term of this Agreement and for three (3) years5492thereafter and, upon request, shall supply to Licensor's representatives or5493independent auditors all information reasonably requested that is useful in5494making a proper audit and verification of Licensee's performance of its5495obligations under this Agreement and of any sublicensee's performance in5496accordance with the terms of this Agreement.549754984.10 Underpayment. If Licensor determines by audit and inspection of5499Licensee's books and records that Licensee has failed to pay all royalties due5500under Paragraph 4.4, Licensee shall pay Licensor one hundred five percent (105%)5501of such additional royalties as may be due in addition to the interest as5502provided for in Paragraph 4.8 above. If the amount of underpayment exceeds 5% of5503the royalties due under Paragraph 4.4, then Licensor shall, in addition to any5504other remedies available to it, recover from Licensee the reasonable costs5505incurred in making any such audit and inspection pursuant to Paragraph 4.95506hereof which revealed such shortfall.550755085. INDEMNIFICATION.550955105.1 Indemnification by Licensor. Licensor shall defend, indemnify and5511hold Licensee and its shareholders, directors, officers, agents,5512representatives, successors and assigns harmless from and against any and all5513claims, damages, costs (including reasonable attorneys' fees), judgments, fines,5514penalties, losses, diminution in value and liabilities of any kind or nature:5515(a) arising out of the breach by Licensor of any of its warranties,5516representations and covenants under this Agreement or the Trademark License5517Agreement; (b) arising out of any misuse by Licensor of the patent process or5518fraud by Licensor on the patent office.551955205.2 Indemnification by Licensee. Licensee shall defend, indemnify and5521hold Licensor and its shareholders, directors, officers, agents,5522representatives, successors and assigns harmless from and against any and all5523claims, damages, costs (including reasonable attorneys' fees), judgments, fines,5524penalties, losses, diminution in value and liabilities of any kind or nature5525arising out of any act of Licensee including, but not limited to, those: (a)5526arising out of the breach by Licensee of any of its warranties, representations5527and covenants under this Agreement or the Trademark License Agreement; or (b)5528arising out of any actual or alleged defect in a Product.552955306. PROTECTION AGAINST INFRINGEMENT. In the event that Licensee becomes5531aware of activity on the part of any third party which may constitute5532infringement of the Patent Rights, or any other intellectual property rights5533with respect to which Licensee is granted a license hereunder, Licensee shall5534give Licensor written notice thereof. Licensee shall, at its sole discretion and5535expense, have the first exclusive right to initiate and thereafter maintain5536reasonable efforts to prevent and abate such infringement, including the5537initiation of an appropriate civil action for infringement and the taking of5538such other action as may determine to be necessary or appropriate to enforce the5539Patent Rights or other intellectual property rights with respect to which5540Licensee is granted a license hereunder. In such event, (i) Licensor will permit5541the use of its name in, and as a party to, all such suits and execute all5542pleadings, documents and other papers necessary or appropriate in conjunction5543therewith, and (ii) Licensee shall receive the full benefits of any action it5544takes pursuant to this Paragraph, including retaining all sums recovered in any5545such suit or in settlement thereof after paying Licensor the Earned Royalties5546which shall be calculated from the amount of Net Sales, if any, asserted by5547Licensee to support any award of compensatory damages (as opposed to55485549<PAGE>555055515552punitive or any other damages). In the event that Licensee fails or refuses to5553take or cause to be taken any such measures against any third party after six5554(6) months from the date of receipt of written notice to Licensee by Licensor of5555such infringement, Licensor may take such legal action in its own name or in the5556name of Licensee (if needed) and at its own expense upon giving fourteen (14)5557days advance, written notice of its intention to do so. In this case, all5558damages recovered as a result of such action by Licensor shall be and become the5559property of Licensor. If either party litigates under this Section 6, the other5560party may, at its option and its cost and expense, participate in meetings with5561the litigating party and/or its counsel and receive all pleadings, documents and5562other related papers useful for the purpose of keeping the other party informed5563of the status of any proceedings commenced by the litigating party.556455657. TERM AND TERMINATION.556655677.1 Term. This Agreement and the Trademark License Agreement shall5568commence on the effective date hereof and shall expire, unless earlier5569terminated pursuant to Paragraphs 7.2 or 7.3 of this Agreement, upon the5570expiration of the last of the Licensed Patents to expire.557155727.2 Termination by Licensor. If Licensee is in material default of any5573of its obligations under this Agreement, Licensor shall have the right to5574terminate this Agreement by giving thirty (30) days' written notice of5575termination specifying the reason for termination, provided that such notice5576will be of no effect and termination will not occur if the specified default is5577cured prior to the expiration of said thirty (30) day notice period.557855797.3 Termination by Licensee.55805581(a) This Agreement and the Trademark License Agreement may be5582terminated by Licensee at any time at will, with or without cause, by5583the giving of at least ninety (90) days' prior written notice to5584Licensor by Licensee in which event any license granted hereunder5585shall, except as otherwise set forth in or contemplated by Paragraph55867.3(b) hereof, terminate upon the effective date of the termination5587(the "Termination Date") stated in any such notice. In the event of the5588termination of any such license, neither Licensor nor Licensee shall5589have any further obligation to the other party hereunder except as5590expressly provided in Paragraphs 7.3(b), 7.3(c) or 7.4 of this5591Agreement below.55925593(b) Upon termination of any license granted hereunder or under5594the Trademark License Agreement, Licensee may, after the effective date5595of such termination, sell any of its (i) completed Products, (ii)5596Products then in the process of manufacture, and (iii) Products with5597respect to which manufacture has been committed at the time of5598termination by reason of either (x) any contracts for the purchase of5599materials to be used in the manufacture of such Products or (y) any5600contract for the sale of such Products, and may, in its sole5601discretion, utilize any of the rights granted by Licensor under the5602Trademark License Agreement. All such sales and uses shall be subject5603to the royalty provisions of Section 4 of this Agreement as though the5604termination of this Agreement had not occurred.56055606(c) Except as expressly provided in Paragraph 7.3(b), after5607termination of this Agreement, Licensee may not use develop, market or5608sell the Products, Product Improvements, Licensed Methods, Patent5609Rights and Know-how, in any way or manner that would violate any rights5610of Licensor and Licensee shall take any and all steps reasonably5611requested by Licensor to completely vest all rights licensed hereunder5612to Licensee back to Licensor upon any such termination. Furthermore,5613Licensee may not use any trademark of the Trademark Rights, and all5614Trademark Rights shall remain the property of Licensor or will5615thereafter be assigned to Licensor. Termination of this Agreement shall5616operate to terminate the Trademark License Agreement.56175618(d) In the event that Licensee terminates this Agreement and5619the Trademark License Agreement under this Section 7, Licensee shall,5620upon written request of Licensor, deliver to Licensor copies of all5621material scientific and marketing research documentation related to or5622used in connection with the Products including, but not limited to,5623manufacturing sources and technical specifications, reports, surveys,5624know-how, trademarks (except the Breathe Right(R) trademark), customer5625lists and other information prepared for or by Licensee with respect to5626which Licensee shall have the right to deliver; provided, however, that5627the delivery of any such information and materials will not impair any5628trade secret relating to Licensee's other existing or contemplated5629products or be deemed by Licensee to be otherwise confidential in5630nature.56315632<PAGE>563356345635(e) In the event that Licensee terminates this Agreement under5636this Section 7, Licensee shall grant to Licensor a limited,5637non-exclusive, worldwide, non-royalty bearing license to any and all5638improvements to the Products developed by Licensee or any of its5639employees or consultants between the date hereof and Termination Date5640which Licensee shall have the right to grant; provided, however, that5641(i) nothing contained in this Paragraph 7(e) shall be in any way5642construed to confer upon Licensor or any third party any rights to such5643improvements which may be subject to the proprietary protection of a5644party other than Licensee including, without limitation, the rights5645granted to Licensee by Creative Integration & Design, Inc. and its5646affiliates; (ii) the license granted shall be applicable to the5647Products and limited for use in the area of nasal support devices for5648animals and no other purpose.564956507.4 Continued Obligations. Termination shall not relieve or release5651either party from its obligations to make any payment which may be owing to the5652other under the terms of this Agreement or from any other liability which either5653party may have to the other arising out of the terms of this Agreement.5654Additionally, notwithstanding anything contained herein to the contrary,5655Sections 3, 5 and 9 shall survive termination of this Agreement and remain in5656full force and effect.565756588. LICENSEE'S UNDERTAKINGS.565956608.1 Exploitation. Licensee hereby agrees that during the term of this5661Agreement it will use its best efforts to manufacture, sell and market the5662Products, and will exert its best efforts to create a demand for the Products in5663appropriate worldwide markets, and to increase and extend its business in the5664manufacture, sale and marketing of the Products in appropriate worldwide5665markets.566656678.2 Distribution. Licensee agrees to undertake and will use its best5668efforts to investigate and, if determined by Licensee to be commercially5669feasible, develop a direct distribution system whereby the Products may be5670marketed directly to the end user.567156728.3 Marking. Licensee agrees to apply appropriate patent notices to the5673Products and to any product advertisements and packaging.567456758.4 Additional Consent or License. In the event that Licensee believes5676it to be necessary or desirable to obtain the consent or a license from Creative5677Integration & Design, Inc. to practice some or all of the Patent Rights under5678this Agreement, the fees paid by Licensee for any such consent or license shall5679not affect the royalties set forth in this Agreement. In addition, Licensor5680acknowledges and agrees that any and all of the rights granted to Licensee by5681Creative Integration & Design, Inc. are not in any way intended to be considered5682transferrable or impaired hereunder any circumstances.568356849. MISCELLANEOUS.568556869.1 Recitals, Schedules and Exhibits Incorporated. The Recitals,5687Schedules and Exhibits are true and correct, incorporated herein and made a part5688of this Agreement as specifically set forth.568956909.2 Force Majeure. Neither party shall be responsible for any delay or5691failure in the performance of any obligation hereunder due to strikes, lockouts,5692fires, floods, acts of God, embargoes, wars, riots, or act or order of any5693government or governmental agency; provided, however, nothing set forth in this5694Paragraph 9.2 (except as otherwise set forth in or contemplated by Paragraph 4.75695of this Agreement) shall be construed to relieve Licensee of the requirement5696that it pay minimum royalties pursuant to Paragraphs 4.5 hereof.569756989.3 Waiver. The waiver or failure of either party to enforce the terms5699of this Agreement in one instance shall not constitute a waiver of said party's5700right under this Agreement with respect to other violations.57015702<PAGE>5703570457059.4 Remedies. The election by either party of any particular right or5706remedy shall not be deemed to exclude any other right or remedy and all rights5707and remedies of either party shall be cumulative. The parties agree that, in5708addition to any other relief afforded under the terms of this Agreement or by5709law, each party shall have the right to enforce this Agreement by injunctive or5710mandatory relief to be issued against the other party, it being understood that5711both damages and specific performance shall be proper modes of relief and are5712not to be considered as alternative remedies.571357149.5 Notices. All notices and replies thereto required hereunder shall5715be in writing, signed by the party giving notice, placed in an envelope and5716either delivered by hand or sent by facsimile or registered mail, postage5717prepaid, return receipt requested, and properly addressed to the other party.5718Notices sent by mail shall be deemed received on the date of receipt indicated5719by the receipt verification provided by the United States Postal Service.5720Notices sent by facsimile shall be deemed received on the date indicated on the5721sender's confirmation report. Notice shall be given, mailed or sent to the other5722party at the following addresses or at such other address as may be given by5723proper notice:57245725If to Licensor: WinEase, LLC5726[CONFIDENTIAL TREATMENT REQUESTED]5727[CONFIDENTIAL TREATMENT REQUESTED]5728Attn: James R. Chiapetta5729Fax No.: [CONFIDENTIAL TREATMENT REQUESTED]57305731If to Licensee: CNS, Inc.57324400 West 78th Street5733Minneapolis, MN 554355734Attn: Daniel E. Cohen, M.D.5735Fax No.: (612) 820-669757365737With a copy to: Lindquist & Vennum P.L.L.P.57384200 IDS Center573980 South 8th Street5740Minneapolis, MN 55402-22055741Attn: Patrick Delaney5742Fax No.: (612) 317-320757435744Either party hereto may designate any other address for notices given5745hereunder by written notice to the other party given at least ten (10) days5746prior to the effective date of such change.574757489.6 Entire Agreement. This Agreement, together with the attached5749schedules and exhibits, represents the entire agreement between the parties with5750respect to the subject matter hereof and supersedes all prior agreements and5751discussions (whether written or oral); there are no oral promises,5752representations or warranties not set forth in this Agreement. No modification5753of this Agreement or waiver of any of its terms shall be binding upon the5754parties unless said modification or waiver is in writing, signed by both5755parties, and states that it is an amendment to this Agreement.575657579.7 Parties in Interest. This Agreement shall inure to the benefit of,5758be binding upon, and be enforceable against the parties hereto, their respective5759successors and assigns.576057619.8 Governing Law. The parties hereby irrevocably submit and consent to5762the jurisdiction of Minnesota state and federal courts over any action or5763proceeding arising out of or relating to this Agreement and further agree that5764all claims in respect of such action or proceeding shall be heard and determined5765in any such court which shall construe and enforce the Agreement under the5766internal laws (and not the laws of conflicts) in such state. Licensor and5767Licensee hereby waive any argument that venue in such forums is not convenient.57685769<PAGE>5770577157729.9 Severability. If any portion of this Agreement is held invalid by5773the final judgment of any court of competent jurisdiction, such portion shall be5774deemed revised or "blue lined" so that it is enforceable to the fullest extent5775possible under applicable law and the remaining provisions shall remain in full5776force and effect as if such invalid provision had not been included herein.577757789.10 Reasonableness. Licensor and Licensee agree that the restrictions,5779covenants, agreements and obligations contained in this Agreement are reasonable5780and necessary to protect the legitimate interests of the parties.57815782IN WITNESS WHEREOF, the parties hereto have executed this Agreement as5783of the day and year first above written.57845785CNS, INC.5786578757885789By:5790--------------------------------------5791Its:5792---------------------------------579357945795WINEASE, LLC5796579757985799By:5800--------------------------------------5801Its:5802---------------------------------58035804<PAGE>5805580658075808LIST OF SCHEDULES58095810Number Description5811------ -----------581258131.5 Patent Rights58141.6 Trademark Rights58152.6 Countries List58165817<PAGE>581858195820SCHEDULE 1.558215822DESCRIPTION OF LICENSED PATENTS58235824U.S. Patent Applications and all other applications and continuations5825thereof filed in connection with the Products together with any and all5826international filings as further described in Section 1.3 of this Agreement.58275828Application Status5829----------- ------58305831U.S. patent application serial no. 08/843,741 Issue fee paid 12/3/9858325833U.S. patent application serial no. 09/018,603 Filed 2/4/9958345835U.S. patent application serial no. 09/250,658 Filed 2/16/9958365837M&G docket no. 12460.1-US-I2 Filed 3/8/9958385839PCT/US98/07885 Filed 4/17/9858405841<PAGE>584258435844SCHEDULE 1.658455846DESCRIPTION OF CERTAIN TRADEMARK RIGHTS58475848U.S. trademark registration and pending trademark applications as5849further described in Section 1.6 of this Agreement.58505851FLAIR58525853NSD58545855<PAGE>585658575858SCHEDULE 2.658595860COUNTRIES LIST586158621. United States;586358642. Canada;586558663. China;586758684. Japan;586958705. Mexico;587158726. New Zealand;587358747. Australia; and587558768. Countries located in Europe.58775878<PAGE>587958805881EXHIBIT A58825883TRADEMARK LICENSE AGREEMENT58845885This Trademark License Agreement (the "Agreement") is entered into and5886is effective as of this 12th day of March, 1999 by and between WinEase, L.L.C.5887("LICENSOR"), a Minnesota limited liability company, and CNS, Inc. ("LICENSEE"),5888a Delaware corporation, upon the following terms and conditions:58895890Recitals58915892WHEREAS, LICENSOR and LICENSEE have entered into that certain license5893agreement on even date herewith (the "License Agreement");58945895WHEREAS, LICENSOR is the sole and exclusive owner of the certain5896"Trademark Rights" (as defined in the License Agreement); and58975898WHEREAS, LICENSEE wishes to have the right but not the obligation use5899the Trademark Rights in connection with the sale and marketing of the "Products"5900(as defined in the License Agreement) and to license from LICENSOR whatever5901rights LICENSOR may have in the Trademark Rights for use in connection with the5902Products;59035904WHEREAS, LICENSOR is willing to grant such a license on the terms and5905conditions set forth in this Agreement;59065907NOW, THEREFORE, for good and valuable consideration, the receipt and5908sufficiency of which are acknowledged by the parties hereto, LICENSOR and5909LICENSEE agree as follows:59105911Terms and Conditions591259131. Definitions. The following definitions shall apply to this5914Agreement:591559161.1 The term "Marks" shall mean the Trademark Rights.591759181.2 The term "Licensed Goods" shall mean the Products.591959201.3 The term "Term" shall mean the time period specified in5921paragraph 3 of this Agreement.592259231.4 The term "Territory" shall mean worldwide.592459252. Grant of Rights and Licenses. Subject to all of the terms and5926conditions of this Agreement, LICENSOR hereby grants to LICENSEE an exclusive,5927worldwide, royalty-free right and license during the Term of this Agreement to5928reproduce, display, broadcast, publish and otherwise use any of the Marks in5929connection with the Licensed Goods by LICENSEE throughout the Territory, and5930LICENSEE hereby accepts such right and license subject to the terms and5931conditions of this Agreement. Notwithstanding anything contained in this5932Agreement to the contrary, LICENSEE shall not be under any obligation to use any5933of the Marks in connection with the sale of the Products or otherwise.593459353. Term. This Agreement and any licenses granted by LICENSOR hereunder5936shall commence as of the effective date hereof and shall continue in full force5937and effect through the term of the License Agreement, at which time they will5938automatically terminate, unless sooner terminated in accordance with the terms5939and conditions of the License Agreement.59405941<PAGE>5942594359444. Quality Assurance.594559464.1 LICENSOR is familiar with LICENSEE'S human nasal dilator5947products and finds them to be of acceptable quality. LICENSEE agrees that any of5948the Licensed Goods used with the Marks will be of substantially similar quality.5949LICENSEE agrees to submit evidence of the nature of the Licensed Goods used with5950the Marks to LICENSOR for review and approval from time to time upon LICENSOR's5951reasonable request.595259534.2 LICENSEE agrees to take all responsibility for any5954Licensed Goods with which the Marks are used. LICENSEE agrees to comply in all5955material respects with all applicable laws and regulations and obtain all5956appropriate governmental approvals pertaining to the Licensed Goods offered in5957connection with the Marks.595859595. Trademark Use and Ownership.596059615.1 In the event that LICENSEE shall at any time elect to use5962any of the Marks, LICENSEE agrees to use the Marks only in the form and manner5963with appropriate legends as may be prescribed from time to time by LICENSOR.596459655.2 In the event that LICENSEE shall at any time elect to use5966any of the Marks, LICENSEE agrees that it shall cause to appear in connection5967with the Licensed Goods, such reasonable trademark notice as LICENSOR may5968reasonably designate.596959705.3 LICENSEE acknowledges and agrees that LICENSOR is the5971owner of all rights in and to the Marks and that LICENSEE will not during the5972Term of this Agreement or at any time thereafter use the Marks or any element5973thereof in any form and for any goods or services or challenge the use or5974registration thereof except as permitted under this Agreement or contemplated by5975the License Agreement without the prior written permission of LICENSOR.597659775.4 LICENSEE agrees that it will not state or imply either5978directly or indirectly that LICENSEE or LICENSEE's activities, other than those5979permitted by this Agreement, are supported, endorsed, or sponsored by LICENSOR5980and, upon the direction of LICENSOR, LICENSEE.598159825.5 LICENSEE recognizes the goodwill associated with the Marks5983and acknowledges that said goodwill belongs exclusively to LICENSOR and that any5984use of the Marks by LICENSEE at any time (whether during or after the term of5985this Agreement) will, except as otherwise contemplated by the transactions set5986forth in the License Agreement, inure solely to the benefit of LICENSOR, and5987LICENSEE hereby assigns any such goodwill in its entirety to LICENSOR upon5988termination of this Agreement. Nothing contained herein shall be construed to5989confer upon LICENSOR any rights of LICENSEE in or to the Breathe Right(R) mark.599059915.6 LICENSEE will comply with the provisions of all laws of5992the United States and each state in which it elects, in its sole discretion, to5993use the Marks regarding trademarks and service marks.599459956. Infringement. LICENSEE agrees to notify LICENSOR promptly of any5996known use of the Mark by others not duly authorized by LICENSOR. Notification of5997such infringement shall include all details known by LICENSEE that would enable5998or aid LICENSOR to investigate such infringement.599960007. Disputes Relating to the Mark. The parties acknowledge and agree6001that all of the provision of Paragraph 6 of the License Agreement shall govern6002the parties' rights with respect to disputes relating to the Marks with third6003parties.60046005<PAGE>6006600760088. No Agency. Nothing contained herein shall be deemed to create an6009agency, joint venture, franchise, or partnership relationship between LICENSEE,6010on the one hand, and LICENSOR, on the other hand, and no party shall so hold6011itself out. LICENSEE shall have no right to obligate or bind LICENSOR in any6012manner whatsoever.601360149. Limited Warranty.601560169.1 LICENSOR warrants it has the lawful capacity to execute6017this Agreement, but does not warrant and shall not be held to have warranted the6018validity or scope of the Marks licensed under this Agreement except as may6019otherwise be set forth in the License Agreement.602060219.2 LICENSOR makes no representations or warranties with6022respect to the Licensed Goods provided by LICENSEE and disclaims any liability6023arising out of the Licensed Goods offered by LICENSEE under the Marks except as6024may otherwise be set forth in the License Agreement.6025602610. Assignability. This Agreement shall inure to the benefit of6027LICENSOR, its successors and assigns, but will be personal to LICENSEE and shall6028be assignable by LICENSEE only to the extent that the rights of LICENSEE are6029assignable under the License Agreement.6030603111. Termination. The termination of the License Agreement shall operate6032to terminate this Agreement.6033603412. Effect of Termination.6035603612.1 Except as may otherwise be set forth in Section 7 of the6037License Agreement, the license granted hereunder shall cease immediately upon6038termination of this Agreement for any reason.6039604012.2 The exercise by any party of its rights to terminate this6041Agreement as provided herein shall be in addition to and not in lieu of any6042other remedies such party may have under this Agreement or otherwise.6043604413. Waiver. No waiver by a party of any breach of any term or provision6045of this Agreement shall be construed to be a waiver of any preceding or6046succeeding breach of the same or any other term or provision hereof. The6047parties' various rights and remedies under this Agreement shall be construed to6048be cumulative and no one of them is exclusive of any other or of any right or6049remedy allowed by law or in equity.6050605114. Notices. All notices to be given hereunder must be in writing and6052shall be given hereto in the manner and at the addresses set forth in the6053License Agreement.6054605515. No Act Contrary to Law; Severability. Nothing contained in this6056Agreement shall be construed to require the commission of any act contrary to6057law and wherever there is any conflict between any provision of this Agreement6058and any present or future statute, law, governmental regulation or order or6059ordinance, then the latter shall prevail, and in such event the provision or6060provisions of the Agreement affected shall be curtailed and limited only to the6061extent necessary to bring it or them within legal requirements. All other terms6062of the Agreement shall remain unaffected.6063606416. Governing Law; Jurisdiction. This Agreement shall be deemed to have6065been made in the State of Minnesota, and its validity, construction and effect6066shall be governed by and enforced pursuant to the substantive laws of the State6067of Minnesota without regard to its conflicts of laws principles.60686069<PAGE>60706071607217. Entire Agreement. This Agreement, together with the License6073Agreement and attached schedules, constitutes the entire agreement between the6074parties relating to the subject matter hereof and shall supersede any and all6075prior written or oral agreements between the parties relating to the subject6076matter hereof. This Agreement may not be amended except by a written instrument6077signed by each of the parties hereto. Each party acknowledges that it has not6078executed this Agreement in reliance upon any representation or promise made by6079any person, except as expressly provided for in this Agreement or the License6080Agreement.6081608218. Inconsistent Provisions. To the extent that any term or provision6083in this Agreement is inconsistent with any term or provision in the License6084Agreement, the terms and provisions of the License Agreement shall in all6085respects control.6086608719. Unavoidable Delay. If any party's obligations hereunder are6088affected by reason of fire, flood, casualty, Act of God, lockout, strike, labor6089conditions, unavoidable accident, LICENSOR calamity, mechanical or other6090breakdown, riot, enactment of law or by any similar cause (collectively referred6091to as "Unavoidable Delay"), its obligations hereunder herein shall be suspended6092during the period of such suspension period due to the Unavoidable Delay, except6093that any such suspension period due to such Unavoidable Delay shall in no event6094exceed six (6) months.6095609620. Headings. The headings or captions of this Agreement or any6097paragraph hereof are inserted for purposes of convenience only and shall not be6098deemed to limit, affect the scope, meaning or intent of this Agreement, nor6099shall they otherwise be given any legal effect.6100610121. Recitals. The Recitals are true and correct, incorporated herein6102and made a part of this Agreement.6103610422. Counterparts. This Agreement may be executed in one or more6105counterparts, each of which will be deemed an original and will, when taken6106together, constitute this Agreement notwithstanding that each party is not a6107signator to the same counterpart.6108610923. Binding on Successors. This Agreement will fully bind and inure to6110the benefit of each party and its respective heirs, successors, permissible6111assigns, and agents.6112611324. Further Documents. The parties agree to execute such further6114documents as may be reasonably requested by the others to effectuate any of the6115provisions or purposes of this Agreement.61166117IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be6118executed by their authorized agents effective as of the date first written6119above.61206121LICENSOR:61226123WinEase, LLC612461256126By6127---------------------------------------6128Print Name:6129------------------------------6130Title:6131-----------------------------------61326133LICENSEE:61346135CNS, Inc.613661376138By6139---------------------------------------6140Print Name:6141------------------------------6142Title:6143-----------------------------------61446145</TEXT>6146</DOCUMENT>6147<DOCUMENT>6148<TYPE>EX-10.116149<SEQUENCE>66150<DESCRIPTION>EXCLUSIVE LICENSE AGREEMENT6151<TEXT>615261536154Exhibit 10.11615561566157[CERTAIN INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY6158WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.]615961606161EXECUTION COPY6162--------------61636164616561666167616861696170617161726173CNS-CRONKS6174EXCLUSIVE LICENSE AGREEMENT61756176<PAGE>617761786179TABLE OF CONTENTS61806181Page6182----61836184WITNESSETH...................................................................-1-618561861 - DEFINITIONS..............................................................-1-618761882 - GRANT....................................................................-4-618961903 - REPRESENTATIONS AND WARRANTIES OF CRONKS.................................-5-619161924 - DILIGENCE................................................................-6-619361945 - ROYALTIES................................................................-7-619561966 - REPORTS AND RECORDS......................................................-9-619761987 - PATENT PROSECUTION......................................................-10-619962008 - INFRINGEMENT............................................................-11-620162029 - INDEMNIFICATION AND INSURANCE...........................................-13-6203620410 - ASSIGNMENT.............................................................-14-6205620611 - DISPUTE RESOLUTION.....................................................-14-6207620812 - TERMINATION............................................................-15-6209621013 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS.............................-17-6211621214 - MISCELLANEOUS PROVISIONS...............................................-18-62136214APPENDIX A.........................................................-20-62156216APPENDIX B.........................................................-21-62176218<PAGE>621962206221CNS-CRONKS6222EXCLUSIVE LICENSE AGREEMENT62236224This Agreement is made and entered into as of the last date of6225signature hereto (the "EFFECTIVE DATE") by and between Peter and Kristen Cronk6226(married) located at 919 McElwee Road, Moorestown, NJ 08057 (hereinafter6227referred to as "CRONKS"), and CNS, Inc., a corporation duly organized under the6228laws of the State of Delaware and having its principal office at 4400 West 78th6229Street, Minneapolis, Minnesota 55435 (hereinafter referred to as "LICENSEE").62306231WITNESSETH62326233WHEREAS, CRONKS are the owners of certain PATENT RIGHTS (as later6234defined herein) and information and KNOW HOW (as later defined herein) relating6235to improvements to nasal dilators, and methods of making and using the same, and6236have the right to grant licenses to the said KNOW HOW and PATENT RIGHTS;62376238WHEREAS, LICENSEE desires to obtain an exclusive license under the6239PATENT RIGHTS and KNOW HOW upon the terms and conditions hereinafter set forth;6240and62416242WHEREAS, CRONKS desire to have the PATENT RIGHTS and KNOW HOW developed6243and commercialized and are willing to grant an exclusive license thereunder to6244LICENSEE.62456246NOW, THEREFORE, inconsideration of the premises and the mutual6247covenants contained herein, the parties hereto agree as follows:624862491 - DEFINITIONS62506251For the purposes of this Agreement, the following words and phrases6252shall have the following meanings:625362541.1 "LICENSEE" shall mean LICENSEE or any ASSIGNEE (as later defined).625562561.2 "PATENT RIGHTS" shall mean all the following CRONKS' intellectual6257property:62586259a. the United States patents listed in Appendix A;62606261b. the United States patent applications listed in Appendix A,6262and divisionals, continuations and claims of6263continuation-in-part applications which shall be directed to6264subject matter specifically described in this Paragraph b. or6265Paragraph a. above;62666267<PAGE>626862696270c. any and all patents resulting from reissues or reexaminations6271of the United States patents described in Paragraphs a. and b.6272above.62736274d. the foreign patent applications listed in Appendix A, and6275divisionals, continuations and claims of6276continuation-in-part-applications which shall be directed to6277subject matter specifically described in such foreign patent6278applications, and the resulting patents;62796280e. the foreign patent applications filed after the EFFECTIVE DATE6281in the countries listed in Appendix B or elsewhere and6282divisionals, continuations and claims of continuation-in-part6283applications which shall be directed to subject matter6284specifically described in such patent applications, and the6285resulting patents;62866287f. any foreign patents, resulting from equivalent foreign6288procedures to United States reissues and reexaminations, of6289the foreign patents described in d., e. and f. above; and62906291g. any and all other future United States and foreign patents and6292patent applications covering the PRODUCTS which may be6293developed, acquired or controlled by CRONKS during the term of6294this Agreement and with respect to which CRONKS shall have the6295right to grant the license hereinafter provided.629662971.3 "PRODUCTS" shall mean any product or part thereof which is covered6298in whole or in part by an issued, unexpired claim or a pending claim contained6299in any of the PATENT RIGHTS as well as any and all improvements, modifications6300or enhancements thereto, whether now existing or in the future developed, and6301any other products, methods or compositions similar in function or purpose6302developed by CRONKS or any of their agents, employees or affiliates during the6303term of this Agreement.630463051.4 "KNOW HOW" shall mean any and all tangible and intangible6306information, technology, documents and materials in the possession and control6307of CRONKS, necessary or desirable in order to enable LICENSEE to utilize fully6308the rights granted by CRONKS to LICENSEE hereunder and shall include, without6309limiting the foregoing, the ideas, methods, concepts, confidential information,6310trade secrets and techniques, as well as all the materials, documents, manuals,6311schematics, blueprints, specifications, compositions, patterns, artwork, bills6312of materials and technical specifications and other information of CRONKS6313relating to the PRODUCTS.63146315<PAGE>6316631763181.5 "CONTRACT QUARTER" shall mean March 31, June 30, September 30 and6319December 31 of each calendar year beginning in the year 2000.632063211.6 "NET SALES" shall mean the gross sales price for LICENSED PRODUCTS6322from any end-user, sublicensee or other person or entity relating to or arising6323from the sale of PRODUCTS after deduction of the following:63246325a. discounts allowed in amounts customary in the trade for6326quantity purchases, cash payments and prompt payments;63276328b. sales, tariff duties and/or use taxes directly imposed and6329with reference to particular sales;63306331c. outbound transportation or other costs directly related to the6332outbound transportation of the PRODUCTS; and63336334d. amounts allowed or credited on account of rejections or6335returns.63366337No deductions, shown above, shall be made from the sales price shall be6338allowed unless all such deductions are shown on an invoice. No deductions shall6339be made for commissions paid to individuals whether they be with independent6340sales agencies or regularly employed by LICENSEE and on its payroll.634163421.7 "MINIMUM ROYALTIES" shall be the amounts set forth in and payable6343by LICENSEE in accordance with Paragraph 5.1(c).634463451.8 "RUNNING ROYALTIES" shall be the amounts payable by LICENSEE as6346determined in accordance with the percentages on account of NET SALES of the6347PRODUCTS as set forth in Paragraph 5.1(d).634863491.9 "ABATEMENT EFFORTS" shall have the meaning ascribed to the term in6350Paragraph 8.2.635163521.10 "ASSIGNEE" shall have the meaning ascribed to the term in6353Paragraph 10.1.635463551.11 "CLAIMS" shall have the meaning ascribed to the term in Paragraph63569.2.63576358<PAGE>6359636063612 - GRANT636263632.1 CRONKS each hereby grant to LICENSEE the exclusive, world-wide6364right and license to exploit and practice under the PATENT RIGHTS (as well as6365any invention disclosed or claimed therein) and under the KNOW HOW and the6366exclusive, world-wide right and license to make, have made, use, lease, sell,6367offer for sale, import and export the PRODUCTS until the expiration of the last6368to expire of the PATENT RIGHTS, unless this Agreement shall be sooner terminated6369according to the terms hereof.637063712.2 LICENSEE shall have the right to enter into sublicensing agreements6372with third parties for the rights, privileges and licenses granted hereunder. In6373the event of a sublicense, LICENSEE shall enter into a written agreement with6374sublicensee (i) with a term no greater than the term of this Agreement, (ii)6375with rights granted to sublicensee which are no greater than the terms of this6376Agreement, and (iii) pursuant to which Licensee shall impose upon any such6377sublicensees substantially the same obligations as CRONKS have imposed upon6378LICENSEE under this Agreement.637963802.3 Any material breach of a sublicense under this Agreement with6381respect to obligations of such sublicensee to CRONKS shall be treated as a6382material breach of this Agreement by LICENSEE and all provisions for notice and6383remedies to cure such breach and terminate this Agreement shall apply.638463852.4 LICENSEE agrees to forward to CRONKS a copy of any and all6386sublicense agreements promptly upon execution by the parties.638763882.5 LICENSEE shall not receive from sublicensees consideration that is6389material in value in lieu of cash payments in exchange for any sublicense under6390this Agreement, without the express prior written permission of CRONKS.63916392<PAGE>6393639463952.6 Nothing in this Agreement shall be construed to confer any rights6396upon LICENSEE by implication, estoppel or otherwise as to any technology or6397patent rights of CRONKS or any other entity other than the PATENT RIGHTS and6398KNOW HOW.639964003 - REPRESENTATIONS AND WARRANTIES OF CRONKS64016402Each of the CRONKS, jointly and severally, represent and warrant to6403LICENSEE as follows:640464053.1 CRONKS are the sole and exclusive owners of all the PATENTS RIGHTS,6406KNOW HOW and other rights granted under this Agreement.640764083.2 Claims have been allowed and the issue fee has been paid for the6409United States patent(s) as listed on Appendix A covering the PRODUCTS.6410Additional United States and foreign patent applications that are directed to6411the PRODUCTS are currently pending as set forth on Appendix A. To the best of6412their knowledge, CRONKS have disclosed to the United States Patent and Trademark6413Office all material evidence relating to the validity or enforceability of the6414PATENT RIGHTS.641564163.3 CRONKS have good and marketable title to the PATENT RIGHTS and KNOW6417HOW, free and clear of any and all liens, pledges, claims, licenses,6418assignments, conditional sales contracts, agreements or encumbrances of any kind6419that would impair the ability of CRONKS to grant the exclusive licenses under6420this Agreement.642164223.4 To the best of CRONKS' knowledge, the PATENT RIGHTS, PRODUCTS and6423KNOW HOW do not infringe on any patent, copyright, trademark, trade secret,6424trade dress or any other intellectual property right of any third party.642564263.5 To the best of CRONKS' knowledge, none of the undertakings or6427activities of CRONKS in connection with the development of the PRODUCTS involve6428the wrongful use of the proprietary rights or assets of any third party.642964303.6 CRONKS have not received notice of any claims, actions, suits or6431proceedings pending or threatened effecting CRONKS, the PATENT RIGHTS or the6432KNOW HOW which, if adversely determined, would have a material adverse effect6433upon LICENSEE's ability to manufacture and have manufactured, use or sell the6434PRODUCTS or otherwise practice the rights and technology licensed to LICENSEE by6435CRONKS under this Agreement.64366437<PAGE>6438643964404 - DILIGENCE644164424.1 LICENSEE shall use its best efforts to bring one or more of the6443PRODUCTS to market through a thorough, vigorous and diligent program for6444exploitation of the PATENT RIGHTS and to continue active, diligent marketing6445efforts for one or more PRODUCTS throughout the term of this Agreement.644664474.2 In addition, LICENSEE shall adhere to the following milestones:64486449a. LICENSEE shall, within sixty (60) days of executing this6450Agreement, provide to CRONKS, correspondence or other6451documentation generally describing how LICENSEE intends to6452research, develop, market, distribute and sell the PRODUCTS.64536454b. LICENSEE shall make a first commercial sale of a PRODUCT on or6455before March 31, 2000.645664574.3 LICENSEE's failure to perform in accordance with Paragraphs 4.1 and64584.2 above shall be grounds for CRONKS to terminate this Agreement pursuant to6459Paragraph 12.3 hereof.646064615 - ROYALTIES646264635.1 For the rights, privileges and licenses granted hereunder, LICENSEE6464shall pay royalties to CRONKS in the manner hereinafter provided to the end of6465the term of the PATENT RIGHTS or until this Agreement shall be terminated:64666467a. Up-Front License Fee: of [CONFIDENTIAL TREATMENT REQUESTED]6468Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be6469non-refundable, and deemed earned and due immediately upon the6470EFFECTIVE DATE.64716472b. Liquidated Expense Fee: of [CONFIDENTIAL TREATMENT REQUESTED]6473Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]), which shall be6474non-refundable, and due immediately upon the EFFECTIVE DATE.64756476c. Minimum Royalty Fees:64776478(i) for the calendar year 2000, [CONFIDENTIAL TREATMENT6479REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]),6480payable for each CONTRACT QUARTER in four (4) equal6481installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars6482($[CONFIDENTIAL TREATMENT REQUESTED]) each;64836484<PAGE>648564866487(ii) for the calendar year 2001, [CONFIDENTIAL TREATMENT6488REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]),6489payable for each CONTRACT QUARTER in four (4) equal6490installments of [CONFIDENTIAL TREATMENT REQUESTED] Dollars6491($[CONFIDENTIAL TREATMENT REQUESTED]) each; and64926493(iii) for the calendar year 2002, and each year thereafter6494while PATENT RIGHTS are in force in any country, [CONFIDENTIAL6495TREATMENT REQUESTED] Dollars ($[CONFIDENTIAL TREATMENT6496REQUESTED]), payable for each CONTRACT QUARTER in four (4)6497equal installments of [CONFIDENTIAL TREATMENT REQUESTED]6498Dollars ($[CONFIDENTIAL TREATMENT REQUESTED]) each;64996500provided, however, that RUNNING ROYALTIES due on NET SALES for6501each said CONTRACT QUARTER, if any, shall be creditable6502against any of the MINIMUM ROYALTIES due during the calendar6503year. RUNNING ROYALTIES paid in excess of MINIMUM ROYALTIES6504shall not be creditable against MINIMUM ROYALTIES for future6505calendar years.65066507d. Running Royalties: shall, subject to setoff, adjustment or6508credit in accordance with Paragraph 5.1(c) above, be payable6509in an amount equal to:65106511(i) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL6512TREATMENT REQUESTED]%) for the first [CONFIDENTIAL TREATMENT6513REQUESTED] Dollars in NET SALES; then65146515(ii) [CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL6516TREATMENT REQUESTED]%) of the next [CONFIDENTIAL TREATMENT6517REQUESTED] Dollars in NET SALES; and then65186519(iii) [CONFIDENTIAL TREATMENT REQUESTED] percent6520([CONFIDENTIAL TREATMENT REQUESTED]%) of NET SALES over6521[CONFIDENTIAL TREATMENT REQUESTED] Dollars;65226523for PRODUCTS manufactured, used, leased or sold by LICENSEE6524its sublicensees, or by others on their behalf.65256526e. In addition to RUNNING ROYALTIES, [CONFIDENTIAL TREATMENT6527REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%) of6528other payments, including, but not limited to, sublicense6529issue fees, up-front fees, and milestone fees, received by6530LICENSEE from sublicensees in consideration for the right to6531utilize the licenses granted hereunder and sell the PRODUCTS.653265335.2 All payments due hereunder shall be paid in full, without deduction6534of taxes or other fees which may be imposed by any government, except as6535otherwise provided in Paragraph 1.6(b).65366537<PAGE>6538653965405.3 No multiple royalties shall be payable because any PRODUCT, its6541importation, manufacture, use, lease, offer for sale or sale are or shall be6542covered by more than one claim, patent application or patent licensed under this6543Agreement.654465455.4 Royalty payments shall be paid in United States dollars to CRONKS'6546address in Paragraph 13, or at such other place CRONKS may reasonably designate6547consistent with the laws and regulations controlling in any foreign country. If6548any currency conversion shall be required in connection with the payment of6549royalties hereunder, such conversion shall be made by using the exchange rate as6550published in the Wall Street Journal on the last business day of the CONTRACT6551QUARTER to which such royalty payments relate.655265535.5 In the event PATENT RIGHTS are invalidated or declared6554unenforceable by a court or patent office of competent jurisdiction in any6555country where they existed, LICENSEE shall pay a RUNNING ROYALTY of only6556[CONFIDENTIAL TREATMENT REQUESTED] percent ([CONFIDENTIAL TREATMENT REQUESTED]%)6557of NET SALES for products sold, made or imported into said jurisdiction, for a6558period of two (2) years from the date said decision becomes final, or6559unappealable, which products would have been, but for the unfavorable decision,6560PRODUCTS. Such payments shall be in consideration of CRONKS' KNOW HOW only.656165626 - REPORTS AND RECORDS656365646.1 LICENSEE shall keep full, true and accurate books of account6565containing all particulars that may be necessary for the purpose of showing the6566amounts payable to CRONKS hereunder. Said books of account shall be kept at6567LICENSEE's principal place of business or the principal place of business of the6568appropriate division of LICENSEE to which this Agreement relates. Said books and6569the supporting data shall be open at all reasonable times for three (3) years6570following the end of the calendar year to which they pertain to the reasonable6571inspection of CRONKS or their agents, which shall in no event be more than twice6572in a calendar year, for the purpose of verifying LICENSEE's royalty calculations6573or compliance in other respects with this Agreement. Should such inspection lead6574to the discovery of a greater than five percent (5%) discrepancy in reporting of6575RUNNING ROYALTIES to CRONKS' detriment, LICENSEE agrees to pay the reasonable6576cost of the inspection which resulted in the discovery of the discrepancy, plus6577interest as required under Paragraph 6.4.65786579<PAGE>6580658165826.2 All royalties due CRONKS from LICENSEE under this Agreement shall6583be payable on a CONTRACT QUARTERLY basis. Within forty-five (45) days after the6584end of each CONTRACT QUARTER during the term of this Agreement, LICENSEE shall6585pay CRONKS the royalties due in accordance with Paragraphs 5.1(c) and 5.1(d).6586LICENSEE shall simultaneously deliver with the payment of the royalties due to6587CRONKS true and accurate reports, giving such particulars to the business6588conducted by LICENSEE and its sublicensees under this Agreement as shall be6589pertinent to a royalty accounting hereunder. These reports shall include at6590least the following:65916592a. number of PRODUCTS manufactured and/or sold by or for LICENSEE6593and all sublicensees;65946595b. total invoiced dollar amount for PRODUCTS manufactured and/or6596sold by or for LICENSEE and all sublicensees;65976598c. accounting for NET SALES, noting the deductions applicable as6599provided in Paragraph 1.6;66006601d. RUNNING ROYALTIES less any applicable MINIMUM ROYALTIES6602previously paid, due under Paragraph 5.1(c);66036604e. royalties due on other payments from sublicensees under6605Paragraph 5.1(e);66066607f. total royalties due; and66086609g. names and addresses of all sublicensees, if any, of LICENSEE.661066116.3 If no RUNNING ROYALTIES shall be due under this Agreement, LICENSEE6612shall so report.661366146.4 Royalty and other payments set forth in Article 5 and amounts due6615under Article 7 shall, if overdue, bear interest until payment at a per annum6616rate two percent (2%) above the prime rate as published in the Wall Street6617Journal on the due date. The payment of such interest shall not foreclose CRONKS6618from exercising any other rights they may have as a consequence of the lateness6619of any payment.66206621<PAGE>6622662366247 - PATENT PROSECUTION662566267.1 CRONKS shall apply for, seek prompt issuance of, and maintain the6627PATENT RIGHTS through their choice of law firm during the term of this6628Agreement. Appendix B is a list of the foreign countries in which patent6629applications corresponding to the United States Patent applications listed in6630Appendix A shall be filed. Appendix B may be amended by mutual agreement of both6631parties. The filing, prosecution and maintenance of all PATENT RIGHTS6632applications and patents shall be the primary responsibility of CRONKS and their6633law firm; provided, however, LICENSEE and its counsel shall have reasonable6634opportunities to advise CRONKS and shall cooperate with CRONKS in such filing,6635prosecution and maintenance. LICENSEE shall have the right to terminate any such6636patent counsel retained by CRONKS if LICENSEE has a reasonable basis for not6637being satisfied with such counsel's efforts, and in such event CRONKS shall6638select a new patent counsel (which counsel is subject to the reasonable consent6639of LICENSEE).664066417.2 Payment of all fees and costs relating to the filing, prosecution6642and maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE.6643LICENSEE shall pay such fees and costs to CRONKS choice of law firm within6644thirty (30) days of invoicing from said law firm; late payments shall accrue6645interest and shall be subject to Paragraph 6.4.664666478 - INFRINGEMENT664866498.1 LICENSEE shall inform CRONKS, and CRONKS shall inform LICENSEE6650promptly in writing of any alleged infringement of the PATENT RIGHTS or other6651intellectual property rights with respect to which LICENSEE is granted a license6652hereunder by a third party and of any available evidence thereof.66536654<PAGE>6655665666578.2 Upon reasonable request by CRONKS or in LICENSEE's own discretion,6658LICENSEE shall, at its sole expense, initiate and thereafter diligently maintain6659reasonable efforts to prevent and abate any infringement of the PATENT RIGHTS or6660other intellectual property rights with respect to which LICENSEE is granted a6661license hereunder, including, without limitation, the initiation of an6662appropriate civil action for infringement and the taking of such other action as6663may be necessary or appropriate ("ABATEMENT EFFORTS"). In furtherance thereof,6664CRONKS hereby agree that LICENSEE may join CRONKS as a party plaintiff in any6665suit, without expense to CRONKS. LICENSEE shall indemnify CRONKS against any6666order for costs or legal fees that may be made against CRONKS in such6667proceedings. In the event that LICENSEE shall undertake the enforcement and/or6668defense of the PATENT RIGHTS or other intellectual property rights licensed6669hereunder, LICENSEE shall receive the full benefits of any action it takes6670pursuant to this Paragraph, including retaining all sums recovered in any suit6671or in settlement thereof after paying CRONKS the RUNNING ROYALTIES which shall6672be calculated from the amount of NET SALES, if any, asserted by LICENSEE to6673support any award of compensatory damages (as opposed to punitive or any other6674damages). In connection with the foregoing, the amount of damages awarded and6675received by LICENSEE on account of such infringer's sales shall be added to6676LICENSEE's NET SALES and paid in the CONTRACT QUARTER in which such sums are6677received by LICENSEE or within forty-five (45) days after the expiration of such6678CONTRACT QUARTER.667966808.3 A refusal by LICENSEE to undertake ABATEMENT EFFORTS within ninety6681(90) days of a reasonable request made by CRONKS in accordance with Paragraph66828.2 above, or to consent to allowing CRONKS to undertake such ABATEMENT EFFORTS,6683shall constitute a material breach of this Agreement and be grounds for6684termination by CRONKS in accordance with Paragraph 12.3 unless LICENSEE provides6685CRONKS with a reasonable business justification for its refusal in writing6686within said ninety (90) day period, which justification is acceptable to CRONKS.6687Any disagreement regarding this Paragraph 8.3 shall be subject to the dispute6688resolution provisions of Article 11.66896690<PAGE>6691669266938.4 In the event that a declaratory judgment action or defense alleging6694invalidity of any of the PATENT RIGHTS shall be brought against LICENSEE,6695CRONKS, at their option, shall have the right but not the obligation, within6696thirty (30) days after commencement of such action, to intervene at their sole6697expense.669866998.5 In any infringement which may be instituted by LICENSEE to enforce6700the PATENT RIGHTS or other intellectual property rights licensed pursuant to6701this Agreement, CRONKS shall, at the request and expense of LICENSEE, cooperate6702in all respects and testify if requested and make available relevant records,6703papers, information, samples, specimens, and the like.670467059 - INDEMNIFICATION AND INSURANCE670667079.1 LICENSEE shall at all times during the term of this Agreement and6708thereafter, indemnify, defend and hold CRONKS harmless from and against all6709claims, costs, proceedings, demands, judgments and liabilities of any kind6710whatsoever, including legal expenses and reasonable attorneys' fees, arising out6711of the death of or injury to any person or persons or out of any damage to6712property, resulting from the production, manufacture, sale, use lease,6713consumption or advertisement of the PRODUCTS.671467159.2 CRONKS shall, jointly and severally, at all times during the term6716of this Agreement and thereafter, indemnify, defend and hold LICENSEE harmless6717from and against all claims, costs, proceedings, demands, judgments and6718liabilities of any kind whatsoever, including legal expenses and reasonable6719attorneys' fees ("CLAIMS"), arising out of the breach by CRONKS of any of their6720representations and warranties under Paragraphs 3.1 and 3.3 of this Agreement.6721Except for LICENSEE's remedy at equity for specific performance, CRONKS'6722liability under this Paragraph 9.2 for CLAIMS arising out of a breach by CRONKS6723of all representations and warranties under this Agreement other than those set6724forth in Paragraph 3.1 and 3.3 shall be limited to Ten Thousand Dollars6725($10,000). Except as otherwise expressly set forth in this Agreement, CRONKS6726make no representations and extend no warranties of any kind, either express or6727implied.67286729<PAGE>6730673167329.3 LICENSEE shall obtain and carry in full force and effect6733commercial, general liability insurance in amounts which shall protect LICENSEE6734and CRONKS with respect to events covered by Paragraph 9.1 above. Such insurance6735shall be written by a reputable insurance company and shall list CRONKS as an6736additional insured thereunder throughout the term of this Agreement.6737673810 - ASSIGNMENT6739674010.1 LICENSEE may assign any and all rights granted hereunder to any6741third party ("ASSIGNEE") upon providing CRONKS with at least thirty (30) days6742prior written notice.6743674411 - DISPUTE RESOLUTION6745674611.1 Except for the right of either party to apply to a court of6747competent jurisdiction for a temporary restraining order, a preliminary6748injunction, or other equitable relief to preserve the status quo or prevent6749irreparable harm, any and all claims, disputes or controversies arising under,6750out of, or in connection with the Agreement, including any dispute relating to6751patent enforcement, validity or infringement, which the parties shall be unable6752to resolve within sixty (60) days shall be mediated in good faith. The party6753raising such dispute shall promptly advise the other party of such claim,6754dispute or controversy in a writing which describes in reasonable detail the6755nature of such dispute. By not later than five (5) business days after the6756recipient has received such notice of dispute, each party shall have selected6757for itself a representative who shall have the authority to bind such party, and6758shall additionally have advised the other party in writing of the name and title6759of such representative. By not later than ten (10) business days after such6760notice of dispute, the party against whom the dispute shall be raised, shall6761select a mediation firm either in the area of their principal residence (in the6762case of CRONKS) or in the area of its principal place of business (in the case6763of LICENSEE) and such representatives shall schedule a date with such firm for a6764mediation hearing. The parties shall enter into good faith mediation and shall6765pay their own expenses, and shall share the costs and expenses of the mediator6766equally.67676768<PAGE>67696770677111.2 If the representatives of the parties have not been able to6772resolve the dispute within fifteen (15) business days after such mediation6773hearing, then any and all claims or controversies arising under, out of, or in6774connection with this Agreement, including any dispute relating to patent6775validity or infringement, shall be resolved by final and binding arbitration to6776be held in Philadelphia, Pennsylvania, in the event that the dispute is raised6777or initiated by LICENSEE against CRONKS, or held in Minneapolis, Minnesota, in6778the event that the dispute is raised or initiated by CRONKS against LICENSEE, in6779either case using a single neutral arbitrator, acceptable to both parties, but6780otherwise employing the rules of the American Arbitration Association, or the6781Patent Arbitration Rules if applicable, then prevailing. The arbitrator shall in6782all cases and for all purposes apply the law set forth in Paragraph 14.1 and6783have no power to add to, subtract from or modify any of the terms or conditions6784of this Agreement, nor to award punitive damages. Any award rendered in such6785arbitration may be enforced by either party in all state or federal courts6786located in Pennsylvania or in Minnesota to whose jurisdiction and venue for such6787purposes CRONKS and LICENSEE each hereby irrevocably consent and submit.6788678911.3 Notwithstanding the foregoing, nothing in this Article shall be6790construed to waive any rights or timely performance of any obligations existing6791under this Agreement.6792679312 - TERMINATION6794679512.1 If LICENSEE shall cease to carry on its business, or enters into6796bankruptcy voluntarily or involuntarily, this Agreement shall terminate upon6797written notice by CRONKS.6798679912.2 Should LICENSEE fail to make any payment whatsoever due and6800payable to CRONKS hereunder, CRONKS shall have the right to terminate this6801Agreement effective on thirty (30) days' written notice, unless LICENSEE shall6802make all such payments to CRONKS within said thirty (30) day period. Upon the6803expiration of the thirty (30) day period, if LICENSEE shall not have made all6804such payments to CRONKS, the rights, privileges and license granted hereunder6805shall automatically terminate.68066807<PAGE>68086809681012.3 Upon any material breach or default of this Agreement by LICENSEE6811(including, but not limited to, breach or default under Paragraph 4.3), other6812than those occurrences set out in Paragraphs 12.1 and 12.2 hereinabove, which6813shall always take precedence in that order over any material breach or default6814referred to in this Paragraph 12.3, CRONKS shall have the right to terminate6815this Agreement and the rights, privileges and license granted hereunder6816effective on ninety (90) days' written notice to LICENSEE. Such termination6817shall become automatically effective unless LICENSEE shall have cured any such6818material breach or default prior to the expiration of the ninety (90) day6819period.6820682112.4 LICENSEE may in its sole discretion terminate this Agreement at6822any time, for any reason, by giving CRONKS at least sixty (60) days prior6823written notice in which event such license shall terminated upon the effective6824date stated in any such notice; provided, however, that LICENSEE shall, except6825as otherwise set forth in and contemplated by Paragraph 12.5 below, do all of6826the following:68276828(a) Cease making, using, selling, offering for sale, and importing6829all PRODUCTS;68306831(b) Cancel and terminate all sublicense agreements between6832LICENSEE and all of LICENSEE's sublicensees; and68336834(c) Render all required payments of fees, and earned royalties,6835and MINIMUM ROYALTIES to CRONKS.6836683712.5 Upon termination of this Agreement by LICENSEE in accordance with6838Paragraph 12.4, LICENSEE and any sublicensee thereof may, for a period of one6839(1) year after the effective date of such termination, sell all PRODUCTS, and6840complete the PRODUCTS in the process of manufacture at the time of such6841termination or for which a written contract exists for the purchase of material6842or for the sale of the PRODUCTS, and sell the same, provided that LICENSEE shall6843make the payments to CRONKS as required by Paragraph 5, 7 or 8 of this Agreement6844and shall submit the reports required by Paragraph 6 hereof.68456846<PAGE>68476848684912.6 Upon termination of this Agreement for any reason, nothing herein6850shall be construed to release either party from any obligation that matured6851prior to the effective date of such termination; and Paragraphs 1, 6, 9, 10, 11,685212.5, 12.6 and 14 shall survive any such termination.6853685412.7 Upon termination of this Agreement for any reason, any sublicensee6855not then in default shall have the right to seek a license from CRONKS and6856CRONKS agree to negotiate such licenses in good faith under reasonable terms and6857conditions.6858685913 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS6860686113.1 Any payments, notices or other communications pursuant to this6862Agreement shall be sufficiently made or given on the date of mailing if sent to6863such party by first class mail, addressed to it at its address below, or as it6864shall otherwise designate by written notice given to the other party:68656866In the case of CRONKS:68676868Peter Cronk6869[CONFIDENTIAL TREATMENT REQUESTED]6870[CONFIDENTIAL TREATMENT REQUESTED]68716872In the case of LICENSEE:68736874Daniel E. Cohen, M.D.6875Chairman and Chief Executive Officer6876CNS, Inc.68774400 West 78th Street6878Minneapolis, Minnesota 5543568796880With a copy to:68816882Patrick Delaney, Esq.6883Lindquist & Vennum P.L.L.P.68844200 IDS Center688580 South Eighth Street6886Minneapolis, Minnesota 5540268876888<PAGE>68896890689114 - MISCELLANEOUS PROVISIONS6892689314.1 All disputes arising out of or related to this Agreement, or the6894performance, enforcement, breach or termination hereof, and any remedies6895relating thereto, shall be construed, governed, interpreted and applied in6896accordance with the internal laws of the State of Minnesota U.S.A., (without6897regard to the laws of conflicts), except that questions affecting the6898construction and effect of any patent outside the United States shall be6899determined by the law of the country in which the patent shall have been6900granted.6901690214.2 The parties hereto acknowledge that this Agreement sets forth the6903entire Agreement and understanding of the parties hereto as to the subject6904matter hereof, and shall not be subject to any change or modification except by6905the execution of a written instrument signed by the parties.6906690714.3 The provisions of this Agreement are severable, and in the event6908that any provisions of this Agreement shall be determined to be invalid or6909unenforceable under any controlling body of the law, such invalidity or6910unenforceability shall not in any way affect the validity or enforceability of6911the remaining provisions hereof.6912691314.4 LICENSEE agrees to mark the PRODUCTS sold in the United States6914with the applicable United States patent numbers. All PRODUCTS shipped to or6915sold in other countries shall be marked in such a manner as to conform with the6916patent laws and practice of the country of manufacture or sale.6917691814.5 The failure of either party to assert a right hereunder or to6919insist upon compliance with any term or condition of this Agreement shall not6920constitute a waiver of that right or excuse a similar subsequent failure to6921perform any such term or condition by the other party.6922692314.6 Neither party shall be responsible for any delay or failure in the6924performance of any obligation hereunder due to strikes, lockouts, fires, floods,6925acts of God, embargoes, wars, riots, or act or order of any government or6926governmental agency; provided, however, that nothing set forth in this Paragraph692714.6 shall be construed to relieve LICENSEE of the requirement that it pay6928MINIMUM ROYALTIES hereunder.69296930<PAGE>693169326933IN WITNESS WHEREOF, the parties have duly executed this Agreement the6934day and year set forth below.69356936for: CRONKS for: CNS, Inc.693769386939By: By6940Peter Cronk Daniel E. Cohen, M.D.6941Chairman and Chief6942Executive Officer69436944Date: Date:694569466947By:6948Kristen Cronk69496950Date:69516952<PAGE>695369546955APPENDIX A69566957PATENT RIGHTS on the EFFECTIVE DATE69586959UNITED STATES PATENT RIGHTS U.S. Patent No. 5,706,800, issued January 13,69601998 and entitled "Medical Nasal Dilator"69616962U.S. Patent Application Serial No. 08/942,7976963filed on October 2, 1997, and entitled "Improved6964Medicated Nasal Dilator"69656966U.S. Patent Application Serial No. 09/099,8256967filed on June 18, 1998, and entitled,6968"Adhesively Applied External Nasal Strips and6969Dilators Containing Medications and Fragrances".69706971FOREIGN PATENT RIGHTS69726973Non-PCT69746975South African Patent Application Serial No. 98/0144, filed on January 8, 1998,6976and entitled "Medicated Nasal Dilator".69776978PCT69796980PCT Application Serial No. US98/01513, filed on January 28, 1998, and entitled6981"Medical Nasal Dilator" (designating Europe, China, Canada, Brazil, Australia,6982Japan).69836984<PAGE>698569866987APPENDIX B69886989PCT DESIGNATED FOREIGN COUNTRIES69906991Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and6992maintained in accordance with Article 7:699369941. Europe: Italy, Portugal, United Kingdom, Germany, Spain and France;69952. Canada;69963. Brazil;69974. Australia;69985. China; and69996. Japan.70007001</TEXT>7002</DOCUMENT>7003<DOCUMENT>7004<TYPE>EX-21.17005<SEQUENCE>77006<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT7007<TEXT>700870097010Exhibit 21.1701170127013SUBSIDIARIES701470157016CNS International, Inc.70177018CNS FSC, Inc.70197020</TEXT>7021</DOCUMENT>7022<DOCUMENT>7023<TYPE>EX-23.17024<SEQUENCE>87025<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT7026<TEXT>702770287029Exhibit 23.1703070317032INDEPENDENT AUDITORS' CONSENT70337034The Board of Directors7035CNS, Inc.70367037We consent to incorporation by reference in the registration statements Nos.7038333-60017, 33-29454, 33-42971 and 33-59719 on Form S-8 of CNS, Inc. of our7039report dated January 20, 2000, relating to the consolidated balance sheets of7040CNS, Inc. and subsidiaries as of December 31, 1999, and 1998, and the related7041consolidated statements of operations, stockholders' equity and comprehensive7042income, and cash flows for each of the years in the three-year period ended7043December 31, 1999, which report is included in the December 31, 1999, annual7044report on Form 10-K of CNS, Inc.70457046/s/ KMPG LLP704770487049Minneapolis, Minnesota7050March 28, 200070517052</TEXT>7053</DOCUMENT>7054<DOCUMENT>7055<TYPE>EX-277056<SEQUENCE>97057<DESCRIPTION>FINANCIAL DATA SCHEDULE7058<TEXT>70597060<TABLE> <S> <C>706170627063<ARTICLE> 570647065<S> <C>7066<PERIOD-TYPE> 12-MOS7067<FISCAL-YEAR-END> DEC-31-19997068<PERIOD-START> JAN-01-19997069<PERIOD-END> DEC-31-19997070<CASH> 859,8527071<SECURITIES> 37,997,4097072<RECEIVABLES> 11,369,8157073<ALLOWANCES> 07074<INVENTORY> 4,905,4497075<CURRENT-ASSETS> 61,935,6697076<PP&E> 3,738,0597077<DEPRECIATION> 1,728,0007078<TOTAL-ASSETS> 65,336,8357079<CURRENT-LIABILITIES> 11,752,7617080<BONDS> 07081<PREFERRED-MANDATORY> 07082<PREFERRED> 07083<COMMON> 192,9467084<OTHER-SE> 53,391,1287085<TOTAL-LIABILITY-AND-EQUITY> 65,336,8357086<SALES> 46,050,2087087<TOTAL-REVENUES> 46,050,2087088<CGS> 18,358,4357089<TOTAL-COSTS> 46,387,6087090<OTHER-EXPENSES> 07091<LOSS-PROVISION> 07092<INTEREST-EXPENSE> 07093<INCOME-PRETAX> (15,857,489)7094<INCOME-TAX> (2,101,138)7095<INCOME-CONTINUING> (13,756,351)7096<DISCONTINUED> 07097<EXTRAORDINARY> 07098<CHANGES> 07099<NET-INCOME> (13,756,351)7100<EPS-BASIC> (.89)7101<EPS-DILUTED> (.89)710271037104</TABLE>7105</TEXT>7106</DOCUMENT>7107</SEC-DOCUMENT>7108-----END PRIVACY-ENHANCED MESSAGE-----710971107111