edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7FOgy0+VfXQHwBJ/yWAHlrx7sdT7bQeAGP0jh+nMtB6OJCes/qp8duOd4Wv5O4k1T8FzVHSSkcJuFxrexsZzxHxw==910<SEC-DOCUMENT>0000897101-02-000189.txt : 2002041511<SEC-HEADER>0000897101-02-000189.hdr.sgml : 2002041512ACCESSION NUMBER: 0000897101-02-00018913CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 415CONFORMED PERIOD OF REPORT: 2001123116FILED AS OF DATE: 200203271718FILER: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: 03312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT: 1934 Act31SEC FILE NUMBER: 000-1661232FILM NUMBER: 025891473334BUSINESS 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<FILENAME>cns021471_10k.htm52<DESCRIPTION>CNS, INC. FORM 10-K 12/31/200153<TEXT>5455<HTML>56<HEAD>57<TITLE>CNS, Inc. Form 10-K 12-31-200158</TITLE>59</HEAD>60<BODY>61626364656667<!-- MARKER FORMAT-SHEET="Para Center Bold" -->68<P ALIGN="CENTER"><B>UNITED STATES<BR> SECURITIES AND EXCHANGE COMMISSION <BR>Washington, D.C.6920549</B></P>7071<!-- MARKER FORMAT-SHEET="Para Center Bold" -->72<P ALIGN="CENTER"><B>FORM 10-K</B></P>7374<!-- MARKER FORMAT-SHEET="Para Flush In 3" -->75<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>76<TR VALIGN=TOP>77<TD WIDTH=15%> </TD>78<TD WIDTH=85%><FONT SIZE=2>79(MARK80ONE)</FONT></TD>81</TR>82</TABLE>83<BR>8485<!-- MARKER FORMAT-SHEET="Para Center Bold" -->86<P ALIGN="CENTER"><B>|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<BR>87EXCHANGE ACT OF 1934</B></P>8889<!-- MARKER FORMAT-SHEET="Para Center" -->90<P ALIGN="CENTER"><FONT size=2>For the fiscal year ended December 31, 2001</font></P>9192<!-- MARKER FORMAT-SHEET="Para Center Bold" -->93<P ALIGN="CENTER"><B>OR</B></P>9495<!-- MARKER FORMAT-SHEET="Para Center Bold" -->96<P ALIGN="CENTER"><B>|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE<BR>97SECURITIES EXCHANGE ACT OF 1934</B></P>9899<!-- MARKER FORMAT-SHEET="Para Center" -->100<P ALIGN="CENTER"><FONT size=2>For the Transition period from _________ to __________</font></P>101102<!-- MARKER FORMAT-SHEET="Para Center Bold" -->103<P ALIGN="CENTER"><B>COMMISSION FILE NUMBER: 0-16612</B></P>104105<!-- MARKER FORMAT-SHEET="Para Center" -->106<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B><BR> (Exact name of registrant as specified in its107charter)</FONT></P>108109<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" ALIGN="CENTER" WIDTH="70%">110<TR VALIGN="BOTTOM">111<TD WIDTH="52%" ALIGN="CENTER"><U>Delaware</U></TD>112<TD WIDTH="47%" ALIGN="CENTER"><U>41-1580270</U></TD></TR>113<TR VALIGN="BOTTOM">114<TD ALIGN="CENTER">(State or other jurisdiction</TD>115<TD ALIGN="CENTER">(I.R.S. Employer</TD></TR>116<TR VALIGN="BOTTOM">117<TD ALIGN="CENTER">of incorporation or organization)</TD>118<TD ALIGN="CENTER">Identification No.)</TD></TR>119</TABLE>120121<!-- MARKER FORMAT-SHEET="Para Center" -->122<P ALIGN="CENTER"><FONT SIZE="2"><B>P.O. Box 39802 <BR>Minneapolis, MN 55439</B> <BR>(Address of principal123executive offices and zip code)</FONT></P>124125<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->126<P><FONT SIZE=2>Registrant's telephone number, including area code: (952) 229-1500 </FONT></P>127128<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->129<P><FONT SIZE=2>Securities registered pursuant to section 12(b) of the Act: None </FONT></P>130131<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->132<P><FONT SIZE=2>Securities registered pursuant to section 12(g) of the Act: </FONT></P>133134<!-- MARKER FORMAT-SHEET="Para Flush In 3" -->135<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>136<TR VALIGN=TOP>137<TD WIDTH=15%> </TD>138<TD WIDTH=85%><FONT SIZE="2"><U>TITLE139OF EACH CLASS</U> <BR>Common Stock, par value of $.01 per share <BR>Preferred Stock purchase rights</FONT></TD>140</TR>141</TABLE>142<BR>143144<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->145<P><FONT SIZE=2>Indicate by check mark whether the registrant (1) has filed all146reports required to be filed by Section 13 or 15(d) of the Securities Exchange147Act of 1934 during the preceding 12 months (or for such shorter period that the148registrant was required to file such reports), and (2) has been subject to such149filing requirements for the past 90 days. YES <U> X </U>150No <U> </U> </FONT></P>151152<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->153<P><FONT SIZE=2>Indicate by check mark if disclosure of delinquent filers154pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be155contained, to the best of registrant’s knowledge, in definitive proxy or156information statements incorporated by reference in Part III of this Form 10-K157or any amendment to this Form 10-K. |_| </FONT></P>158159<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->160<P><FONT SIZE=2>As of March 18, 2002, assuming as market value the price of161$6.15 per share, the closing sale price of the Company’s Common Stock on162the Nasdaq National Market, the aggregate market value of shares held by163non-affiliates was approximately $58,000,000. </FONT></P>164165<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->166<P><FONT SIZE=2>As of March 18, 2002, the Company had outstanding 13,530,065167shares of Common Stock of $.01 par value per share. </FONT></P>168169<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->170<P><FONT SIZE=2>Documents Incorporated by Reference: Portions of the171Company’s Proxy Statement for its Annual Meeting of Stockholders to be held172on May 15, 2002, are incorporated by reference into Part III of this Form 10-K. </FONT></P>173<BR><BR><BR>174175176177178179<!-- *************************************************************************** -->180<!-- MARKER PAGE="sheet: 1; page: 1" -->181<HR SIZE=5 COLOR=GRAY NOSHADE>182183184185186187188<!-- MARKER FORMAT-SHEET="Head Major" -->189<H1 ALIGN=CENTER><FONT SIZE=2>TABLE OF CONTENTS</FONT></H1>190191<PRE><FONT SIZE=-1>192193<B><U>Page</U></B>194<B><U>PART I</U></B>195196Item 1. Business................................................................................. 3197Item 2. Properties............................................................................... 17198Item 3. Legal Proceedings........................................................................ 17199Item 4. Submission of Matters to a Vote of Security Holders...................................... 17200201<B><U>PART II</U></B>202203Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 18204Item 6. Selected Financial Data.................................................................. 19205Item 7. Management's Discussion and Analysis of Financial Condition206and Results of Operations............................................................. 20207Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................... 28208Item 8. Financial Statements and Supplementary Data.............................................. 28209Item 9. Changes in and Disagreements with Accountants on Accounting and210Financial Disclosure.................................................................. 28211212<B><U>PART III</U></B>213214Item 10. Directors and Executive Officers of the Registrant....................................... 29215Item 11. Executive Compensation................................................................... 30216Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 30217Item 13. Certain Relationships and Related Transactions........................................... 30218219<B><U>PART IV</U></B>220221Item 14. Exhibits, Financial Statement Schedules, and222Reports on Form 8-K................................................................... 31223</pre>224<pre>225SIGNATURES........................................................................................ 32226EXHIBIT INDEX..................................................................................... 34227FINANCIAL STATEMENTS.............................................................................. F-1228229230</FONT></PRE>231232233<!-- MARKER FORMAT-SHEET="Para Center" -->234<P ALIGN="CENTER"><FONT size=2>2</font></P>235236237238239240241<!-- *************************************************************************** -->242<!-- MARKER PAGE="sheet: 2; page: 2" -->243<HR SIZE=5 COLOR=GRAY NOSHADE>244245246247248249<!-- MARKER FORMAT-SHEET="Head Minor" -->250<H2><FONT SIZE="2"><U>Forward-Looking Statements</U></FONT></H2>251252<!-- MARKER FORMAT-SHEET="Para In 0" -->253<P><font size=2> Certain254statements contained in this Annual Report on Form 10-K and other written and255oral statements made from time to time by the Company do not relate strictly to256historical or current facts but provide current expectations or forecasts of257future events. As such, they are considered “forward-looking258statements” under the Private Securities Litigation Reform Act of 1995 and259are subject to certain risks and uncertainties that could cause actual results260to differ materially from those presently anticipated or projected. Such261forward-looking statements can be identified by the use of terminology such as262“may,” “will,” “expect,” “plan,”263“intend,” “anticipate,” “estimate,” or264“continue” or similar words or expressions. It is not possible to265foresee or identify all factors affecting the Company’s forward-looking266statements and investors therefore should not consider any list of factors to be267an exhaustive statement of all risks, uncertainties or potentially inaccurate268assumptions. Factors that could cause actual results to differ from the results269discussed in the forward-looking statements include, but are not limited to, the270following factors: (i) the Company’s revenue and profitability is reliant271on sales of Breathe Right® nasal strips; (ii) the Company currently has a272seasonal pattern of sales that is typically higher in the first and fourth273quarters of each calendar year due to increased nasal strip usage during the274cough/cold season and its revenues and earnings may be impacted by the<B>275</B>severity of such season; (iii) the Company’s success and future growth276will depend significantly on its ability to effectively market Breathe Right277nasal strips and upon its ability to develop and achieve markets for additional278products; (iv) the Company’s competitive position will, to some extent, be279dependent on the enforceability and comprehensiveness of the patents on its280Breathe Right nasal strip technology which have been, and in the future may be,281the subject of litigation and could be narrowed as a result of the outcome of282the reexamination of one such patent by the United States Patent and Trademark283Office (see Item 1, “Patents, Trademarks and Proprietary Rights”); (v)284the Company has faced and will continue to face challenges in successfully285developing and introducing new products; (vi) the Company operates in286competitive markets where recent and potential entrants into the nasal dilator287segment pose competitive challenges (see Item 1, “Competition”); (vii)288the Company is dependent upon contract manufacturers for the production of289substantially all of its products; and (viii) the Company currently purchases290most of its major components for its nasal strip products from different291contract manufacturers that obtain the raw materials from a single supplier (see292Item 1, “Manufacturing and Operations”).</font></P>293294<!-- MARKER FORMAT-SHEET="Head Major" -->295<H1 ALIGN=CENTER><FONT SIZE=2>PART I</FONT></H1>296297<!-- MARKER FORMAT-SHEET="Head Minor" -->298<H2><FONT SIZE="2"><U>Item 1. BUSINESS</U></FONT></H2>299300<!-- MARKER FORMAT-SHEET="Head Minor" -->301<H2><FONT SIZE=2>General</FONT></H2>302303<!-- MARKER FORMAT-SHEET="Para In 0" -->304<P><font size=2> CNS, Inc. (the305“Company”) is in the business of developing and marketing consumer306health care products, including the Breathe Right® nasal strip and the307FiberChoice® chewable fiber tablet. The Company focuses on products that308address important consumer needs within the aging well/self care market,309including better breathing and digestive health.</font></P>310311<!-- MARKER FORMAT-SHEET="Para In 0" -->312<P><font size=2> The313Company’s principal product, the Breathe Right nasal strip, improves314breathing by reducing nasal airflow resistence. It can be effective in providing315temporary relief for nasal congestion, reducing snoring and reducing breathing316difficulties due to a deviated nasal septum. In 2000, the Company expanded its317Breathe Right product line to include nasal strips for colds with Vicks®318mentholated vapors that are sized for the entire family, and nasal strips for319children that are available in multiple colors. Breathe Right nasal strips for320colds with mentholated vapors were introduced in selected overseas markets in3212001.</font></P>322323<!-- MARKER FORMAT-SHEET="Para In 0" -->324<P><font size=2> The Company325further extended the Breathe Right brand in 2001 through product licensing. The326Company entered into an agreement to license the Breathe Right name for a new327line of premium air filters for home furnace and air conditioning systems. In328addition to expanding the Breathe Right brand and introducing</font></P>329<BR><BR><BR>330331<!-- MARKER FORMAT-SHEET="Para Center" -->332<P ALIGN="CENTER"><FONT size=2>3</font></P>333334335336337338339340<!-- *************************************************************************** -->341<!-- MARKER PAGE="sheet: 3; page: 3" -->342<HR SIZE=5 COLOR=GRAY NOSHADE>343344345346347<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->348<P><FONT SIZE=2>other new products, the Company is exploring possibilities for349acquiring new consumer health care products that have established consumer350brands, particularly those that complement the Company’s drug-free, better351breathing platform. The Company is also considering opportunities for licensing352new products and technologies. </FONT></P>353354<!-- MARKER FORMAT-SHEET="Para In 0" -->355<P><font size=2> The Company356introduced its new FiberChoice® chewable fiber tablets in the second quarter357of 2000. The FiberChoice product is an orange-flavored, chewable fiber tablet358that offers consumers an effective, convenient and good-tasting way to359supplement their daily intake of dietary fiber. In the fourth quarter of 1999,360the Company introduced a product for race horses called the FLAIR<SUP>TM</SUP>361equine nasal strip. Invented by two veterinarians, the FLAIR equine nasal strip362is a patented, drug-free product that enables horses to breathe more easily363during strenuous exercise.</font></P>364365<!-- MARKER FORMAT-SHEET="Para In 0" -->366<P><font size=2> During 2001, the367Company completed a restructuring and organizational realignment plan. The368Company eliminated 20 positions across all areas for a 25% work force reduction.369These actions enable the Company to focus its resources on better leveraging the370success of the Breathe Right brand, both in the United States and abroad,371operate the FiberChoice business more flexibly and efficiently, and reduce the372Company’s investment in new products and business development.</font></P>373374<!-- MARKER FORMAT-SHEET="Head Minor" -->375<H2><FONT SIZE=2>Management</FONT></H2>376377<!-- MARKER FORMAT-SHEET="Para In 0" -->378<P><font size=2> The379Company’s management structure is organized into strategic business teams380in order to expand the platform for building the Breathe Right brand and develop381and launch new products: Breathe Right Brand Team; FiberChoice Team;382International Team; FLAIR Team; and Business Development Team. The Company383believes that its team focus enables the Company to more effectively implement384its business strategies.</font></P>385386<!-- MARKER FORMAT-SHEET="Para In 0" -->387<P><font size=2> <B><I>Breathe388Right Brand Team.</I></B><I></I> The Company’s Breathe Right Brand Team is389responsible for the strategic development and management of the Breathe Right390nasal strip business and other non-nasal strip products that carry the Breathe391Right brand name. Breathe Right nasal strip products currently represent the392cornerstone of the Company’s business. The Company intends to exploit new393markets and opportunities that it believes exist for its current nasal strip394products and plans to commercialize potential new Breathe Right brand products.395The Company introduced two new products in the United States during the fall of3962000 to coincide with the cough/cold season, nasal strips for colds with Vicks397mentholated vapors for the entire family and nasal strips for children. In398connection with the fall 2002 cough/cold season, the Company intends to launch a399new product that has been under development–Breathe Right Snore Relief<SUP>TM</SUP>400throat spray. This product will leverage the Company’s existing position in401the better breathing/snoring product category and complement existing Breathe402Right offerings.</font></P>403404<!-- MARKER FORMAT-SHEET="Para In 0" -->405<P><font size=2> <B><I>FiberChoice406Team.</I></B><I></I> The Company introduced its FiberChoice chewable fiber407tablets during the second quarter of 2000. The FiberChoice Product Team is408responsible for the strategic development and management of the FiberChoice409chewable fiber supplement business.</font></P>410411<!-- MARKER FORMAT-SHEET="Para In 0" -->412<P><font size=2> <B><I>International413Team</I>.</B> The Company began shipping Breathe Right nasal strips to new414distributor partners in Europe, Australia and Japan during 2000. Breathe Right415nasal strips for colds with mentholated vapors were introduced in selected416overseas markets in 2001. The International Team is responsible for developing417and managing the Company’s overseas business and its relationships with418distributors and representatives in international markets. See Item 1,419“International Distribution.”</font></P>420421<!-- MARKER FORMAT-SHEET="Para In 0" -->422<P><font size=2> <B><I>FLAIR423Team.</I></B><I></I> The Company introduced the FLAIR equine nasal strip during4241999. The Company’s FLAIR Product Team is responsible for the strategic425development and management of the FLAIR equine nasal</font></P>426<BR><BR><BR>427428<!-- MARKER FORMAT-SHEET="Para Center" -->429<P ALIGN="CENTER"><FONT size=2>4</font></P>430431432433434435436437<!-- *************************************************************************** -->438<!-- MARKER PAGE="sheet: 4; page: 4" -->439<HR SIZE=5 COLOR=GRAY NOSHADE>440441442443444<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->445<P><FONT SIZE=2>strip business. In March of 2002, the Company established an exclusive,446worldwide distribution relationship for its FLAIR equine nasal strip product with Merial447Limited, an affiliate of Merck & Co., Inc. </FONT></P>448449<!-- MARKER FORMAT-SHEET="Para In 0" -->450<P><font size=2> <B><I>Business451Development Team.</I></B><I></I> The Business Development Team is committed to452the expansion of the Company’s product base through the development,453acquisition or licensing of promising consumer health care products,454particularly those that complement the Company’s drug-free, better455breathing platform. The Business Development Team is responsible for identifying456and evaluating potential new products, inventions and other business prospects457that will enable the Company to achieve its long-term growth and profit458objectives, including opportunities for the acquisition of established product459lines.</font></P>460461<!-- MARKER FORMAT-SHEET="Head Minor" -->462<H2><FONT SIZE=2>Products</FONT></H2>463464<!-- MARKER FORMAT-SHEET="Para In 0" -->465<P><font size=2> <B><I>Breathe466Right Nasal Strips</I></B><I></I>. The Breathe Right nasal strip is a467nonprescription, single-use disposable device that improves breathing by opening468the nasal passages. The Company has 510(k) clearance from the United States Food469and Drug Administration (“FDA”) to market the Breathe Right nasal470strip for improvement of nasal breathing, temporary relief of nasal congestion,471elimination or reduction of snoring and temporary relief of breathing472difficulties due to a deviated nasal septum. See Item 1, “Government473Regulation.” The Breathe Right nasal strips come in tan, clear, mentholated474and stars-for-kid’s varieties.</font></P>475476<!-- MARKER FORMAT-SHEET="Para In 0" -->477<P><font size=2> The Breathe478Right nasal strip includes two embedded plastic strips. When folded down onto479the sides of the nose, the Breathe Right nasal strip lifts the side walls of the480nose outward to open the nasal passages. The product improves nasal breathing481upon application and does not include any medication, thereby avoiding any482medicinal side effects. The Breathe Right nasal strip is offered in three sizes483(kid’s, small/medium and large) to accommodate the range of nose sizes. The484Breathe Right nasal strip is packaged for the consumer market in various485quantities ranging between 8 to 38 strips per box. The Company believes that the486Breathe Right nasal strip is priced comparably to medicinal decongestants on a487daily or nightly dosage basis at suggested retail prices ranging between $3.99488and $11.99 per box.</font></P>489490<!-- MARKER FORMAT-SHEET="Para In 0" -->491<P><font size=2> The Company492expanded the Breathe Right nasal strip line with the introduction of the Breathe493Right nasal strip with Vicks mentholated vapors and the Breathe Right nasal494strip for kids in 2000. The Company has licensed the Vicks trademark from The495Proctor & Gamble Company for use with the new mentholated nasal strip496product. The Vicks mentholated nasal strip uses traditional Breathe Right strip497technology but contains a soothing mentholated aroma for additional relief. The498mentholated vapors are released when the strip surface is rubbed. The Company499believes that its mentholated nasal strip product has increased the500Company’s customer base for nasal strip products by more clearly501communicating that Breathe Right nasal strips can ease the congestion associated502with the common cold. The Kid’s Strips are sized specifically to fit503children and include a brightly-colored version and a mentholated version.</font></P>504505<!-- MARKER FORMAT-SHEET="Para In 0" -->506<P><font size=2> <B><I>Breathe507Right Brand Products.</I></B><I></I> The Breathe Right saline nasal spray is a508non-habit forming, drug-free product that restores moisture to comfort and509soothe dry, irritated nasal passages due to colds, allergies, dry air (low510humidity), air pollution and the overuse of nasal decongestants. The Company511intends to introduce additional non-nasal strip products in the future that512carry the Breathe Right brand name to extend the product line. For example, the513Company intends to launch a new product in connection with the fall 2002 cough/cold season514– Breathe Right Snore Relief throat spray.515The throat spray addresses a different cause of snoring than nasal strips and516lubricates and soothes dry throats while a natural astringent firms loose517tissues to reduce the vibrations that produce snoring. This product will518leverage the Company’s existing position in the better breathing/snoring519product category and complement existing Breathe Right product offerings.</font></P>520<BR><BR><BR>521522<!-- MARKER FORMAT-SHEET="Para Center" -->523<P ALIGN="CENTER"><FONT size=2>5</font></P>524525526527528529530531<!-- *************************************************************************** -->532<!-- MARKER PAGE="sheet: 5; page: 5" -->533<HR SIZE=5 COLOR=GRAY NOSHADE>534535536537538<!-- MARKER FORMAT-SHEET="Para In 0" -->539<P><font size=2> <B><I>FiberChoice540Chewable Fiber Tablets.</I></B><I></I> The Company introduced nationally its541FiberChoice chewable fiber tablets in the second quarter of 2000. FiberChoice is542an orange-flavored, chewable tablet that offers consumers an effective,543convenient, good-tasting way to supplement their daily intake of dietary fiber.544The active ingredient in FiberChoice tablets is fructan, a natural fiber source.545Fructan is a prebiotic that helps promote the growth of healthy intestinal tract546bacteria. The FiberChoice tablets can be taken without water and have been547clinically proven to be as effective as powder alternatives. The product is548available in both regular and sugar-free varieties and packaged in 160-count and54990-count bottles and 10-count rolls. In 2002, the Company expects to make the550product also available in 36-count bottles.</font></P>551552<!-- MARKER FORMAT-SHEET="Para In 0" -->553<P><font size=2> <B><I>FLAIR554Equine Nasal Strips</I>.</B> The FLAIR equine nasal strip is a product for555horses that capitalizes on the Company’s current nasal strip technology.556Invented by two veterinarians, the FLAIR equine nasal strip is a patented,557drug-free product that enables horses to breathe more easily during strenuous558exercise. Results from several clinical trials indicate that the equine nasal559strip product also reduces a bleeding condition in horses called560exercise-induced pulmonary hemorrhaging (“EIPH”) that often occurs561during and after races, high performance events and strenuous workouts. The562FLAIR equine nasal strip holds open the nasal passages of the horses, which can563breathe only through their noses, and reduces the effort required to breathe.</font></P>564565<!-- MARKER FORMAT-SHEET="Para In 0" -->566<P><font size=2> The FLAIR equine567nasal strip was introduced for the first time during the Breeder’s Cup in568November of 1999 at Gulfstream Park in Hallandale, Florida. Currently, FLAIR569equine nasal strips are being sold in tack shops and equine supply stores and570through equine catalogs. The Company’s FLAIR product remains a developing571business but has not and is not expected to materially contribute to the572Company’s revenues. The Company has recently established an exclusive573distribution relationship with Merial Limited, an affiliate of Merck & Co.,574Inc., under which Merial has assumed all direct sales and marketing activities575for the FLAIR equine nasal strip business.</font></P>576577<!-- MARKER FORMAT-SHEET="Head Minor" -->578<H2><FONT SIZE=2>Markets</FONT></H2>579580<!-- MARKER FORMAT-SHEET="Para In 0" -->581<P><font size=2> <B><I>Breathe582Right Brand Product Line</I>.</B> The Breathe Right brand of products includes583the Breathe Right nasal strip and the Breathe Right saline nasal spray. The584Company intends to expand the Breathe Right brand in 2002 in connection with the fall585cough/cold season with the introduction of its Breathe Right Snore Relief throat586spray product.</font></P>587588<!-- MARKER FORMAT-SHEET="Para In 0" -->589<P><font size=2> Air impedance in590the nose accounts for approximately one-half of the total airway resistance591involved in the respiratory system (i.e., one-half of the energy required for592breathing). If the effort to breathe through the nose during sleep is excessive,593the person will resort to mouth breathing, promoting snoring, dry mouth, sore594throat and mini-awakenings which disrupt sleep. In addition, nasal breathing595difficulties during sleep are often caused by nasal congestion found in people596who have a common cold, allergies and sinusitis and by those who experience597nasal obstruction due to a deviated nasal septum. The Company believes that598people with chronic conditions such as snoring or allergies or with structural599problems such as deviated septa may be more predisposed to use Breathe Right600products on a regular or daily basis, while seasonal sufferers are likely to use601Breathe Right products as needed. These conditions are aggravated when people602have nasal congestion, thus increasing the opportunity for usage and consumer603trial during the cough/cold season. People suffering from these conditions are604currently the primary users of the Company’s Breathe Right products and are605the main targets of its advertising.</font></P>606607<!-- MARKER FORMAT-SHEET="Para In 0" -->608<P><font size=2> In 1999, the609Company began to emphasize the Breathe Right nasal strip position as a product610that provides instant, drug-free relief for those suffering from nasal611congestion and other symptoms due to the common cold, allergies and sinusitis.612The Company’s advertising currently emphasizes the ability of Breathe Right613nasal strips to provide immediate relief from nasal congestion due to colds.</font></P>614<BR><BR><BR>615616<!-- MARKER FORMAT-SHEET="Para Center" -->617<P ALIGN="CENTER"><FONT size=2>6</font></P>618619620621622623624<!-- *************************************************************************** -->625<!-- MARKER PAGE="sheet: 6; page: 6" -->626<HR SIZE=5 COLOR=GRAY NOSHADE>627628629630631632<!-- MARKER FORMAT-SHEET="Para In 0" -->633<P><font size=2> The634Company’s marketing efforts capitalize on the benefits of Breathe Right635products to consumers in various, and often overlapping, consumer market636segments:</font></P>637638<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->639<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>640<TR VALIGN=TOP>641<TD WIDTH=5%><FONT SIZE=2></FONT></TD>642<TD WIDTH=5%><FONT SIZE=2>•</FONT></TD>643<TD WIDTH=90%><FONT SIZE=2>644<I><U>Nasal Congestion Relief</U>.</I> Most Americans suffer some nasal645congestion annually as a result of the common cold, while nasal congestion as a646result of allergies affects approximately 35 million Americans. The Company647believes that the Breathe Right nasal strip is often used as either an648alternative or as an adjunct to decongestant drugs (including nasal sprays and649oral decongestants). This broad cough/cold market represents a significant650potential for the Breathe Right nasal strip. In 1999, the Company commenced651marketing efforts aimed at repositioning the Breathe Right nasal strip as a652product that provides relief for the common cold. In the fall of 2000, this653repositioning as a product for colds was reinforced by the introduction of654Breathe Right nasal strips with Vicks mentholated vapors. At the same time, the655product line was extended into children’s sizes, with a brightly colored656“stars” strip and a Kid Strip with Vicks mentholated vapors.</FONT></TD>657</TR>658</TABLE>659<BR>660661<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->662<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>663<TR VALIGN=TOP>664<TD WIDTH=5%><FONT SIZE=2></FONT></TD>665<TD WIDTH=5%><FONT SIZE=2>•</FONT></TD>666<TD WIDTH=90%><FONT SIZE=2>667<I><U>Snoring Relief</U>.</I> Based on results from clinical trials, Breathe668Right products were effective in reducing snoring loudness in approximately 85%669of the participants. This market remains very important to the Company since670approximately 37 million people snore regularly, while another 50 million people671snore occasionally. The Company believes that snorers can be targeted672effectively and directly through relationship marketing efforts as well as673through broad-based advertising.</FONT></TD>674</TR>675</TABLE>676<BR>677678<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->679<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>680<TR VALIGN=TOP>681<TD WIDTH=5%><FONT SIZE=2></FONT></TD>682<TD WIDTH=5%><FONT SIZE=2>•</FONT></TD>683<TD WIDTH=90%><FONT SIZE=2>684<I><U>Improved Breathing for Consumers with Deviated Septa</U>.</I>685Approximately 12 million people in the United States suffer from a deviated686septum, a bend in the cartilage or bone that divides the nostrils. Breathe Right687nasal strips were cleared by the Food and Drug Administration in 1996 to provide688temporary relief from breathing difficulties associated with a deviated septum.</FONT></TD>689</TR>690</TABLE>691<BR>692693<!-- MARKER FORMAT-SHEET="Para Hang In 1" -->694<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>695<TR VALIGN=TOP>696<TD WIDTH=5%><FONT SIZE=2></FONT></TD>697<TD WIDTH=5%><FONT SIZE=2>•</FONT></TD>698<TD WIDTH=90%><FONT SIZE=2>699<I><U>Athletic Market</U></I><U></U>. The Company believes that the Breathe700Right nasal strip makes nasal breathing more comfortable and may improve701endurance during athletic activity, particularly when a mouth guard is used. An702exercise physiology study published in peer-reviewed medical literature in 1997703concluded that the Breathe Right nasal strip provided physiologic advantages in704ventilation and heart rate during mid-level exercise. Other exercise physiology705studies have been conducted and add to the substantiation of the positive706effects of the Breathe Right nasal strip during exercise. The Company continues707to use athletes to endorse the Breathe Right nasal strip to increase the708visibility of the product, which leads to greater awareness of the product and709the Breathe Right brand.</FONT></TD>710</TR>711</TABLE>712<BR>713714<!-- MARKER FORMAT-SHEET="Para In 0" -->715<P><font size=2> <B><I>FiberChoice716Chewable Fiber Tablets.</I></B><I></I> Approximately 10 million U.S. households717annually purchase bulk fiber products, primarily to promote regularity and718improve digestive health. The bulk fiber category represents approximately $325719million in U.S. retail sales. The Company believes there is a significant720opportunity to expand this category due to both the aging of the baby-boomer721generation and the marketing of a better consumer solution to existing dietary722fiber products–FiberChoice chewable fiber tablets. As people age, they723frequently develop digestive problems. People over 55 years old are three times724more likely to purchase a bulk fiber supplement than those younger than 55. The725first year the baby-boom generation turned 55 was in 2001. This generation is726generally more active and demanding than their parents. These consumers search727for solutions that do not hamper their active lifestyles. The Company believes728that its FiberChoice chewable fiber tablet represents such a solution in that it729provides an effective, convenient and good-tasting alternative for supplementing730dietary fiber intake. The tablets can be taken anytime and anywhere, with or731without water.</font></P>732<BR><BR><BR>733734<!-- MARKER FORMAT-SHEET="Para Center" -->735<P ALIGN="CENTER"><FONT size=2>7</font></P>736737738739740741742<!-- *************************************************************************** -->743<!-- MARKER PAGE="sheet: 7; page: 7" -->744<HR SIZE=5 COLOR=GRAY NOSHADE>745746747748749750<!-- MARKER FORMAT-SHEET="Para In 0" -->751<P><font size=2> <B><I>FLAIR752Equine Nasal Strips.</I></B><I></I> The FLAIR equine nasal strip is similar in753concept to the human Breathe Right nasal strip adjusted to the unique anatomy754and size of a horse. A horse breathes only through its nose, not through its755mouth. During strenuous exercise, large amounts of air are inhaled and exhaled756during which soft tissue on the side of the nose can collapse. The equine nasal757strip supports those soft tissues so they do not collapse, which allows a horse758to breathe more easily with less stress developing in the lungs. Results from759several clinical trials indicate that horses wearing the FLAIR equine nasal760strip use less energy to breathe and that the product reduces a bleeding761condition in horses called exercise-induced pulmonary hemorrhaging762(“EIPH”) that often occurs during races, high-performance events and763strenuous workouts.</font></P>764765<!-- MARKER FORMAT-SHEET="Para In 0" -->766<P><font size=2> The FLAIR equine767nasal strip could be used any time a horse is engaged in strenuous exercise. The768Company estimates that in the U.S. there are approximately 1.3 million769individual horse starts in racing competitions and over 1 million individual770horse starts in non-racing competitions. Horses can benefit from the use of the771FLAIR equine nasal strip in training as well as competition.</font></P>772773<!-- MARKER FORMAT-SHEET="Head Minor" -->774<H2><FONT SIZE=2>Business Strategies</FONT></H2>775776<!-- MARKER FORMAT-SHEET="Para In 0" -->777<P><font size=2> The778Company’s business strategy includes attempting to increase sales of its779Breathe Right nasal strip and other Breathe Right brand products through780advertising, expanding its Breathe Right product line with value added line781extensions like Breathe Right nasal strips for colds with Vicks mentholated782vapors and children’s nasal strips, maximizing the potential of recently783introduced products and successfully introducing new products with an emphasis784on drug-free, better breathing such as the Company’s Breathe Right Snore785Relief throat spray.</font></P>786787<!-- MARKER FORMAT-SHEET="Para In 0" -->788<P><font size=2> <B><I>Increasing789New Consumer Product Trial and Increasing Product Usage.</I></B><I></I> The790Company uses a combination of advertising, sampling, promotions, public791relations and celebrity endorsements to increase consumer awareness and to792encourage consumer trial of the Breathe Right nasal strip. In 1999, the Company793began to increase its emphasis on positioning the Breathe Right nasal strip as a794product that provides instant, drug-free relief for those suffering from nasal795congestion and other symptoms due to the common cold, allergies and sinusitis.796The Company’s new advertising introduced the Breathe Right nasal strip for797the common cold with Vicks mentholated vapors, emphasizing the ability of798Breathe right nasal strips to provide instant, drug-free relief from nasal799congestion. In 2001, the Company separately advertised Breathe Right nasal800strips as a product that provides drug-free relief from nasal congestion and801snoring.</font></P>802803<!-- MARKER FORMAT-SHEET="Para In 0" -->804<P><font size=2> <B><I>Marketing805New Breathe Right Brand Products.</I></B><I></I> The Company believes that the806Breathe Right brand name is one of its most valuable assets. In 1998, the807Company introduced the Breathe Right saline nasal spray. The Company has also808expanded the Breathe Right product line to include nasal strips for colds with809Vicks mentholated vapors and nasal strips for children, both of which were810introduced during the fall of 2000 in order to coincide with the cough/cold811season. In 2001, the Company entered into an agreement to license the Breathe812Right name for a new line of premium air filters for home furnace and air813conditioning systems that target allergy sufferers. The Company intends to814launch a new product in connection with the fall 2002 cough/cold season–Breathe Right815Snore Relief throat spray. This product will leverage the Company’s816existing position in the better breathing/snoring product category and817complement existing Breathe Right offerings.</font></P>818819<!-- MARKER FORMAT-SHEET="Para In 0" -->820<P><font size=2> <B><I>Expanding821Company Presence in International Markets</I>.</B> The Company believes that822there is a significant market potential for its products outside the United823States. The Company is devoting significant resources to the development of its824international business. The Company entered into agreements with new825distributors and representatives for the distribution of the Company’s826nasal strip products in Japan, Australia and a number of major markets in Europe827in 2000 and in Hong Kong in 2001. The Company is considering additional828distributors and representatives for distribution of its nasal strip products in829international markets. During 2001, the Company launched its Breathe Right nasal830strips with mentholated vapors in international markets in conjunction with each831market’s cough/cold season. The Company believes that the network that it</font></P>832<BR><BR><BR>833834<!-- MARKER FORMAT-SHEET="Para Center" -->835<P ALIGN="CENTER"><FONT size=2>8</font></P>836837838839840841842<!-- *************************************************************************** -->843<!-- MARKER PAGE="sheet: 8; page: 8" -->844<HR SIZE=5 COLOR=GRAY NOSHADE>845846847848849850<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->851<P><FONT SIZE=2>has established for the international distribution of Breathe Right nasal852strips will also enable the Company to build its international marketing and distribution853capacity for other products. See Item 1, "International Distribution." </FONT></P>854855<!-- MARKER FORMAT-SHEET="Para In 0" -->856<P><font size=2> <B><I>Acquiring,857Developing and Marketing New Products.</I></B><I></I> The Company plans to take858advantage of its position as the drug-free, better breathing company and its859marketing and distribution strengths by acquiring, developing or licensing the860rights to new products that it believes have merit and by bringing them to market. The861FiberChoice chewable fiber tablet was launched in the second quarter of 2000 and862the FLAIR equine nasal strip was introduced in the fourth quarter of 1999. See863Item 1, “Marketing Strategies.” In addition, the Company is evaluating864opportunities for licensing new products and acquiring product lines that have865an established base of consumer acceptance.</font></P>866867<!-- MARKER FORMAT-SHEET="Head Minor" -->868<H2><FONT SIZE=2>Marketing Strategies</FONT></H2>869870<!-- MARKER FORMAT-SHEET="Para In 0" -->871<P><font size=2> <B><I>Breathe872Right Nasal Strips</I>.</B> The Company’s marketing efforts for Breathe873Right products are directed to different consumer markets–the nasal874congestion market and the snoring market. The Company has primarily used875television advertising to market its products. The Company’s advertising876focuses on the Breathe Right brand benefits of providing instant, drug-free877relief from nasal congestion and snoring. The Company also uses product878promotion programs, such as sampling, coupons and public relations activities to879encourage product trial and repeat purchases. Introduction of the new Breathe880Right nasal strips for colds with Vicks mentholated vapors has aided in881expanding the Company’s penetration into this significant market. In 2001,882the Company implemented its first on-line consumer promotion, the883“Nosebowl.com sweepstakes”, and offered a trip for eight people to884Super Bowl XXXVI. The promotion included an “Our Nose885Bowl<SUP>TM</SUP>” on-line game show where consumers could learn how886Breathe Right nasal strips could help them. Marketing communications are887generally designed to promote trial of Breathe Right brand products by888increasing consumer awareness of the benefits of each product.</font></P>889890<!-- MARKER FORMAT-SHEET="Para In 0" -->891<P><font size=2> Marketing892efforts for Breathe Right nasal strips as an aid in the prevention of snoring893also included direct mail sampling and sampling through direct response894television. In both programs, self-identified snorers were sent a sample of895Breathe Right nasal strips along with a brochure explaining the causes of896snoring and how the Company’s Breathe Right products can alleviate the897condition.</font></P>898899<!-- MARKER FORMAT-SHEET="Para In 0" -->900<P><font size=2> Because the901Breathe Right nasal strip is sold as a consumer product, sales of the product902will depend in part upon the degree to which the consumer is aware of the903product and is satisfied with its use, which also influences repeat usage and904word of mouth referrals. The most recent research data collected by a nationally905recognized consumer market research firm indicated that approximately 35% of906those in the United States who had purchased Breathe Right nasal strips have907purchased additional product in the same year.</font></P>908909<!-- MARKER FORMAT-SHEET="Para In 0" -->910<P><font size=2> <B><I>FiberChoice911Chewable Fiber Tablets</I>.</B> The Company’s marketing efforts for the912launch of FiberChoice chewable fiber tablets concentrated on advertising through913television and magazines to consumers who are 55 or more years old. In addition,914the Company distributed samples of the product and coupons to current users of915bulk fiber products. The Company also used direct response television as a916sampling vehicle. In these advertisements, consumers were invited to call a917toll-free number to receive a free 10-count sample of FiberChoice fiber tablets.918During the second half of 2001, the Company significantly reduced the level of919spending on a national marketing strategy for FiberChoice fiber tablets in favor920of more focused, regional efforts. The Company intends to test new marketing921programs first regionally and, if effective, thereafter extend such programs to922a national level.</font></P>923924<!-- MARKER FORMAT-SHEET="Para In 0" -->925<P><FONT SIZE="2"> <B><I>FLAIR Equine Nasal926Strips</I>.</B> The Company's marketing communications for FLAIR equine nasal strips has focused927on the health benefits of using the product identified in clinical studies. FLAIR equine928nasal</FONT></P>929<BR><BR><BR>930931<!-- MARKER FORMAT-SHEET="Para Center" -->932<P ALIGN="CENTER"><FONT size=2>9</font></P>933934935936937938939<!-- *************************************************************************** -->940<!-- MARKER PAGE="sheet: 9; page: 9" -->941<HR SIZE=5 COLOR=GRAY NOSHADE>942943944945946947<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->948<P><FONT SIZE=2>strips remain a developing business, but are not expected to949have a material impact on the Company’s revenues. In March of 2002, the950Company entered into a distribution relationship with Merial Limited, an affiliate951of Merck & Co., Inc. Under that arrangement, Merial has the exclusive right952to market and distribute the Company’s FLAIR equine nasal strips throughout953the world. </FONT></P>954955<!-- MARKER FORMAT-SHEET="Head Minor" -->956<H2><FONT SIZE=2>New Products Strategy</FONT></H2>957958<!-- MARKER FORMAT-SHEET="Para In 0" -->959<P><font size=2> The Company is960committed to the future expansion of its product base through the acquisition961and development of unique consumer health care products and technologies that962have good market potential, particularly those that complement the963Company’s drug-free, better breathing platform. The Company routinely964evaluates the merit of product concepts and acquisition opportunities and, from965time to time, may acquire or license the rights to products which it believes966could successfully be sold through the Company’s established distribution967channels. For example, the Company has licensed the Vicks trademarks from The968Proctor & Gamble Company for use with its new product, Breathe Right nasal969strips for colds with Vicks mentholated vapors. The Company also seeks to extend970the Breathe Right brand awareness through licensing to other better breathing971products in new categories. In 2001, the Company entered into an arrangement to972license the Breathe Right name for a new line of premium air filters for home973furnace and air conditioning systems that target allergy sufferers. The Company974intends to launch a new product in connection with the fall 2002 cough/cold season that has975been under development–Breathe Right Snore Relief throat spray. This976product will leverage the Company’s existing position in the better977breathing/snoring product category and complement existing Breathe Right978offerings.</font></P>979980<!-- MARKER FORMAT-SHEET="Para In 0" -->981<P><font size=2> Most, if not982all, of the Company’s current products are regulated to varying degrees by983the FDA and other regulatory bodies. See Item 1, “Government984Regulation.” Products that the Company may acquire or develop in the future985could also be subject to a variety of regulatory requirements. Some products986will require extensive clinical studies and regulatory approvals prior to987marketing and sale. There can be no assurance that any required regulatory988approvals will be obtained or that the Company will market or sell any of these989products.</font></P>990991<!-- MARKER FORMAT-SHEET="Head Minor" -->992<H2><FONT SIZE=2>Domestic Distribution</FONT></H2>993994<!-- MARKER FORMAT-SHEET="Para In 0" -->995<P><font size=2> The Breathe996Right nasal strip, the Breathe Right saline nasal spray and the FiberChoice997chewable fiber tablets are sold primarily as consumer products in mass merchant998chain stores, drug stores, grocery stores, warehouse clubs and military base999stores in the United States. The Company sells its products through a direct1000sales force that concentrates on serving certain key retail accounts as well as1001through a network of independent sales representatives referred to in the1002industry as non-food general merchandise brokers. The Company uses direct sales1003people and broker groups who call on the mass merchant, chain drug, and grocery1004accounts and the wholesalers who serve primarily the independent drug stores and1005many of the grocery stores in the United States.</font></P>10061007<!-- MARKER FORMAT-SHEET="Para In 0" -->1008<P><font size=2> The Breathe1009Right nasal strip is typically positioned in the cough, cold and allergy1010sections of stores because it provides benefits similar to those obtained with1011other decongestant products. The Breathe Right saline nasal spray is also1012usually positioned in the same section of the store as the Breathe Right nasal1013strip since the products are typically used by those suffering from congestion,1014allergies and colds. FiberChoice chewable tablets are positioned in the bulk1015fiber and laxative sections of stores.</font></P>10161017<!-- MARKER FORMAT-SHEET="Para In 0" -->1018<P><font size=2> The1019Company’s retail customers include national chains of mass merchants, drug1020stores and grocery stores such as Wal-Mart, Kmart, Target, Eckerd, Walgreens,1021RiteAid, CVS, and Albertson’s and warehouse clubs such as Sam’s Club1022and Price Costco, as well as regional and independent stores in the same store1023categories. In 2001, one retail chain accounted for approximately 21% of sales.1024The loss of this customer or</font></P>1025<BR><BR><BR>10261027<!-- MARKER FORMAT-SHEET="Para Center" -->1028<P ALIGN="CENTER"><FONT size=2>10</font></P>10291030103110321033103410351036<!-- *************************************************************************** -->1037<!-- MARKER PAGE="sheet: 10; page: 10" -->1038<HR SIZE=5 COLOR=GRAY NOSHADE>10391040104110421043<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1044<P><FONT SIZE=2>any other large retailer would require the Company to replace1045the lost sales through other retail outlets and could disrupt distribution of1046the Company’s products. </FONT></P>10471048<!-- MARKER FORMAT-SHEET="Para In 0" -->1049<P><font size=2> The FLAIR equine1050nasal strip has been historically sold by the Company primarily to trainers and1051owners in the horse racing industry through tack shops, equine catalogs,1052veterinarians and equine supply stores. In March of 2002, the Company1053established an exclusive distribution relationship for its FLAIR equine nasal1054strip product with Merial Limited, an affiliate of Merck & Co., Inc. Pursuant1055to that arrangement, Merial has assumed all direct sales and marketing1056activities for the product.</font></P>10571058<!-- MARKER FORMAT-SHEET="Head Minor" -->1059<H2><FONT SIZE=2>International Distribution</FONT></H2>10601061<!-- MARKER FORMAT-SHEET="Para In 0" -->1062<P><font size=2> From August of10631995 through September of 1999, The 3M Company (“3M”) was the1064exclusive distributor of the Company’s Breathe Right nasal strip products1065outside the United States and Canada. The contractual relationship with 3M1066produced less than anticipated results in international markets. The Company1067believed that international markets required an increased level of focus,1068advertising and promotion to reach their potential. On September 30, 1999, the1069Company and 3M agreed to terminate the existing distribution agreement in a1070manner that enabled the Company to take a direct and immediate role in the sale,1071marketing and distribution of its nasal strip products in international markets.1072As part of the agreement, 3M also agreed not to sell any nasal dilator devices1073for a period of two years, which period ends on June 30, 2002.</font></P>10741075<!-- MARKER FORMAT-SHEET="Para In 0" -->1076<P><font size=2> In 2000, the1077Company established a broad-ranging international distribution system for the1078Breathe Right nasal strip business that consists of both sales representatives1079and reselling distributors. The Company has established relationships with1080distributors in Canada, Australia, Japan, Hong Kong and most of the major1081markets in Europe. The Company is also pursuing additional distribution1082opportunities. Sales are supervised by the Company from its Minnesota1083headquarters and by CNS International, Inc., a wholly-owned domestic subsidiary1084with one business manager in Europe. The business manager supervises and1085coordinates the activities of the distributors and sales representatives in1086Europe. Distributors are appointed largely on an exclusive basis, with1087territories consisting of one or more countries, and it is expected that this1088pattern will continue. The Company retains control over the packaging and1089advertising in all territories. Most shipments are made in bulk, either to1090reselling distributors who package for the local market, or to warehouse1091facilities abroad, where final packaging is arranged by the Company directly1092before shipment to retailers.</font></P>10931094<!-- MARKER FORMAT-SHEET="Head Minor" -->1095<H2><FONT SIZE=2>Manufacturing and Operations</FONT></H2>10961097<!-- MARKER FORMAT-SHEET="Para In 0" -->1098<P><font size=2> The Company1099currently subcontracts with multiple manufacturers to produce Breathe Right1100nasal strips, Breathe Right saline nasal spray, FiberChoice chewable fiber1101tablets and FLAIR equine nasal strips. The Company does no in-house product1102production itself. These contract manufacturers provide full turnkey service and1103ship product to the Company that is completely packaged ready to be sold to1104retailers or provide semi-finished goods to the Company that require final1105packaging.</font></P>11061107<!-- MARKER FORMAT-SHEET="Para In 0" -->1108<P><font size=2> Each of the1109manufacturers makes Breathe Right nasals strips to the Company’s1110specifications using materials specified by the Company. The contract1111manufacturers have all entered into confidentiality agreements with the Company1112to protect the Company’s intellectual property rights. Company quality1113control and operations personnel periodically inspect the contract manufacturers1114in order to observe processes and procedures in an attempt to ensure compliance1115with FDA Good Manufacturing Practice Standards. Finished goods are also1116inspected to ensure that they meet quality requirements. The Company works1117closely with its material vendors and contract manufacturers to reduce scrap and1118waste, improve efficiency and improve yields to reduce the manufacturing costs1119of the product. The Company has received certification that it has established1120and maintains a quality system which meets the requirements of ISO 9001/EN112146001.</font></P>1122<BR><BR><BR>11231124<!-- MARKER FORMAT-SHEET="Para Center" -->1125<P ALIGN="CENTER"><FONT size=2>11</font></P>11261127112811291130113111321133<!-- *************************************************************************** -->1134<!-- MARKER PAGE="sheet: 11; page: 11" -->1135<HR SIZE=5 COLOR=GRAY NOSHADE>11361137113811391140<!-- MARKER FORMAT-SHEET="Para In 0" -->1141<P><font size=2> To ensure1142consistent quality and supply, the Company has multi-year contracts with1143converters that purchase most of the major components for the Breathe Right1144nasal strips directly from 3M. In 2001, the Company entered into a multi-year1145contract with 3M that provides for consistent supply, adherence to1146specifications and pricing. Although similar materials are currently available1147from other suppliers, the Company has historically utilized 3M components in its1148products. Although the Company believes that this relationship will not be1149disrupted or terminated, the inability to obtain sufficient quantities of these1150components or the need to develop alternative sources in a timely and1151cost-effective manner could adversely affect the Company’s operations until1152new sources of these components become available, if at all.</font></P>11531154<!-- MARKER FORMAT-SHEET="Head Minor" -->1155<H2><FONT SIZE=2>Competition</FONT></H2>11561157<!-- MARKER FORMAT-SHEET="Para In 0" -->1158<P><font size=2> <B><I>Breathe1159Right Nasal Strips</I>.</B> The market for decongestant products is highly1160competitive. The Company’s competition in the consumer market for1161decongestant products and other cold, allergy and sinus relief products consists1162primarily of pharmaceutical products, other nasal sprays and external nasal1163dilators, while competition in the snoring remedies market also consists1164primarily of nasal dilators, throat sprays, herbs, supplements and homeopathic1165remedies. Although the Company is currently the leading manufacturer of external1166nasal dilation products, Schering Plough Corp. entered the market in the fourth1167quarter of 1998 with an external nasal dilation device. Other companies have1168also recently entered the nasal dilation market with private label products.1169Many of the companies that compete with the Breathe Right nasal strip and other1170Breathe Right products, including Schering Plough, have significantly greater1171financial and operating resources than the Company. The Company has developed1172and implemented marketing strategies aimed at minimizing the impact of1173competitive products. As a result of these strategies and other steps taken by1174the Company, the Breathe Right nasal strip has maintained approximately 90% of1175the nasal dilator market despite the entry of other competitors into the market1176place.</font></P>11771178<!-- MARKER FORMAT-SHEET="Para In 0" -->1179<P><font size=2> The patents1180owned and licensed by the Company on the Breathe Right nasal strip will limit1181the ability of others to introduce competitive external nasal dilator products1182similar to the Breathe Right nasal strip in the United States. The Company1183intends to aggressively enforce its patent rights covering the Breathe Right1184nasal strip and has engaged in significant litigation to protect its patent1185rights. See Item 1, “Patents, Trademarks and Proprietary Rights.”</font></P>11861187<!-- MARKER FORMAT-SHEET="Para In 0" -->1188<P><font size=2> There can be no1189assurance that potential competitors will not be able to develop nasal dilation1190products which circumvent the Company’s patents. In addition, external1191nasal dilator products compete in the consumer markets with decongestant and1192sinus relief products and snoring remedies in many international markets where1193the Company does not yet have, and may not in the future have, patent protection1194on the Breathe Right nasal strip.</font></P>11951196<!-- MARKER FORMAT-SHEET="Para In 0" -->1197<P><font size=2> <B><I>FiberChoice1198Chewable Fiber Tablet</I>.</B> The market for dietary fiber supplements is1199highly competitive and dominated by large companies with resources greater than1200the Company’s and established brands, such as Metamucil, Citrucel and1201FiberCon. The Company believes that its FiberChoice chewable fiber tablet is a1202unique product with significant market potential that offers consumers an1203effective, convenient and good-tasting alternative to existing products.</font></P>12041205<!-- MARKER FORMAT-SHEET="Para In 0" -->1206<P><font size=2> <B><I>FLAIR1207Equine Nasal Strip</I>.</B> As an alternative to controversial drug therapies,1208the FLAIR equine nasal strip is a unique product which currently has no direct1209competition. The only competitive product currently available is the drug1210Furosemide (“Lasix”). Lasix is intended to alleviate a bleeding1211condition in the lungs of horses called exercise-induced pulmonary hemorrhaging1212(“EIPH”) that often occurs during races, high-performance events and1213strenuous workouts. Unlike Lasix, however, the FLAIR equine nasal strip has not1214been shown to be a race-day, performance enhancing product.</font></P>1215<BR><BR><BR>12161217<!-- MARKER FORMAT-SHEET="Para Center" -->1218<P ALIGN="CENTER"><FONT size=2>12</font></P>121912201221122212231224<!-- *************************************************************************** -->1225<!-- MARKER PAGE="sheet: 12; page: 12" -->1226<HR SIZE=5 COLOR=GRAY NOSHADE>1227122812291230123112321233<!-- MARKER FORMAT-SHEET="Head Minor" -->1234<H2><FONT SIZE=2>Government Regulation</FONT></H2>12351236<!-- MARKER FORMAT-SHEET="Para In 0" -->1237<P><font size=2> As a1238manufacturer and marketer of medical devices, the Company is subject to1239regulation by, among other governmental entities, the FDA and the corresponding1240agencies of the states and foreign countries in which the Company sells its1241products. The Company must comply with a variety of regulations, including the1242FDA’s Good Manufacturing Practice regulations, and is subject to periodic1243inspections by the FDA and applicable state and foreign agencies. If the FDA1244believes that its regulations have not been fulfilled, it may implement1245extensive enforcement powers, including the ability to ban products from the1246market, prohibit the operation of manufacturing facilities and effect recalls of1247products from customer locations. The Company believes that it is currently in1248compliance with applicable FDA regulations.</font></P>12491250<!-- MARKER FORMAT-SHEET="Para In 0" -->1251<P><font size=2> FDA regulations1252classify medical devices into three categories that determine the degree of1253regulatory control to which the manufacturer of the device is subject. In1254general, Class I devices involve compliance with labeling and record keeping1255requirements and are subject to other general controls. Class II devices are1256subject to performance standards in addition to general controls. Class III1257devices are those devices, usually invasive, for which pre-market approval (as1258distinct from pre-market notification) is required before commercial marketing1259to assure product safety and effectiveness.</font></P>12601261<!-- MARKER FORMAT-SHEET="Para In 0" -->1262<P><font size=2> Before a new1263medical device can be introduced into the market, the manufacturer generally1264must obtain FDA clearance through either a 510(k) pre-market notification or a1265pre-market approval application (“PMA”). A 510(k) clearance will be1266granted if the submitted data establish that the proposed device is1267“substantially equivalent” to a legally marketed Class I or II medical1268device, or to a Class III medical device for which the FDA has not called for1269PMAs. The PMA process can be expensive, uncertain and lengthy, frequently1270requiring from one to several years from the date the PMA is accepted. In1271addition to requiring clearance for new products, FDA rules may require a filing1272and waiting period prior to marketing modifications of existing products. The1273Company has received 510(k) approvals to market the Breathe Right nasal strip as1274a device that can (i) temporarily relieve the symptoms of nasal congestion and1275stuffy nose, (ii) eliminate or reduce snoring, (iii) improve nasal breathing by1276reducing nasal airflow resistance, and (iv) temporarily relieve breathing1277difficulties due to a deviated nasal septum. Nasal dilators have been classified1278by the FDA as Class I devices and exempt from pre-market notification.</font></P>12791280<!-- MARKER FORMAT-SHEET="Para In 0" -->1281<P><font size=2> The1282Company’s FiberChoice product is considered to be a dietary supplement and1283is regulated under the Federal Food, Drug, and Cosmetic Act as amended by the1284Dietary Supplement Health and Education Act “DSHEA” of 1994, and under1285the Fair Packaging and Labeling Act. There is generally no requirement that a1286company obtain a license or approval from FDA before marketing dietary1287supplements in the United States. The FDA is developing implementing regulations1288for certain provisions of the DSHEA which will be published as final rules in1289the Federal Register.</font></P>12901291<!-- MARKER FORMAT-SHEET="Para In 0" -->1292<P><font size=2> There is no1293national regulatory body for horse racing. Consequently, approval from state1294horse racing commissions must be obtained on a state-by-state basis before the1295Company’s FLAIR equine nasal strip can be used during horse racing events.1296The Company has been working with state racing commissions to gain approval for1297the use of the FLAIR equine nasal strip in competition. To date, the FLAIR1298equine nasal strip can be used in horse races in most states, including the1299leading racing states of Kentucky, California and Florida, and most of the1300provinces in Canada. The product has not, however, been approved for racing in1301New York or New Jersey.</font></P>13021303<!-- MARKER FORMAT-SHEET="Para In 0" -->1304<P><font size=2> Sales of the1305Company’s products outside the United States are subject to regulatory1306requirements that vary widely from country to country. The Company has selected1307a third party to act as an “Authorized Representative” in the European1308Union. The Company believes that it has the necessary documentation to support1309affixing the “CE” mark, an international symbol of quality and1310compliance with applicable European</font></P>1311<BR><BR><BR>13121313<!-- MARKER FORMAT-SHEET="Para Center" -->1314<P ALIGN="CENTER"><FONT size=2>13</font></P>131513161317131813191320<!-- *************************************************************************** -->1321<!-- MARKER PAGE="sheet: 13; page: 13" -->1322<HR SIZE=5 COLOR=GRAY NOSHADE>1323132413251326132713281329<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1330<P><FONT SIZE=2>medical device directives, to the Company’s Breathe Right1331nasal strips in Europe. Regulatory approvals have also been obtained for the1332Breathe Right nasal strip in Australia and additional approvals in other1333jurisdictions will be sought by the Company as needed for all of its products. </FONT></P>13341335<!-- MARKER FORMAT-SHEET="Para In 0" -->1336<P><font size=2> No assurance can1337be given that the FDA or state or foreign regulatory agencies will give on a1338timely basis, if at all, the requisite approvals or clearances for additional1339applications for the Breathe Right nasal strip or for any of the other1340Company’s products. Moreover, after clearance is given, the Company is1341required to advise the FDA and these other regulatory agencies of modifications1342to its products. These agencies have the power to withdraw the clearance or1343require the Company to change the device or its manufacturing process or1344labeling, to supply additional proof of its safety and effectiveness or to1345recall, repair, replace or refund the cost of the medical device if it is shown1346to be hazardous or defective. The process of obtaining clearance to market1347products is costly and time-consuming and can delay the marketing and sale of1348the Company’s products. Furthermore, federal, state and foreign regulations1349regarding the manufacture and sale of medical devices and other products are1350subject to future change. The Company cannot predict what impact, if any, such1351changes might have on its business.</font></P>13521353<!-- MARKER FORMAT-SHEET="Para In 0" -->1354<P><font size=2> The Company is1355also subject to substantial federal, state and local regulation regarding1356occupational health and safety, environmental protection, hazardous substance1357control and waste management and disposal, among others.</font></P>13581359<!-- MARKER FORMAT-SHEET="Head Minor" -->1360<H2><FONT SIZE=2>Patents, Trademarks and Proprietary Rights</FONT></H2>13611362<!-- MARKER FORMAT-SHEET="Para In 0" -->1363<P><font size=2> The Company has1364registered trademarks, owns two patents and one pending patent application, and1365has a number of patents through licenses which are used in connection with its1366business. Some of these patents and licenses cover significant product1367formulations, methods and designs for the Company’s current and possible1368future products. The Company believes its trademarks are important as protection1369for the Company’s image in the marketplace. The Company’s success is1370and will continue to be dependent upon the existence of and ability to protect1371its patents, trademarks and those under its licenses and the Company intends to1372take such steps as are necessary to protect its intellectual property rights.</font></P>13731374<!-- MARKER FORMAT-SHEET="Para In 0" -->1375<P><font size=2> There can be no1376assurance that the Company’s technology and proprietary rights will not be1377challenged on the grounds that its products infringe on patents, copyrights or1378other proprietary information owned or claimed by others, or that others will1379not successfully utilize part or all of the Company’s technology without1380compensation to the Company. Nor can there be any assurance that others will not1381attempt to challenge the validity or enforceability of the Company’s1382patents and licensed patents on the basis of prior art or introduce competitive1383products. In addition to seeking patent protection for its products, the Company1384also intends to protect its proprietary technologies and proprietary information1385as trade secrets.</font></P>13861387<!-- MARKER FORMAT-SHEET="Para In 0" -->1388<P><font size=2> The Company1389entered into license agreements pursuant to which the Company acquired from the1390licensors the exclusive rights to manufacture and sell the Breathe Right nasal1391strip in its various versions, the FiberChoice chewable fiber tablet and the1392FLAIR equine nasal strip. Specifically, the Company has the exclusive right1393pursuant to those license agreements to manufacture, sell and otherwise practice1394any invention claimed in the licensors’ patents issued in any country,1395including those that issue on pending applications. The Company is obligated to1396pay royalties to the licensors based on sales of the products typically1397including certain minimum royalty amounts in order to maintain its exclusivity.</font></P>13981399<!-- MARKER FORMAT-SHEET="Para In 0" -->1400<P><font size=2> The original1401licensor of the Breathe Right nasal strip has filed patent applications with the1402U.S. Patent and Trademark Office seeking patent protection for different aspects1403of the Breathe Right nasal strip technology. Seven of these patent applications1404have resulted in issued patents in the United States, including one with claims1405that cover the single-body construction of the Breathe Right nasal strip. The1406licensor of the Breathe Right nasal</font></P>1407<BR><BR><BR>14081409<!-- MARKER FORMAT-SHEET="Para Center" -->1410<P ALIGN="CENTER"><FONT size=2>14</font></P>14111412141314141415141614171418<!-- *************************************************************************** -->1419<!-- MARKER PAGE="sheet: 14; page: 14" -->1420<HR SIZE=5 COLOR=GRAY NOSHADE>14211422142314241425<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1426<P><FONT SIZE=2>strip also has one patent application which is currently1427pending. In addition, that licensor has obtained patent protection on the1428Breathe Right nasal strip in several foreign countries and has various1429applications pending which seek further patent protection in these and a number1430of additional countries. The Company, in addition to the two patents and one1431patent application pending in the U.S. mentioned above, has filed a1432corresponding patent application seeking protection in several foreign countries1433to protect certain rights to nasal dilation technology that it acquired. </FONT></P>14341435<!-- MARKER FORMAT-SHEET="Para In 0" -->1436<P><font size=2> The licensor of1437the FiberChoice chewable fiber tablet has filed one patent application with the1438U.S. Patent and Trademark Office seeking patent protection for different aspects1439of this product which remain pending. The later licensor of the Breathe Right1440aromatic nasal strip has filed at least four pending patent applications with1441the U.S. Patent and Trademark Office resulting in three issued patents so far.1442Eight patent applications for the FLAIR equine nasal strip have also been filed1443by the licensor thereof in the U.S. Patent and Trademark Office which have1444resulted in four issued U.S. patents. Each of these licensors has filed1445corresponding patent applications for acquiring patent protection in several1446foreign countries on the licensed products.</font></P>14471448<!-- MARKER FORMAT-SHEET="Para In 0" -->1449<P><font size=2> Although the1450Company believes that its owned and licensed patents on nasal strips will limit1451the ability of others to introduce competitive external nasal dilator products1452in the United States, there can be no assurance that the patents on the Breathe1453Right nasal strip, or any additional patents on this or other products that may1454be issued in the future, if any, will effectively foreclose the development of1455competitive products or that the Company will have sufficient resources to1456pursue enforcement of any patents issued. The Company does, however, intend to1457aggressively enforce the patents covering nasal strips and its other products.1458In order to enforce any patents issued covering nasal strips, including the1459Breathe Right nasal strip, or any of its other products, the Company may have to1460engage in litigation which may result in substantial cost to the Company and1461counterclaims against the Company. Any adverse outcome of such litigation could1462have a negative impact on the Company’s business.</font></P>14631464<!-- MARKER FORMAT-SHEET="Para In 0" -->1465<P><font size=2> The Company has1466engaged in litigation to enforce its patent rights relating to the Breathe Right1467nasal strip. In 1999, the Company brought a suit in federal district court to1468enforce one of the licensed nasal strip patents containing the broadest claims1469and providing the most comprehensive protection. In the course of this suit, the1470defendant requested reexamination in the U.S. Patent and Trademark Office (the1471“Patent Office”) of the Company’s primary licensed patent. On1472September 29, 2000, the Patent Office issued an Office Action in Reexamination1473and rejected certain of the claims. Other claims that were not subject to1474reexamination remain in effect. The Company has joined the licensor in the1475exercise of its right to contest the action of the Patent Office and has1476provided reasons that it believes establish that the claims should not have been1477rejected. The Company and its licensor are also seeking to amend certain claims1478to provide the Company with additional protection under the patent. The final1479outcome of the reexamination by the Patent Office is therefore uncertain.1480Although an adverse ruling from the Patent Office would narrow the protection1481available for nasal dilators and limit the breadth of the Company’s patent1482protection, the Company believes that its current portfolio of both pending1483patent applications and issued patents will enable it to maintain significant1484patent protection for its nasal strip products.</font></P>14851486<!-- MARKER FORMAT-SHEET="Para In 0" -->1487<P><font size=2> The Company has1488registered its Breathe Right and FiberChoice trademarks in the United States and1489in several foreign countries and is seeking further registration of those1490trademarks and other trademarks. The Company has also licensed the right to a1491U.S. trademark registration for the FLAIR equine nasal strip product.</font></P>14921493<!-- MARKER FORMAT-SHEET="Head Minor" -->1494<H2><FONT SIZE=2>Employees</FONT></H2>14951496<!-- MARKER FORMAT-SHEET="Para In 0" -->1497<P><font size=2> At March 18,14982002, the Company had 55 full-time employees and 1 part-time employee, of whom149914 were engaged in operations, 23 in general administration, and 19 in marketing1500and sales. There are no unions</font></P>1501<BR><BR><BR>15021503<!-- MARKER FORMAT-SHEET="Para Center" -->1504<P ALIGN="CENTER"><FONT size=2>15</font></P>1505150615071508150915101511<!-- *************************************************************************** -->1512<!-- MARKER PAGE="sheet: 15; page: 15" -->1513<HR SIZE=5 COLOR=GRAY NOSHADE>151415151516151715181519<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1520<P><FONT SIZE=2>representing Company employees. Relations with its employees are1521believed to be positive and there are no pending or threatened labor employment1522disputes or work interruptions. </FONT></P>15231524<!-- MARKER FORMAT-SHEET="Head Major" -->1525<H1 ALIGN=CENTER><FONT SIZE=2>EXECUTIVE OFFICERS OF THE COMPANY</FONT></H1>15261527<!-- MARKER FORMAT-SHEET="Para In 0" -->1528<P><font size=2> The following1529table sets forth the names and ages of the Company’s Executive Officers1530together with all positions and offices held with the Company by such executive1531officers. Officers are appointed to serve until the meeting of the Board of1532Directors following the next Annual Meeting of Stockholders and until their1533successors have been elected and have qualified.</font></P>153415351536<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="80%">1537<TR VALIGN="BOTTOM">1538<TD align=left><font size=-1> <U>Name and Age</U></font></TD>1539<TD align=left><font size=-1> <U>Office</U></font></TD></TR>1540<tr><td> </td></tr>1541<TR VALIGN="BOTTOM">1542<TD WIDTH="47%" ALIGN="LEFT"><FONT SIZE="2">Daniel E. Cohen (49)</FONT></TD>1543<TD WIDTH="53%" ALIGN="LEFT"><FONT SIZE="2">Chairman of the Board and Director</FONT></TD></TR>1544<tr><td> </td></tr>1545<TR VALIGN="BOTTOM">1546<TD ALIGN="LEFT"><FONT SIZE="2">Marti Morfitt (44)</FONT></TD>1547<TD ALIGN="LEFT"><FONT SIZE="2">Chief Executive Officer and Director</FONT></TD></TR>1548<tr><td> </td></tr>1549<TR VALIGN="TOP">1550<TD ALIGN="LEFT"><FONT SIZE="2">M. W. Anderson, Ph.D (51)</FONT></TD>1551<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Product Development and <BR>Regulatory Affairs</FONT></TD></TR>1552<tr><td> </td></tr>1553<TR VALIGN="TOP">1554<TD ALIGN="LEFT"><FONT SIZE="2">David J. Byrd (48)</FONT></TD>1555<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Finance, Chief Financial<BR> Officer and Treasurer</FONT></TD></TR>1556<tr><td> </td></tr>1557<TR VALIGN="BOTTOM">1558<TD ALIGN="LEFT"><FONT SIZE="2">John J. Keppeler (40)</FONT></TD>1559<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Worldwide Sales</FONT></TD></TR>1560<tr><td> </td></tr>1561<TR VALIGN="BOTTOM">1562<TD ALIGN="LEFT"><FONT SIZE="2">Larry R. Muma (51)</FONT></TD>1563<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Operations</FONT></TD></TR>1564<tr><td> </td></tr>1565<TR VALIGN="BOTTOM">1566<TD ALIGN="LEFT"><FONT SIZE="2">Teri P. Osgood (38)</FONT></TD>1567<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of U.S. Marketing</FONT></TD></TR>1568<tr><td> </td></tr>1569<TR VALIGN="BOTTOM">1570<TD ALIGN="LEFT"><FONT SIZE="2">Carol J. Watzke (54)</FONT></TD>1571<TD ALIGN="LEFT"><FONT SIZE="2">Vice President of Consumer Strategy</FONT></TD></TR>1572</TABLE>15731574<!-- MARKER FORMAT-SHEET="Para In 0" -->1575<P><font size=2> <I>Daniel E.1576Cohen</I> has served as the Company’s Chairman of the Board since 1993, its1577Chief Executive Officer from 1989 to June 2001 and a director since 1982. He1578also served as the Company’s Treasurer from 1982 to March of 1999. Mr.1579Cohen, a founder of the Company, is a medical doctor and board-certified1580neurologist.</font></P>15811582<!-- MARKER FORMAT-SHEET="Para In 0" -->1583<P><font size=2> <I>Marti1584Morfitt</I> has served as the Company’s President and a director since1585March 1998 and its Chief Executive Officer since June 2001. She also served as1586the Company’s Chief Operating Officer from 1998 to June 2001. From1587September of 1982 through February of 1998, Ms. Morfitt served in a series of1588positions of increasing responsibility with The Pillsbury Company, a1589Minneapolis-based manufacturer and distributor of food products, most recently1590serving from May of 1997 to February of 1998 as Vice-President, Meals, and from1591February 1994 to May 1997 as Vice-President, Green Giant Brands. She also serves1592as a director of Graco, Inc., a Minneapolis-based manufacturer of fluid handling1593systems.</font></P>15941595<!-- MARKER FORMAT-SHEET="Para In 0" -->1596<P><font size=2> <I>M. W.1597Anderson, Ph.D</I> has served as the Company’s Vice President of Product1598Development and Regulatory Affairs since 1998,Vice President of Clinical and1599Regulatory Affairs from 1994 to 1998, and Vice President of Research and1600Development from 1990 to 1994. He has served in various other capacities since1601joining the Company in 1984, including Director of Applications Research and1602Director of Research and Development. Prior to joining the Company in 1984, Dr.1603Anderson was an Assistant Professor at the University of Minnesota’s1604College of Pharmacy.</font></P>1605<BR><BR><BR>16061607<!-- MARKER FORMAT-SHEET="Para Center" -->1608<P ALIGN="CENTER"><FONT size=2>16</font></P>16091610161116121613161416151616<!-- *************************************************************************** -->1617<!-- MARKER PAGE="sheet: 16; page: 16" -->1618<HR SIZE=5 COLOR=GRAY NOSHADE>16191620162116221623<!-- MARKER FORMAT-SHEET="Para In 0" -->1624<P><FONT SIZE="2"> <I>David J. Byrd</I> has served1625as the Company's Vice President of Finance and Chief Financial Officer since February of16261996 and its Treasurer since March of 1999. Prior to joining the Company, Mr. Byrd was1627Chief Financial Officer and Treasurer of Medisys, Inc., a health care services company,1628since 1991. From 1975 to 1991, Mr. Byrd was employed by Coopers & Lybrand, where he was a1629partner from 1986 to 1991. Mr. Byrd is a certified public accountant.</FONT></P>16301631<!-- MARKER FORMAT-SHEET="Para In 0" -->1632<P><font size=2> <I>John J.1633Keppeler</I> has served as the Company’s Vice President of Worldwide Sales1634since August of 1999, and has served as the Company’s Vice President of1635Sales from 1998 to 1999. From November of 1986 to June of 1998, Mr. Keppeler1636served in a series of sales and marketing positions of increasing responsibility1637with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of1638food products, most recently serving as Director of Category & Customer1639Development for the Green Giant and Progresso Business.</font></P>16401641<!-- MARKER FORMAT-SHEET="Para In 0" -->1642<P><font size=2> <I>Larry R.1643Muma</I> has served as the Company’s Vice President of Operations since1644January of 2001. From May of 2000 to December of 2000, Mr. Muma served as1645Director of Supply Chain for Novartis, Inc., a worldwide manufacturer and1646distributor of health care and pharmaceutical products. From February of 1992 to1647April of 2000, Mr. Muma served in various operations positions of increasing1648responsibility with The Pillsbury Company, a Minneapolis-based manufacturer and1649distributor of food products, serving from February 1994 to April of 1999 as1650Vice President of Operations for Pillsbury North America and most recently from1651April of 1999 to April of 2000 as Vice President of Operations Frozen Division.</font></P>16521653<!-- MARKER FORMAT-SHEET="Para In 0" -->1654<P><font size=2> <I>Teri P.1655Osgood</I> has served as the Company’s Vice President of U.S. Marketing1656since December of 1999, of the Breathe Right Brand from April to December of16571999, and has served as the Company’s Vice President of New Business1658Commercialization from 1998 to April of 1999. From August of 1990 to July of16591998, Ms. Osgood served in a series of positions of increasing responsibility1660with The Pillsbury Company, a Minneapolis- based manufacturer and distributor of1661food products, most recently serving from May of 1997 to July of 1998 as1662Business Team Leader for Old El Paso, and from October of 1995 to May of 1997 as1663Business Team Leader for Pizza Snacks. Prior to joining Pillsbury, Ms. Osgood1664was employed in marketing by the Kimberly Clark Corp., from 1988 to 1990.</font></P>16651666<!-- MARKER FORMAT-SHEET="Para In 0" -->1667<P><font size=2> <I>Carol J.1668Watzke</I> has served as the Company’s Vice President of Consumer Strategy1669since July of 1998. Prior to joining the Company, Ms. Watzke served in a series1670of positions of increasing responsibility since 1974 with The Pillsbury Company,1671a Minneapolis-based manufacturer and distributor of food products, most recently1672serving as Consumer Insights Director from May of 1997 to July of 1998 and as1673Market Research Director, Green Giant Brands, from 1994 to 1997.</font></P>16741675<!-- MARKER FORMAT-SHEET="Head Minor" -->1676<H2><FONT SIZE="2"><U>Item 2. PROPERTIES</U></FONT></H2>16771678<!-- MARKER FORMAT-SHEET="Para In 0" -->1679<P><font size=2> The Company leases approximately168073,000 square feet of office, manufacturing and warehouse space in Eden Prairie,1681Minnesota. The lease expires in November of 2010 and contains a renewal option.</FONT> </P>16821683<!-- MARKER FORMAT-SHEET="Head Minor" -->1684<H2><FONT SIZE="2"><U>Item 3. LEGAL PROCEEDINGS</U></FONT></H2>16851686<!-- MARKER FORMAT-SHEET="Para In 0" -->1687<P><font size=2> None.</font></P>16881689<!-- MARKER FORMAT-SHEET="Head Minor" -->1690<H2><FONT SIZE="2"><U>Item 4. SUBMISSION OF MATTERS TO A VOTE OF1691SECURITY HOLDERS</U></FONT></H2>16921693<!-- MARKER FORMAT-SHEET="Para In 0" -->1694<P><font size=2> None.</font></P>16951696<BR><BR><BR>169716981699<!-- MARKER FORMAT-SHEET="Para Center" -->1700<P ALIGN="CENTER"><FONT size=2>17</font></P>1701170217031704170517061707<!-- *************************************************************************** -->1708<!-- MARKER PAGE="sheet: 17; page: 17" -->1709<HR SIZE=5 COLOR=GRAY NOSHADE>171017111712171317141715<!-- MARKER FORMAT-SHEET="Head Major" -->1716<H1 ALIGN=CENTER><FONT SIZE=2>PART II</FONT></H1>17171718<!-- MARKER FORMAT-SHEET="Head Minor" -->1719<H2><FONT SIZE="2"><U>Item 5. MARKET FOR REGISTRANT’S COMMON1720EQUITY AND RELATED STOCKHOLDER MATTERS</U></FONT></H2>172117221723<!-- MARKER FORMAT-SHEET="Head Minor" -->1724<H2><FONT SIZE=2>Market Information</FONT></H2>17251726<!-- MARKER FORMAT-SHEET="Para" -->1727<P ALIGN="LEFT"><FONT SIZE=2> The Company’s Common Stock1728has been traded on The Nasdaq Stock Market under the symbol “CNXS”1729since April 8, 1994. The following table sets forth the high and low last sale1730prices of the Company’s Common Stock for the period indicated. </FONT></P>17311732<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="85%">1733<TR VALIGN="BOTTOM">1734<TH align=left><FONT SIZE="2">Fiscal Year Ended December 31, 2001</FONT> </TH>1735<TH><FONT SIZE="2"><U>High</U></FONT></TH>1736<TH><FONT SIZE="2"><U>Low</U></FONT></TH></TR>1737<TR VALIGN="BOTTOM">1738<TD WIDTH="74%" ALIGN="LEFT"><FONT SIZE="2">First Quarter.......................................................................................</FONT></TD>1739<TD WIDTH="16%" ALIGN="center"><FONT SIZE="2">5.125 </FONT></TD>1740<TD WIDTH="10%" ALIGN="center"><FONT SIZE="2">3.500 </FONT></TD></TR>1741<TR VALIGN="BOTTOM">1742<TD ALIGN="LEFT"><FONT SIZE="2">Second Quarter...................................................................................</FONT></TD>1743<TD ALIGN="center"><FONT SIZE="2">6.080 </FONT></TD>1744<TD ALIGN="center"><FONT SIZE="2">3.250 </FONT></TD></TR>1745<TR VALIGN="BOTTOM">1746<TD ALIGN="LEFT"><FONT SIZE="2">Third Quarter......................................................................................</FONT></TD>1747<TD ALIGN="center"><FONT SIZE="2">5.130 </FONT></TD>1748<TD ALIGN="center"><FONT SIZE="2">3.150 </FONT></TD></TR>1749<TR VALIGN="BOTTOM">1750<TD ALIGN="LEFT"><FONT SIZE="2">Fourth Quarter....................................................................................</FONT></TD>1751<TD ALIGN="center"><FONT SIZE="2">5.950 </FONT></TD>1752<TD ALIGN="center"><FONT SIZE="2">3.660 </FONT></TD></TR>1753</TABLE>17541755<BR><BR>1756<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="85%">1757<TR VALIGN="BOTTOM">1758<TH align=left><FONT SIZE="2">Fiscal Year Ended December 31, 2000</FONT> </TH>1759<TH><FONT SIZE="2"><U>High</U></FONT></TH>1760<TH><FONT SIZE="2"><U>Low</U></FONT></TH></TR>1761<TR VALIGN="BOTTOM">1762<TD WIDTH="74%" ALIGN="LEFT"><FONT SIZE="2">First Quarter........................................................................................</FONT></TD>1763<TD WIDTH="16%" ALIGN="CENTER"><FONT SIZE="2">7.109</FONT></TD>1764<TD WIDTH="10%" ALIGN="CENTER"><FONT SIZE="2">3.938</FONT></TD></TR>1765<TR VALIGN="BOTTOM">1766<TD ALIGN="LEFT"><FONT SIZE="2">Second Quarter...................................................................................</FONT></TD>1767<TD ALIGN="CENTER"><FONT SIZE="2">5.000</FONT></TD>1768<TD ALIGN="CENTER"><FONT SIZE="2">3.500</FONT></TD></TR>1769<TR VALIGN="BOTTOM">1770<TD ALIGN="LEFT"><FONT SIZE="2">Third Quarter......................................................................................</FONT></TD>1771<TD ALIGN="CENTER"><FONT SIZE="2">5.500</FONT></TD>1772<TD ALIGN="CENTER"><FONT SIZE="2">3.906</FONT></TD></TR>1773<TR VALIGN="BOTTOM">1774<TD ALIGN="LEFT"><FONT SIZE="2">Fourth Quarter....................................................................................</FONT></TD>1775<TD ALIGN="CENTER"><FONT SIZE="2">4.125</FONT></TD>1776<TD ALIGN="CENTER"><FONT SIZE="2">3.125</FONT></TD></TR>1777</TABLE>17781779<!-- MARKER FORMAT-SHEET="Para" -->1780<P ALIGN="LEFT"><FONT SIZE=2> On March 18, 2002, the last sale1781price of the Common Stock was $6.15 per share. </FONT></P>17821783<!-- MARKER FORMAT-SHEET="Head Minor" -->1784<H2><FONT SIZE=2>Shareholders</FONT></H2>17851786<!-- MARKER FORMAT-SHEET="Para" -->1787<P ALIGN="LEFT"><FONT SIZE=2> As of March 18, 2002, there were approximately1788700 owners of record of Common Stock and an estimated 7,000 beneficial holders1789whose shares were registered in the names of nominees. </FONT></P>17901791<!-- MARKER FORMAT-SHEET="Head Minor" -->1792<H2><FONT SIZE=2>Dividends</FONT></H2>17931794<!-- MARKER FORMAT-SHEET="Para" -->1795<P ALIGN="LEFT"><FONT SIZE=2> The Company has never paid any1796dividends on its Common Stock. The Company currently intends to retain any1797earnings for use in its operations and does not anticipate paying cash dividends1798in the foreseeable future. The payment of dividends, if any, in the future will1799be at the discretion of the Board of Directors and will depend upon, among other1800things, future earnings, capital requirements, restrictions in future financing1801agreements, the general financial condition of the Company and general business1802considerations. </FONT></P>1803<BR><BR><BR>18041805<!-- MARKER FORMAT-SHEET="Para Center" -->1806<P ALIGN="CENTER"><FONT size=2>18</font></P>1807180818091810181118121813<!-- *************************************************************************** -->1814<!-- MARKER PAGE="sheet: 18; page: 18" -->1815<HR SIZE=5 COLOR=GRAY NOSHADE>181618171818181918201821<!-- MARKER FORMAT-SHEET="Head Minor" -->1822<H2><FONT SIZE="2"><U>Item 6. SELECTED FINANCIAL DATA</U></FONT></H2>18231824<!-- MARKER FORMAT-SHEET="Para" -->1825<P ALIGN="LEFT"><FONT SIZE=2> The following selected financial1826data should be read in conjunction with the Company’s Consolidated1827Financial Statements and Notes thereto together with the “Management’s1828Discussion and Analysis of Financial Condition and Results of Operations,”1829all of which are included elsewhere in this Report. The Consolidated Statements1830of Operations and Balance Sheet data presented below as of and for the Years1831Ended December 31, 1999 through December 31, 2001 have been derived from the1832Company’s Consolidated Financial Statements included elsewhere in this1833Report, which have been audited by KPMG LLP, independent certified public1834accountants.</FONT></P>1835183618371838<!-- MARKER FORMAT-SHEET="Para Center" -->1839<P ALIGN="CENTER"><FONT SIZE="2"><B>FINANCIAL HIGHLIGHTS</B><BR> (In thousands, except per share1840amounts)</FONT></P>18411842184318441845<PRE><FONT SIZE=-1>1846<B>Years Ended December 31,1847----------------------------------------------------------------------18482001 2000 1999 1998 1997</B>1849---------- ------------ ------------ ------------ ------------18501851Net sales.......................... $ 83,934 $ 68,892 $ 46,050 $ 53,623 $ 66,9571852Operating income (loss)............ (1,225) (17,843) (18,696) 701 9,6441853Net income (loss).................. 81 (15,660) (13,756) 2,982 8,7701854Diluted net income (loss) per share 0.01 (1.09) (0.89) 0.16 0.4418551856Working capital.................... $ 32,712 $ 32,507 $ 50,183 $ 72,025 $ 76,9191857Total assets....................... 50,618 56,344 65,337 84,963 88,4951858Stockholders’ equity............... 36,612 36,937 53,584 75,866 80,6451859</FONT></PRE>186018611862<BR><BR><BR><BR><BR><BR>186318641865186618671868<!-- MARKER FORMAT-SHEET="Para Center" -->1869<P ALIGN="CENTER"><FONT size=2>19</font></P>1870187118721873187418751876<!-- *************************************************************************** -->1877<!-- MARKER PAGE="sheet: 19; page: 19" -->1878<HR SIZE=5 COLOR=GRAY NOSHADE>18791880188118821883<!-- MARKER FORMAT-SHEET="Head Minor" -->1884<H2><FONT SIZE="2"><U>Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS1885OF FINANCIAL CONDITION AND </U><BR> <u>RESULTS OF OPERATIONS</U></FONT></H2>188618871888<!-- MARKER FORMAT-SHEET="Para In 0" -->1889<P><font size=2> The following1890discussion of the financial condition and results of operations should be read1891in conjunction with the Company’s audited consolidated financial statements1892and notes thereto appearing elsewhere in this Annual Report. In the opinion of1893the Company’s management, the quarterly unaudited information set forth1894below has been prepared on the same basis as the audited financial information,1895and includes all adjustments (consisting only of normal, recurring adjustments)1896necessary to present this information fairly when read in conjunction with the1897Company’s consolidated financial statements and notes thereto.</font></P>18981899<!-- MARKER FORMAT-SHEET="Head Minor" -->1900<H2><FONT SIZE=2>Overview</FONT></H2>19011902<!-- MARKER FORMAT-SHEET="Para In 0" -->1903<P><font size=2> The Company was1904founded in 1982. From 1987 until 1995, the Company designed, manufactured and1905marketed computer-based diagnostic devices for sleep disorders. In 1995, the1906Company divested itself of the assets related to its sleep disorders business to1907focus on the Breathe Right® nasal strip.</font></P>19081909<!-- MARKER FORMAT-SHEET="Para In 0" -->1910<P><font size=2> The Company1911obtained the exclusive license to manufacture and sell the Breathe Right nasal1912strip in 1992 and received FDA clearance in October 1993 to market the Breathe1913Right nasal strip as a product that improves nasal breathing. The Company has1914also received FDA clearance to market the Breathe Right nasal strip for the1915reduction or elimination of snoring, for the temporary relief of nasal1916congestion and for the temporary relief of breathing difficulties due to a1917deviated nasal septum.</font></P>19181919<!-- MARKER FORMAT-SHEET="Para In 0" -->1920<P><font size=2> In August 1995,1921the Company signed an exclusive international distribution agreement with the 3M1922Company (“3M”) to market Breathe Right nasal strips outside the U.S.1923and Canada. On September 30, 1999, the Company and 3M amended the distribution1924agreement in a manner that enabled the Company to regain control of the1925marketing, sales and distribution of Breathe Right nasal strips in international1926markets. In exchange for the one-time contract termination fee the international1927distribution agreement with 3M terminated on June 30, 2000. During 2000, the1928Company established an international distribution network that consists of both1929sales representatives and reselling distributors. The Company has reintroduced1930nasal strips in Europe, Japan and Australia.</font></P>19311932<!-- MARKER FORMAT-SHEET="Para In 0" -->1933<P><font size=2> In July 1996,1934U.S. Utility Patents were issued covering the basic invention of the Breathe1935Right nasal strip and additional elements incorporated in the product. During19361997, the Company became aware of a foreign reference to a nasal dilator, not1937commercially available. During 2000, the U.S. Patent and Trademark Office1938(“Patent Office”) reexamined the Company’s primary licensed1939patent and rejected certain claims. The Company has joined its licensor in the1940exercise of its right to contest the action of the Patent Office. The Company1941and its licensor have amended and are also seeking to amend certain claims to1942provide the Company with additional protection under the patent. The final1943outcome of the reexamination is uncertain. Although an adverse ruling could1944narrow the range of protection available for nasal dilators and limit the1945breadth of the Company’s patent protection, the Company believes that its1946current portfolio of both pending patent applications and issued patents will1947enable it to maintain significant patent protection for its nasal strip1948products.</font></P>19491950<!-- MARKER FORMAT-SHEET="Para In 0" -->1951<P><font size=2> During 1998, the Company1952strengthened its management team to add consumer packaged goods and new products1953experience and organized into focused business teams. The Company</font></P>1954<BR><BR><BR>19551956<!-- MARKER FORMAT-SHEET="Para Center" -->1957<P ALIGN="CENTER"><FONT size=2>20</font></P>195819591960196119621963<!-- *************************************************************************** -->1964<!-- MARKER PAGE="sheet: 20; page: 20" -->1965<HR SIZE=5 COLOR=GRAY NOSHADE>196619671968<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->1969<P><FONT SIZE=2>completed positioning research work to expand the Breathe Right1970brand and developed a road map for new product development. During 1999 and19712000, the Company invested aggressively in marketing, selling and product1972development expenses to build the Breathe Right brand and launch additional1973products. </FONT></P>19741975<!-- MARKER FORMAT-SHEET="Para In 0" -->1976<P><font size=2> In 2000, the1977Company expanded its Breathe Right product line to include nasal strips for1978colds with Vicks® mentholated vapors that are sized for the entire family and1979nasal strips for children that are available in multiple colors. Breathe Right1980nasal strips for colds with mentholated vapors were introduced in selected1981overseas markets in 2001.</font></P>19821983<!-- MARKER FORMAT-SHEET="Para In 0" -->1984<P><font size=2> During 2000, the1985Company launched FiberChoice® chewable fiber tablets. The tablets are1986positioned in the bulk fiber supplement market and give the Company an entry1987into the digestive health products market. FiberChoice tablets can be taken1988without water and have been clinically proven to be as effective as powder1989alternatives.</font></P>19901991<!-- MARKER FORMAT-SHEET="Para In 0" -->1992<P><font size=2> In 2001, the1993Company announced a plan to streamline and realign the Company’s resources1994to better match its strategic goals and to focus on building the core1995businesses. The Company recorded a special charge related to costs associated1996with this plan. Approximately 25% of the workforce, from throughout the1997organization, were eliminated. These cost-cutting actions are expected to result1998in annual savings of approximately $2 to $2.5 million. Cost savings relating to1999this plan were realized beginning in July of 2001.</font></P>20002001<!-- MARKER FORMAT-SHEET="Para In 0" -->2002<P><font size=2> In 2002, the2003Company changed its fiscal year-end from December 31 to March 31. The first2004period to be reported in 2002 will be a three-month stub period ending March 31,20052002. Fiscal 2003 will be from April 1, 2002 through March 31, 2003.</font></P>20062007<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2008<P><FONT SIZE="2"><B>Accounting Policies </B></FONT></P>200920102011<!-- MARKER FORMAT-SHEET="Para In 0" -->2012<P><font size=2> In preparing the2013consolidated financial statements in conformity with accounting principles2014generally accepted in the United States of America, management must make2015decisions which impact the reported amounts and the related disclosures. Such2016decisions include the selection of the appropriate accounting principles to be2017applied and the assumptions on which to base accounting estimates. In reaching2018such decisions, management applies judgment based on its understanding and2019analysis of the relevant circumstances. Note 1 to the consolidated financial2020statements provides a summary of the significant accounting policies followed in2021the preparation of the financial statements.</font></P>20222023<!-- MARKER FORMAT-SHEET="Para In 0" -->2024<P><font size=2> The2025Company’s critical accounting policies include the following:</font></P>20262027<!-- MARKER FORMAT-SHEET="Para In 0" -->2028<P><FONT SIZE="2"> <I>Sales Returns2029and Other Allowances, and Allowance for Doubtful Accounts</I>. Revenue from sales is2030recognized at the time products are shipped less estimated sales returns and2031other allowances. Management must make estimates of potential future product2032returns and other allowances related to current period revenue. Management2033analyzes historical returns, current trends, and changes in customer and2034consumer demand when evaluating the adequacy of the sales returns and other2035allowances. The Company has established a reserve of $1.2 million for future2036sales returns and other allowances as of December 31, 2001. Similarly,2037management must make estimates of the uncollectability of accounts receivables.2038Management specifically analyzes customer account balances, historical bad2039debts, current economic trends and changes in the timing of customer payments.2040The balance of accounts receivable was $12.3 million net of the allowance for2041doubtful accounts of $500,000 as of December 31, 2001.</FONT></P>2042<BR><BR><BR>20432044<!-- MARKER FORMAT-SHEET="Para Center" -->2045<P ALIGN="CENTER"><FONT size=2>21</font></P>204620472048204920502051<!-- *************************************************************************** -->2052<!-- MARKER PAGE="sheet: 21; page: 21" -->2053<HR SIZE=5 COLOR=GRAY NOSHADE>205420552056<!-- MARKER FORMAT-SHEET="Para In 0" -->2057<P><FONT SIZE="2"> <I>Inventory2058Valuation</I>. Inventory is valued at lower of cost, determined on a first in first2059out basis, or market. The Company analyzes the cost and the market value of2060inventory items and establishes the appropriate valuation reserves. The Company2061has established a reserve of $326,000 as of December 31, 2001. Management2062believes that the inventory valuation results in carrying inventory at the lower2063of cost or market.</FONT></P>20642065<!-- MARKER FORMAT-SHEET="Para In 0" -->2066<P><FONT SIZE="2"> <I>Accounting for2067Income Taxes</I>. As part of the process of preparing financial statements, the2068Company is required to estimate income taxes, both state and federal. This2069process involves management estimating the actual current tax exposure together2070with assessing temporary differences resulting from different treatment for tax2071and accounting purposes. These differences result in deferred tax assets and2072liabilities, which are included within the consolidated balance sheet.2073Management must then assess the likelihood that deferred tax assets will be2074utilized to offset future taxable income during the periods in which these2075temporary differences are deductible. Based on the level of historical taxable2076income and projections of future taxable income for the periods in which the2077deferred tax assets are deductible, management does not believe that it is more2078likely than not the Company will realize the benefits of these deductible2079differences. Accordingly, the Company has provided a valuation allowance of $9.32080million against the net deferred tax assets as of December 31, 2001.</FONT></P>20812082<!-- MARKER FORMAT-SHEET="Para In 0" -->2083<P><FONT SIZE="2"> <I>Valuation of2084Product Rights.</I> Management assesses the impairment of product rights whenever2085events or changes in circumstances indicate that the carrying value may not be2086recoverable. Factors that are considered important for the assessment include2087significant underperformance of a product line relative to projected or2088historical results, significant change in the market in relation to competitive2089products, significant negative industry or economic trends. Management currently2090does not believe that it is necessary to record an impairment charge at this2091time and that the carrying value of these assets will be recoverable.</FONT></P>20922093<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2094<P><FONT SIZE="2"><B>Operating Results </B></FONT></P>209520962097<!-- MARKER FORMAT-SHEET="Para In 0" -->2098<P><font size=2> The tables below2099set forth certain selected financial information of the Company and the2100percentage of net sales represented by certain items included in the2101Company’s statements of operations for the periods indicated.</font></P>21022103<BR><BR><BR>21042105<!-- MARKER FORMAT-SHEET="Head Major" -->2106<p ALIGN=CENTER><FONT SIZE=2>22</FONT></p>210721082109211021112112<!-- *************************************************************************** -->2113<!-- MARKER PAGE="sheet: 22; page: 22" -->2114<HR SIZE=5 COLOR=GRAY NOSHADE>211521162117<!-- MARKER FORMAT-SHEET="Para In 0" -->2118<P><font size=2> Certain2119prior year amounts have been reclassified to conform to the current2120period’s presentation. These reclassifications had no impact on the2121operating loss or net loss for 2000 and 1999.</FONT></P>21222123<DIV><FONT SIZE=-6>2124<PRE>2125THREE MONTHS ENDED THREE MONTHS ENDED2126--------------------------------------------- YEAR ----------------------------------------------- YEAR2127ENDED ENDED2128MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,21292001 2001 2001 2001 2001 2001 2001 2001 2001 20012130----------- ----------- --------- ----------- ---------- ----------- ----------- ----------- ----------- -----------2131(IN THOUSANDS)21322133Domestic net sales ......... $ 22,284 $ 12,540 $14,847 $18,041 $ 67,7122134International net sales .... 4,828 2,936 3,398 5,060 16,2222135-------- -------- ------- ------- --------2136Net sales ................. 27,112 15,476 18,245 23,101 83,934 100.0% 100.0% 100.0% 100.0% 100.0%2137Cost of goods sold ......... 8,706 5,557 6,059 7,376 27,698 32.1 35.9 33.2 31.9 33.02138-------- -------- ------- ------- -------- ------- ------- ---- ----- -----2139Gross profit ............. 18,406 9,919 12,186 15,725 56,236 67.9 64.1 66.8 68.1 67.02140-------- -------- ------- ------- -------- ------- ------- ---- ----- -----2141Operating expenses:2142Advertising and promotion . 17,579 8,635 4,371 11,363 41,948 64.8 55.8 24.0 49.2 50.02143Selling, general and2144administrative ........... 4,766 3,519 3,247 3,051 14,583 17.6 22.7 17.8 13.2 17.42145Special charges ........... 0 1,100 0 (170) 930 0.0 7.1 0.0 (0.7) 1.12146-------- -------- ------- ------- -------- ------- ------- ---- ----- -----2147Total operating expenses . 22,345 13,254 7,618 14,244 57,461 82.4 85.6 41.8 61.7 68.52148-------- -------- ------- ------- -------- ------- ------- ---- ----- -----2149Operating income (loss) .. (3,939) (3,335) 4,568 1,481 (1,225) (14.5) (21.5) 25.0 6.4 (1.5)2150Interest income ............ 362 345 269 330 1,306 1.3 2.2 1.5 1.4 1.62151-------- -------- ------- ------- -------- ------- ------- ---- ----- -----2152Income (loss) before2153income taxes ............ $ (3,577) $ (2,990) $ 4,837 $ 1,811 $ 81 (13.2)% (19.3)% 26.5% 7.8% 0.1%2154======== ======== ======= ======= ======== ======= ======= ==== ===== =====215521562157THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR2158----------------------------------------------- ENDED ----------------------------------------------- ENDED2159MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,21602000 2000 2000 2000 2000 2000 2000 2000 2000 20002161----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- -----------2162(IN THOUSANDS)21632164Domestic net sales ......... $ 14,338 $ 12,697 $16,618 $ 19,082 $ 62,7352165International net sales .... 296 606 2,603 2,652 6,1572166-------- -------- ------- -------- ---------2167Net sales ................. 14,634 13,303 19,221 21,734 68,892 100.0% 100.0% 100.0% 100.0% 100.0%2168Cost of goods sold ......... 4,846 5,110 6,875 8,076 24,907 33.1 38.4 35.8 37.2 36.22169-------- -------- ------- -------- --------- ------- ----- ----- ------- -------2170Gross profit ............. 9,788 8,193 12,346 13,658 43,985 66.9 61.6 64.2 62.8 63.82171-------- -------- ------- -------- --------- ------- ----- ----- ------- -------2172Operating expenses:2173Advertising and promotion . 12,058 5,998 9,490 19,148 46,694 82.4 45.1 49.4 88.1 67.82174Selling, general and2175administrative ........... 3,915 3,470 3,756 3,993 15,134 26.8 26.1 19.5 18.4 22.02176Special charges ........... 0 0 0 0 0 0.0 0.0 0.0 0.0 0.02177-------- -------- ------- -------- --------- ------- ----- ----- ------- -------2178Total operating expenses . 15,973 9,468 13,246 23,141 61,828 109.1 71.2 68.9 106.5 89.72179-------- -------- ------- -------- --------- ------- ----- ----- ------- -------2180Operating loss ........... (6,185) (1,275) (900) (9,483) (17,843) (42.3) (9.6) (4.7) (43.6) (25.9)2181Interest income ............ 498 566 507 612 2,183 3.4 4.3 2.6 2.8 3.22182-------- -------- ------- -------- --------- ------- ----- ----- ------- -------2183Loss before income taxes . $ (5,687) $ (709) $ (393) $ (8,871) $ (15,660) (38.9)% (5.3)% (2.0)% (40.8)% (22.7)%2184======== ======== ======= ======== ========= ======= ===== ===== ======= =======21852186218721882189THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR2190----------------------------------------------- ENDED ----------------------------------------------- ENDED2191MAR 31, JUN 30, SEP 30, DEC 31, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, DEC 31,21921999 1999 1999 1999 1999 1999 1999 1999 1999 19992193----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- -----------2194(IN THOUSANDS)21952196Domestic net sales ......... $ 11,811 $ 7,994 $ 10,151 $ 15,106 $ 45,0622197International net sales .... 123 191 312 362 9882198-------- --------- -------- -------- ---------2199Net sales ................. 11,934 8,185 10,463 15,468 46,050 100.0% 100.0% 100.0% 100.0% 100.0%2200Cost of goods sold ......... 4,688 3,629 3,992 6,049 18,358 39.3 44.3 38.2 39.1 39.92201-------- --------- -------- -------- --------- ------- ------- ------- ------- -------2202Gross profit ............. 7,246 4,556 6,471 9,419 27,692 60.7 55.7 61.8 60.9 60.12203-------- --------- -------- -------- --------- ------- ------- ------- ------- -------2204Operating expenses:2205Advertising and promotion . 9,749 2,864 2,915 12,576 28,104 81.7 35.0 27.9 81.3 61.02206Selling, general and2207administrative ........... 3,463 3,164 3,452 1,859 11,938 29.0 38.7 33.0 12.0 25.92208Special charges ........... 0 0 6,345 0 6,345 0.0 0.0 60.6 0.0 13.82209-------- --------- -------- -------- --------- ------- ------- ------- ------- -------2210Total operating expenses . 13,212 6,028 12,712 14,435 46,387 110.7 73.6 121.5 93.3 100.72211-------- --------- -------- -------- --------- ------- ------- ------- ------- -------2212Operating loss ........... (5,966) (1,472) (6,241) (5,016) (18,695) (50.0) (18.0) (59.6) (32.4) (40.6)2213Interest income ............ 899 698 643 598 2,838 7.5 8.5 6.1 3.9 6.22214-------- --------- -------- -------- --------- ------- ------- ------- ------- -------2215Loss before income taxes . $ (5,067) $ (774) $ (5,598) $ (4,418) $ (15,857) (42.5)% ( 9.5)% (53.5)% (28.6)% (34.4)%2216======== ========= ======== ======== ========= ======= ======= ======= ======= =======2217</PRE>2218</font></DIV>2219<BR><BR><BR>22202221<!-- MARKER FORMAT-SHEET="Para Center" -->2222<P ALIGN="CENTER"><FONT size=2>23</font></P>222322242225222622272228<!-- *************************************************************************** -->2229<!-- MARKER PAGE="sheet: 23; page: 23" -->2230<HR SIZE=5 COLOR=GRAY NOSHADE>22312232223322342235<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2236<P><FONT SIZE="2"><B>2001 Compared to 2000 </B></FONT></P>223722382239<!-- MARKER FORMAT-SHEET="Para In 0" -->2240<P><FONT SIZE="2"> <I>Net Sales. </I>Net2241sales for 2001 of $83.9 million showed a 21.8% increase over 2000 sales of $68.92242million. The sales increase is the result of growth in all areas of the2243Company’s business. Domestic sales of Breathe Right nasal strips grew to2244$59.8 million, representing an increase of 8.7% over 2000 sales of $55.02245million. FiberChoice tablet sales for 2001 grew to $7.9 million from $7.32246million for the previous year, representing an increase of 8.2%, primarily as2247the result of a full year of sales activity.</FONT></P>22482249<!-- MARKER FORMAT-SHEET="Para In 0" -->2250<P><font size=2> International2251sales increased by 161.3% to $16.2 million dollars compared to 2000 sales of2252$6.2 million. This increase was the result of a full year of distribution in2253Japan, Europe and Australia as well as the launch of Breathe Right strips for2254colds with mentholated vapors in selected countries.</font></P>22552256<!-- MARKER FORMAT-SHEET="Para In 0" -->2257<P><font size=2> The Company has2258experienced in the past, and expects that it will continue to experience in the2259future, quarterly fluctuations in both domestic and international sales and2260earnings. These fluctuations are due in part to advertising levels and2261seasonality of sales as described below, as well as increases and decreases in2262purchases by distributors and retailers in anticipation of future demand by2263consumers.</font></P>22642265<!-- MARKER FORMAT-SHEET="Para In 0" -->2266<P><FONT SIZE="2"> <I>Gross Profit.</I>2267Gross profit was $56.2 million for 2001 compared to $44.0 million for 2000.2268Gross profit as a percentage of net sales increased to 67.0% for 2001 compared2269to 63.8% for 2000. Gross profit in 2000 was unfavorably impacted by the lower2270gross profit on 10-count FiberChoice chewable tablets, disposal of an excess2271inventory of pillow covers and higher costs associated with expediting inventory2272purchases and deliveries.</FONT></P>22732274<!-- MARKER FORMAT-SHEET="Para In 0" -->2275<P><FONT SIZE="2"> <I>Advertising and2276Promotion Expenses.</I> Advertising and promotion expenses were $41.9 million for22772001 compared to $46.7 million for 2000. Advertising and promotion expenses as a2278percentage of net sales decreased to 50.0% in 2001 from 67.8% in 2000. This2279decrease in spending rate was the result of a planned lower support level for2280FiberChoice tablets the year following its introduction and the elimination of2281less effective expenditures for the Breathe Right brand.</FONT></P>22822283<!-- MARKER FORMAT-SHEET="Para In 0" -->2284<P><FONT SIZE="2"> <I>Selling, General2285and Administrative Expenses.</I> Selling, general and administrative expenses were2286$14.6 million for 2001 compared to $15.1 million for 2000. Selling, general and2287administrative expenses as a percentage of net sales decreased to 17.4% compared2288to 22.0% for 2000. This decrease was primarily the result of the corporate2289restructure that included a workforce reduction and that enabled the Company to2290streamline its resources to focus on building the core businesses.</FONT></P>22912292<!-- MARKER FORMAT-SHEET="Para In 0" -->2293<P><FONT SIZE="2"> <I>Special Charges.</I>2294The Company recorded a special charge of $930,000 in 2001 for the costs of2295implementing the Company’s corporate restructuring plan to streamline and2296realign the Company’s resources. The charge was primarily for severance2297benefits.</FONT></P>22982299<!-- MARKER FORMAT-SHEET="Para In 0" -->2300<P><FONT SIZE="2"> <I>Investment2301Income.</I> Investment income was $1.3 million for 2001 compared to $2.2 million for23022000. The decrease in investment income was the result of a decrease in funds2303invested and market interest rates.</FONT></P>23042305<!-- MARKER FORMAT-SHEET="Para In 0" -->2306<P><FONT SIZE="2"> <I>Income Tax Benefit2307(Expense).</I> There was no income tax provision for 2001 due to tax loss carryforwards.</FONT></P>23082309<BR><BR><BR>23102311<!-- MARKER FORMAT-SHEET="Para Center" -->2312<P ALIGN="CENTER"><FONT size=2>24</font></P>231323142315231623172318<!-- *************************************************************************** -->2319<!-- MARKER PAGE="sheet: 24; page: 24" -->2320<HR SIZE=5 COLOR=GRAY NOSHADE>232123222323<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2324<P><FONT SIZE="2"><B>2000 Compared to 1999 </B></FONT></P>232523262327<!-- MARKER FORMAT-SHEET="Para In 0" -->2328<P><FONT SIZE="2"> <I>Net Sales. </I>Net2329sales were $68.9 million for 2000 compared to $46.1 million for 1999. Sales2330increased by 49.6% for the year due to the impact of increased advertising2331expenditures and new product introductions. For the year 2000, domestic sales2332increased to $62.7 million from $45.1 for 1999. The increase reflects increased2333Breathe Right nasal strip sales and shipments of FiberChoice chewable tablets.2334Breathe Right strip sales grew due to initial shipments of the Company’s2335new mentholated and kids strips and the growth of the core Breathe Right nasal2336strip business. In addition, 1999 sales were reduced by reserves for returns of2337product in connection with the introduction of new packaging that year.</FONT></P>23382339<!-- MARKER FORMAT-SHEET="Para In 0" -->2340<P><font size=2> International2341sales increased to $6.2 million for 2000 from $988,000 for 1999. The higher2342level of sales reflects the reintroduction of Breathe Right nasal strips through2343the Company’s new international distributors in Japan, Europe and2344Australia. The distribution agreement with the Company’s previous2345international distributor was terminated effective June 30, 2000.</font></P>23462347<!-- MARKER FORMAT-SHEET="Para In 0" -->2348<P><FONT SIZE="2"> <I>Gross Profit.</I>2349Gross profit was $44.0 million for 2000 compared to $27.7 million for 1999.2350Gross profit as a percentage of net sales was 63.8% for 2000 compared to 60.1%2351for 1999. Gross profit in 2000 was unfavorably impacted by the lower gross2352profit on FiberChoice chewable tablets, especially the 10-count trial size2353tubes. The Company also disposed of an excess inventory of pillow covers and2354incurred higher costs associated with expediting inventory purchases and2355deliveries. During the third and early fourth quarters, customer orders exceeded2356forecasts, resulting in additional costs to meet customer delivery schedules.2357The gross profit percentage was lower in 1999, primarily due to costs for the2358transition of Breathe Right nasal strips to new product packaging.</FONT></P>23592360<!-- MARKER FORMAT-SHEET="Para In 0" -->2361<P><FONT SIZE="2"> <I>Advertising and2362Promotion Expenses.</I> Advertising and promotion expenses were $46.7 million for23632000 compared to $28.1 million for 1999. Marketing and selling expenses as a2364percentage of net sales increased to 67.8% in 2000 from 61.0% in 1999,2365reflecting the planned investment in advertising needed to return the Breathe2366Right brand to growth, relaunch Breathe Right nasal strips in key international2367markets and launch FiberChoice tablets.</FONT></P>23682369<!-- MARKER FORMAT-SHEET="Para In 0" -->2370<P><FONT SIZE="2"> <I>Selling, General2371and Administrative Expenses.</I> Selling, general and administrative expenses were2372$15.1 million for 2000 compared to $11.9 million for 1999. This increase was2373primarily from infrastructure to support the growing business and business2374development expenses to identify future product opportunities. General and2375administrative expenses as a percentage of net sales decreased to 22.0% in 20002376from 25.9% in 1999 as a result of the higher level of sales in 2000.</FONT></P>23772378<!-- MARKER FORMAT-SHEET="Para In 0" -->2379<P><FONT SIZE="2"> <I>Special Charge.</I>2380In 1999, the Company recorded a special charge relating to a contract2381termination fee of $6.3 million. This special charge represents a one-time2382payment to 3M, the Company’s international distributor, to terminate the2383international distribution agreement. The agreement allowed the Company to2384regain control of the international business on a phased schedule that was2385completed June 30, 2000.</FONT></P>23862387<!-- MARKER FORMAT-SHEET="Para In 0" -->2388<P><FONT SIZE="2"> <I>Investment Income.</I>2389Investment income was $2.2 million for 2000 compared to $2.8 million for 1999. The2390decrease was primarily the result of a decrease in investments.</FONT></P>239123922393<!-- MARKER FORMAT-SHEET="Para In 0" -->2394<P><FONT SIZE="2"> <I>Income Tax Benefit2395(Expense).</I> There was no income tax provision for 2000 due to tax loss carryforwards.</FONT></P>23962397<BR><BR><BR>23982399<!-- MARKER FORMAT-SHEET="Para Center" -->2400<P ALIGN="CENTER"><FONT size=2>25</font></P>240124022403240424052406<!-- *************************************************************************** -->2407<!-- MARKER PAGE="sheet: 25; page: 25" -->2408<HR SIZE=5 COLOR=GRAY NOSHADE>240924102411<!-- MARKER FORMAT-SHEET="Head Minor" -->2412<H2><FONT SIZE=2>Seasonality</FONT></H2>24132414<!-- MARKER FORMAT-SHEET="Para In 0" -->2415<P><font size=2> The Company2416believes that a portion of Breathe Right nasal strip use is for the temporary2417relief of nasal congestion and congestion-related snoring. Sales of nasal2418congestion remedies are higher during the fall and winter seasons because of2419increased use during the cough/cold season.</font></P>24202421<!-- MARKER FORMAT-SHEET="Head Minor" -->2422<H2><FONT SIZE=2>Liquidity and Capital Resources</FONT></H2>242324242425<!-- MARKER FORMAT-SHEET="Para In 0" -->2426<P><font size=2> At December 31,24272001, the Company had cash, cash equivalents and marketable securities of $27.32428million and working capital of $32.7 million.</font></P>24292430<!-- MARKER FORMAT-SHEET="Para In 0" -->2431<P><FONT SIZE="2"> <I>Operating2432Activities.</I> The Company used cash in operations of $2.8 million in 20012433primarily due to a decrease in operating liabilities. The Company used cash in2434operations of $4.4 million and $12.1 million in 2000 and 1999, respectively. The2435decreased cash flow in 2000 was primarily due to the net loss for the year2436offset by an increase in operating liabilities.</FONT></P>24372438<!-- MARKER FORMAT-SHEET="Para In 0" -->2439<P><FONT SIZE="2"> <I>Investing2440Activities.</I> Sales and maturities of marketable securities exceeded purchases by2441$10.5 million in 2001. Net proceeds were used primarily to fund the cash used in2442operations and purchase treasury shares. Sales and maturities of marketable2443securities exceeded purchases by $9.2 million in 2000. Net proceeds were used to2444fund the cash used in operations, purchase property and equipment and purchase2445treasury shares. Marketable securities purchased consisted of cash equivalents,2446corporate bonds, U.S. Government obligations and municipal bonds.</FONT></P>24472448<!-- MARKER FORMAT-SHEET="Para In 0" -->2449<P><font size=2> The Company2450purchased $400,000 and $2.0 million of property and equipment in 2001 and 2000,2451respectively, primarily associated with the Company’s move to different2452facilities.</font></P>24532454<!-- MARKER FORMAT-SHEET="Para In 0" -->2455<P><FONT SIZE="2"> <I>Financing2456Activities.</I> The Company purchased 202,000 shares of its common stock for $1.02457million in 2001 and purchased 396,000 shares for $1.5 million in 2000. These2458treasury shares will be used to meet the Company’s obligations under its2459employee stock ownership plan and stock option plans, and for possible future2460acquisitions. The Company received $288,000 in 2001 and $103,000 in 2000 from2461the exercise of stock options and issuance of stock under the employee stock2462purchase plan.</FONT></P>24632464<!-- MARKER FORMAT-SHEET="Para In 0" -->2465<P><FONT SIZE="2"> <I>Significant2466Agreements and Lease Obligations.</I> The Company has entered into certain2467agreements and leases in order to secure product rights and office space. The2468following is a summary of significant agreements and lease obligations:</FONT></P>24692470<PRE><FONT SIZE=1>2471<B>2472Minimum Operating2473<u>Year Ending December 31,</U> <u>Royalties</U> <u>Leases</U> <U>Total</u></B>2474247524762002 ..................... $ 1,070 $ 733 $ 1,80324772003 ..................... 1,070 744 1,81424782004 ..................... 1,070 727 1,79724792005 ..................... 1,070 740 1,81024802006 ..................... 1,070 755 1,8252481Later years .............. 3,1042482-------2483Total .................... $ 6,8032484-------2485</FONT></PRE>24862487<!-- MARKER FORMAT-SHEET="Para In 0" -->2488<P><font size=2> The Company has2489agreements that exclusively license intellectual property rights for certain2490products. Royalties due under these agreements are based on various percentages2491to net sales. The licensing agreements are valid for the lives of the related2492patents, however, they may be terminated earlier under certain conditions. Total2493minimum royalties are not determinable since royalties</font></P>2494<BR><BR><BR>24952496<!-- MARKER FORMAT-SHEET="Para Center" -->2497<P ALIGN="CENTER"><FONT size=2>26</font></P>249824992500250125022503<!-- *************************************************************************** -->2504<!-- MARKER PAGE="sheet: 26; page: 26" -->2505<HR SIZE=5 COLOR=GRAY NOSHADE>250625072508<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2509<P><FONT SIZE=2>continue for the life of current and potential future patents2510related to the licensed intellectual property. The Company has entered into2511operating leases for office space and office equipment. Leases expire at various2512dates beginning in 2002 through 2010. Management is not aware of any significant2513agreements or obligations that would have a material negative impact upon the2514Company’s short-term or long-term liquidity. </FONT></P>25152516<!-- MARKER FORMAT-SHEET="Para In 0" -->2517<P><font size=2> The Company2518believes that its existing funds will be sufficient to support its planned2519operations for the foreseeable future.</font></P>25202521<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2522<P><FONT SIZE="2"><B>Recent Accounting Pronouncements </B></FONT></P>252325242525<!-- MARKER FORMAT-SHEET="Para In 0" -->2526<P><font size=2> In 2000, the2527Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.252800-14, “Accounting for Certain Sales Incentives”. This EITF requires2529companies to present in their statements of operations, certain sales incentives2530as sales allowances, resulting in a reduction of net sales. The Company2531currently records sales incentives covered by this EITF as operating expenses.2532The Company will be required to adopt this EITF beginning with the quarter2533ending March 31, 2002. If the Company would have applied the presentation set2534forth in this issue in 2001, 2000 and 1999, net sales would have been reduced by2535$1.1, $1.5 and $3.1 million, respectively. Operating expenses would have also2536been reduced by the same amounts in the corresponding years. This issue does not2537impact operating income (loss) for any of these years.</font></P>25382539<!-- MARKER FORMAT-SHEET="Para In 0" -->2540<P><font size=2> In 2001, the2541EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement2542Characterization of Consideration Paid to a Reseller”. This EITF requires2543companies to present in their statements of operations, certain consideration2544paid to a purchaser of the company’s products as sales allowances,2545resulting in a reduction of net sales. The Company currently records costs2546covered by this EITF as operating expenses. The Company plans on adopting this2547EITF beginning with the quarter ending March 31, 2002. The Company is in the2548process of evaluating this EITF and its potential impact.</font></P>25492550<!-- MARKER FORMAT-SHEET="Para In 0" -->2551<P><font size=2> In 2001, the2552Financial Accounting Standards Board issued Statement of Financial Accounting2553Standards (“SFAS”) No. 144, “Accounting for the Impairment or2554Disposal of Long-Lived Assets.” This statement supercedes SFAS No. 121,2555“Accounting for the Impairment of Long-Lived Assets and for Long-Lived2556Assets to Be Disposed Of”. The statement retains the previously existing2557accounting requirements related to the recognition and measurement of the2558impairment of long-lived assets to be held and used while expanding the2559measurement requirements of long-lived assets to be disposed of by sale. It also2560expands the previously existing reporting requirements for discontinued2561operations to include a component of an entity that either has been disposed of2562or is classified as held for sale. The Company is required to implement SFAS No.2563144 beginning with the quarter ending March 31, 2002. Management does not expect2564this statement to have a material impact on the Company’s consolidated2565financial position or results of operations.</font></P>25662567<BR><BR><BR>25682569<!-- MARKER FORMAT-SHEET="Head Major" -->2570<p ALIGN=CENTER><FONT SIZE=2>27</FONT></p>257125722573257425752576<!-- *************************************************************************** -->2577<!-- MARKER PAGE="sheet: 27; page: 27" -->2578<HR SIZE=5 COLOR=GRAY NOSHADE>2579258025812582<!-- MARKER FORMAT-SHEET="Head Minor" -->2583<H2><FONT SIZE=2><U>Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT2584MARKET RISK</U></FONT></H2>25852586<!-- MARKER FORMAT-SHEET="Para In 0" -->2587<P><font size=2> The Company’s market2588risk exposure is primarily interest rate risk related to its cash and cash equivalents2589and investments in marketable securities. The Company has investment guidelines which2590limit the types of securities in which it may invest as well as the length of maturities.2591No investment may exceed 36 months in maturity and the weighted average life of the2592portfolio may not exceed 18 months. </font></P>25932594<!-- MARKER FORMAT-SHEET="Para In 0" -->2595<P><font size=2> The table below provides2596information about the Company’s cash and cash equivalents and marketable securities2597as of December 31, 2001: </font></P>25982599<PRE><FONT SIZE=-1>2600<b>(In thousands)2601Cost Fair Value</b>2602-------- ----------26032604Due within one year........................... $19,022 $19,1582605Due after one year through three years........ 7,911 8,1372606------- -------2607$26,933 $27,2952608======= =======2609</font></PRE>26102611<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->2612<P><FONT SIZE="2"><B><U>Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</U></B></FONT> </P>26132614<!-- MARKER FORMAT-SHEET="Para In 0" -->2615<P><font size=2> The Consolidated Balance2616Sheets of the Company as of December 31, 2001 and 2000, and the related Consolidated2617Statements of Operations, Stockholders’Equity and Comprehensive Income (Loss), and2618Cash Flows for each of the years in the three-year period ended December 31, 2001, the2619Notes to the Consolidated Financial Statements and the Report of KPMG LLP, independent2620certified public accountants, are listed under Item 14 of this Report. </font></P>26212622<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->2623<P><FONT SIZE="2"><B><U>Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING2624AND FINANCIAL DISCLOSURE</U></B></FONT> </P>26252626<!-- MARKER FORMAT-SHEET="Para Hang In 2" -->2627<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2628<TR VALIGN=TOP>2629<TD WIDTH=5%><FONT SIZE=2> </FONT></TD>2630<TD WIDTH=5%><FONT SIZE=2> </FONT></TD>2631<TD WIDTH=5%><FONT SIZE=2>None.</FONT></TD>2632<TD WIDTH=85%><FONT SIZE=2></FONT></TD>2633</TR>2634</TABLE>2635<BR>263626372638<BR><BR><BR>26392640<!-- MARKER FORMAT-SHEET="Para Center" -->2641<P ALIGN="CENTER"><FONT size=2>28</font></P>26422643264426452646264726482649<!-- *************************************************************************** -->2650<!-- MARKER PAGE="sheet: 44; page: 28" -->2651<HR SIZE=5 COLOR=GRAY NOSHADE>26522653265426552656<!-- MARKER FORMAT-SHEET="Head Major" -->2657<H1 ALIGN=CENTER><FONT SIZE=2>PART III</FONT></H1>26582659<!-- MARKER FORMAT-SHEET="Head Minor" -->2660<H2><FONT SIZE="2"><U>Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE2661REGISTRANT</U></FONT></H2>26622663<!-- MARKER FORMAT-SHEET="Head Minor" -->2664<H2><FONT SIZE=2>Directors</FONT></H2>26652666<!-- MARKER FORMAT-SHEET="Para In 0" -->2667<P><font size=2> The following sets forth2668certain information with respect to the Company’s directors: </font></P>26692670<!-- MARKER FORMAT-SHEET="Para In 0" -->2671<P><FONT SIZE="2"> <I>Daniel E. Cohen,</I> 49, has2672served as the Company's Chairman of the Board since 1993 and has served as a director of2673the Company since its formation in 1982. Mr. Cohen also served as the Company's Chief2674Executive Officer from 1989 to June 2001 and as Treasurer from 1982 to March 1999. Mr.2675Cohen, a founder of the Company, is a medical doctor and board-certified neurologist.</FONT></P>26762677<!-- MARKER FORMAT-SHEET="Para In 0" -->2678<P><FONT SIZE="2"> <I>Patrick Delaney</I>, 59, has2679served as a director of the Company since 1983 and as the Company's Secretary since 1995.2680Mr. Delaney is a partner in the Minneapolis-based law firm of Lindquist & Vennum P.L.L.P.,2681counsel to the Company. He has been in the private practice of law since 1967. He is also2682a director of Community First Bankshares, Inc., a multi-bank holding company, and the2683secretary of Cardia, Inc., a manufacturer of medical devices.</FONT></P>26842685<!-- MARKER FORMAT-SHEET="Para In 0" -->2686<P><FONT SIZE="2"> <I>R. Hunt Greene</I>, 51, has2687served as a director of the Company since 1985. Mr. Greene has been an investment banker2688for over twenty years. He is presently Managing Director and Member of Greene Holcomb2689&Fisher LLC (“GH&F”), a Minneapolis investment banking firm that was2690formed in 1995. GH&F has provided the Company with certain financial advisory and2691investment banking services from time to time since 1996.</FONT> </P>26922693<!-- MARKER FORMAT-SHEET="Para In 0" -->2694<P><FONT SIZE="2"> <I>Andrew J. Greenshields</I>,269564, has served as a director of the Company since 1986. Mr. Greenshields has been2696President of Pathfinder Ventures, Inc., Minneapolis, Minnesota, since 1980. He is also a2697general partner of Pathfinder Venture Capital Fund III and a general partner of Spell2698Capital Partners, LP, both of which are Minneapolis-based financial limited partnerships.2699Mr. Greenshields is also a director of Aetrium, Inc., a manufacturer of semi-conductor2700handling equipment.</FONT></P>27012702<!-- MARKER FORMAT-SHEET="Para In 0" -->2703<P><FONT SIZE="2"> <I>H. Robert Hawthorne</I>, 57,2704has served as a director of the Company since 1999. Mr. Hawthorne has been2705Chief Executive Officer of Ocean Spray Cranberries, Inc., a Boston-based food and2706beverage company, since February 2000. From 1997 to 1999, Mr. Hawthorne served as a2707director, President and Chief Executive Officer of Select Comfort Corporation, a2708Minneapolis-based company that manufactures air beds and sleep related products. From27091986 to 1997, Mr. Hawthorne served in a series of positions of increasing responsibility2710with The Pillsbury Company, a Minneapolis-based manufacturer and distributor of food2711products, most recently serving from February 1992 to December 1997 as President of The2712Pillsbury Brands Group, a subsidiary of The Pillsbury Company.</FONT> </P>27132714<!-- MARKER FORMAT-SHEET="Para In 0" -->2715<P><FONT SIZE="2"> <I>Marti Morfitt</I>, 44, has2716served as the Company’s President and Chief Executive Officer since June 2001, its2717President and Chief Operating Officer from March 1998 to June 2001. Ms. Morfitt has2718served as a director of the Company since 1998. From September 1982 to February 1998, Ms.2719Morfitt served in a series of positions of increasing responsibility with The Pillsbury2720Company, a Minneapolis-based manufacturer and distributor of food products, most recently2721serving from May 1997 to February 1998 as Vice-President, Meals, and from February 19942722to May 1997 as Vice-President, Green Giant Brands. She also serves as a director of2723Graco, Inc., a Minneapolis-based manufacturer of fluid handling systems.</FONT> </P>27242725<!-- MARKER FORMAT-SHEET="Para In 0" -->2726<P><FONT SIZE="2"> <I>Richard A. Peddie</I>, 55,2727has served as a director of the Company since July 19, 2001. Mr. Peddie currently serves2728as President and Chief Executive Officer of Canadian-based Maple Leaf Sports &</FONT></P>27292730<BR><BR><BR>27312732<!-- MARKER FORMAT-SHEET="Para Center" -->2733<P ALIGN="CENTER"><FONT size=2>29</font></P>2734273527362737273827392740<!-- *************************************************************************** -->2741<!-- MARKER PAGE="sheet: 45; page: 45" -->2742<HR SIZE=5 COLOR=GRAY NOSHADE>274327442745274627472748<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2749<P><FONT SIZE=2>Entertainment, Ltd., which owns the Toronto Raptors Basketball2750Club, the Toronto Maple Leafs Hockey Team and Air Canada Centre, and has served2751in that capacity since 1998. From 1996 to 1998, Mr. Peddie served President and2752Chief Executive Officer of the Toronto Raptors Basketball Club. From 1994 to27531996, Mr. Peddie served as President and Chief Operating Officer of NetStar2754Communications, Inc., a Canadian-based broadcast company. From 1989 to 1994, Mr.2755Peddie served as the President and Chief Executive Officer of Stadium2756Corporation of Ontario (SkyDome). From 1985 to 1989, Mr. Peddie served as2757President and Chief Executive Officer of Pillsbury Canada Limited, a subsidiary2758of The Pillsbury Company and manufacturer and distributor of food products. From27591973 to 1985, Mr. Peddie served in positions of increasing responsibility with2760General Foods Limited, a manufacturer and distributor of food products, most2761recently serving from 1983 to 1985 as the President of the Hostess Food Products2762Division. </FONT></P>27632764<!-- MARKER FORMAT-SHEET="Para In 0" -->2765<P><FONT SIZE="2"> <I>Richard W. Perkins</I>, 71,2766has been a director of the Company since 1993. Mr. Perkins has been President, Chief2767Executive Officer and a director of Perkins Capital Management, Inc., a Minneapolis-based2768investment management company, since 1985. He is also a general partner of Spell Capital2769Partners, LP, a Minneapolis-based venture capital limited partnership. He is also a2770director of the following publicly-held companies: Bio-Vascular, Inc., a manufacturer of2771medical products; Intellefilm Corp., a producer of television and internet commercials;2772PW Eagle, Inc., a manufacturer of plastic pipe; Lifecore Biomedical, Inc., a medical2773device company; Nortech Systems, Inc., a contract manufacturer for the electronics2774industry; Quantech, Ltd., a development stage medical device company; Vital Images, Inc.,2775a medical diagnostic software company; and Paper Warehouse, Inc., a retailer specializing2776in party supplies and paper products.</FONT></P>27772778<!-- MARKER FORMAT-SHEET="Para Cutoff Rule" -->2779<HR SIZE=1 WIDTH=15% ALIGN=CENTER>27802781<!-- MARKER FORMAT-SHEET="Para In 0" -->2782<P><font size=2> Certain other information2783required under this Item with respect to directors is contained in the Section “Election2784of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in2785the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on2786May 15, 2002 (the “2002 Proxy Statement”), a definitive copy of which will be2787filed with the Commission within 120 days of the close of the last fiscal year, and is2788incorporated herein by reference. </font></P>27892790<!-- MARKER FORMAT-SHEET="Head Minor" -->2791<H2><FONT SIZE=2>Executive Officers</FONT></H2>27922793<!-- MARKER FORMAT-SHEET="Para In 0" -->2794<P><font size=2> Information concerning2795executive officers is set forth in the Section entitled “Executive Officers of the2796Company” in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of2797Item 401 of Regulation S-K. </font></P>27982799<!-- MARKER FORMAT-SHEET="Head Minor" -->2800<H2><FONT SIZE="2"><U>Item 11. EXECUTIVE COMPENSATION</U></FONT></H2>28012802<!-- MARKER FORMAT-SHEET="Para In 0" -->2803<P><font size=2> Information required2804under this item is contained in the section entitled “Executive Compensation” in2805the Company’s 2002 Proxy Statement and is incorporated herein by reference. </font></P>28062807<!-- MARKER FORMAT-SHEET="Head Minor" -->2808<H2><FONT SIZE="2"><U>Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL2809OWNERS AND MANAGEMENT</U></FONT></H2>28102811<!-- MARKER FORMAT-SHEET="Para In 0" -->2812<P><font size=2> Information required2813under this item is contained in the section entitled “Security Ownership of2814Principal Stockholders and Management” in the Company’s 2002 Proxy Statement and2815is incorporated herein by reference. </font></P>28162817<!-- MARKER FORMAT-SHEET="Head Minor" -->2818<H2><FONT SIZE="2"><U>Item 13. CERTAIN RELATIONSHIPS AND RELATED2819TRANSACTIONS</U></FONT></H2>28202821<!-- MARKER FORMAT-SHEET="Para Flush In 2" -->2822<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2823<TR VALIGN=TOP>2824<TD WIDTH=5%> </TD>2825<TD WIDTH=95%><FONT SIZE=2>2826Not2827Applicable.</FONT></TD>2828</TR>2829</TABLE>2830<BR>28312832<BR><BR><BR>28332834<!-- MARKER FORMAT-SHEET="Para Center" -->2835<P ALIGN="CENTER"><FONT size=2>30</font></P>2836283728382839284028412842<!-- *************************************************************************** -->2843<!-- MARKER PAGE="sheet: 46; page: 46" -->2844<HR SIZE=5 COLOR=GRAY NOSHADE>284528462847284828492850<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2851<P ALIGN="CENTER"><B>PART IV</B></P>28522853<!-- MARKER FORMAT-SHEET="Head Minor" -->2854<H2><FONT SIZE="2"><U>Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,2855AND REPORTS ON FORM 8-K</U></FONT></H2>28562857<!-- MARKER FORMAT-SHEET="Para Hang" -->2858<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2859<TR VALIGN=TOP>2860<TD WIDTH=5%><FONT SIZE=2>(a) </FONT></TD>2861<TD WIDTH=95%><FONT SIZE=2>Documents2862filed as part of this Report:</FONT></TD>2863</TR>2864</TABLE>2865<BR>28662867<PRE><FONT SIZE=-1>2868<B>Form 10-K2869Page Reference</B>2870--------------287128721. Financial Statements.28732874Independent Auditors' Report.............................................................F-12875Consolidated Statements of Operations for the Years Ended2876December 31, 2001, 2000 and 1999......................................................F-22877Consolidated Balance Sheets as of December 31, 2001 and 2000.............................F-32878Consolidated Statements of Stockholders' Equity and Comprehensive2879Income (Loss) for the Years Ended December 31, 2001, 2000 and 1999....................F-42880Consolidated Statements of Cash Flows for the Years Ended2881December 31, 2001, 2000 and 1999......................................................F-52882Notes to Consolidated Financial Statements...............................................F-6288328842. Financial Statement Schedules.28852886None.288728883. Exhibits.28892890See "Exhibit Index" on the page following the Signature Page.2891</FONT></PRE>28922893<!-- MARKER FORMAT-SHEET="Para Hang" -->2894<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>2895<TR VALIGN=TOP>2896<TD WIDTH=5%><FONT SIZE=2>(b) </FONT></TD>2897<TD WIDTH=95%><FONT SIZE=2>Reports2898on Form 8-K.</FONT></TD>2899</TR>2900</TABLE>2901<BR>29022903<!-- MARKER FORMAT-SHEET="Para In 0" -->2904<P><font size=2> The Company did not file2905a report on Form 8-K during the fourth quarter ended December 31, 2001. On February 7, 2002, the Company2906filed a report on Form 8-K announcing that the Board of Directors adopted a resolution changing the Company's2907fiscal year end from December 31 to March 31.</font></P>2908<BR><BR><BR>29092910<!-- MARKER FORMAT-SHEET="Para Center" -->2911<P ALIGN="CENTER"><FONT size=2>31</font></P>2912291329142915291629172918<!-- *************************************************************************** -->2919<!-- MARKER PAGE="sheet: 47; page: 47" -->2920<HR SIZE=5 COLOR=GRAY NOSHADE>292129222923292429252926<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2927<P ALIGN="CENTER"><B>SIGNATURES</B></P>29282929<!-- MARKER FORMAT-SHEET="Para In 0" -->2930<P><font size=2> Pursuant to the2931requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the2932Registrant has duly caused this report to be signed on its behalf by the undersigned,2933thereunto duly authorized. </font></P>29342935<TABLE WIDTH="100%">2936<TR><TD WIDTH=50%></TD>2937<TD><FONT SIZE=2>CNS, INC.<BR>2938(“Registrant”)</FONT></TD></TR>2939<TR><TD> </TD></TR>29402941<TR>2942<TD><FONT SIZE=2>2943Dated: March 25, 2002 </FONT></TD> <TD><FONT SIZE=2> <U>By /s/ Marti Morfitt</U><BR>2944Marti Morfitt<BR>2945Chief Executive Officer and Director</FONT></TD></TR>2946</TABLE>29472948<!-- MARKER FORMAT-SHEET="Para In 0" -->2949<P><font size=2> Pursuant to the2950requirements of the Securities Exchange Act of 1934, this Report has been signed by the2951following persons on March 25, 2002 on behalf of the Registrant in the capacities2952indicated. </font></P>29532954<!-- MARKER FORMAT-SHEET="Para Center Bold" -->2955<P ALIGN="CENTER"><B>(Power of Attorney and Signatures)</B></P>29562957<!-- MARKER FORMAT-SHEET="Para In 0" -->2958<P><font size=2> Each person whose2959signature appears below constitutes and appoints DANIEL E. COHEN and MARTI MORFITT as his2960or her true and lawful attorneys-in-fact and agents, each acting alone, with the full2961power of substitution and resubstitution, for him or her and in his or her name, place2962and stead, in any and all capacities, to sign any or all amendments to this Annual Report2963on Form 10-K and to file the same, with all exhibits thereto, and other documents in2964connection therewith, with the Securities and Exchange Commission, granting unto said2965attorneys-in-fact and agents, each acting alone, full power and authority to do and2966perform each and every act and thing requisite and necessary to be done in and about the2967premises, as fully to all intents and purposes as he or she might or could do in person,2968hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone,2969or his or her substitute or substitutes, may lawfully do or cause to be done by virtue2970thereof. </font></P>297129722973<P><FONT SIZE=2>2974<U>/s/ Marti Morfitt</U><BR>2975Marti Morfitt<BR>2976Chief Executive Officer and Director<BR>(Principal Executive Officer)</FONT></P>29772978<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2979<P><FONT SIZE="2"><U>/s/ David J. Byrd</U> <BR> David J. Byrd<BR>Vice President of Finance,<BR>Chief Financial Officer and Treasurer<BR>(Principal Financial and Accounting Officer)</FONT> </P>29802981<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->2982<P><FONT SIZE="2"><U>/s/ Daniel E. Cohen</U> <BR> Daniel E. Cohen<BR>Chairman of the Board and Director</FONT> </P>2983<BR><BR><BR>298429852986<!-- MARKER FORMAT-SHEET="Para Center" -->2987<P ALIGN="CENTER"><FONT size=2>32</font></P>29882989299029912992299329942995<!-- *************************************************************************** -->2996<!-- MARKER PAGE="sheet: 48; page: 48" -->2997<HR SIZE=5 COLOR=GRAY NOSHADE>29982999<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3000<P><FONT SIZE="2"><U>/s/ Patrick Delaney</U> <BR>Patrick Delaney<BR>Director</FONT> </P>30013002<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3003<P><FONT SIZE="2"><U>/s/ H. Robert Hawthorne</U> <BR>H. Robert Hawthorne<BR>Director</FONT> </P>30043005<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3006<P><FONT SIZE="2"><U>/s/ R. Hunt Greene</U> <BR>R. Hunt Greene<BR>Director</FONT> </P>30073008<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3009<P><FONT SIZE="2"><U>/s/ Andrew J. Greenshields</U><BR> Andrew J. Greenshields<BR>Director</FONT> </P>30103011<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3012<P><FONT SIZE="2"><U>/s/ Richard A. Peddie</U><BR> Richard A. Peddie<BR>Director</FONT> </P>30133014<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3015<P><FONT SIZE="2"><U>/s/ Richard W. Perkins</U> <BR>Richard W. Perkins<BR>Director</FONT> </P>301630173018<BR><BR><BR><BR><BR><BR><BR>30193020302130223023<!-- MARKER FORMAT-SHEET="Para Center" -->3024<P ALIGN="CENTER"><FONT size=2>33</font></P>302530263027302830293030303130323033<!-- *************************************************************************** -->3034<!-- MARKER PAGE="sheet: 49; page: 49" -->3035<HR SIZE=5 COLOR=GRAY NOSHADE>3036303730383039<!-- MARKER FORMAT-SHEET="Para Center" -->3040<P ALIGN="CENTER"><FONT SIZE="2">CNS, INC.<BR><U>EXHIBIT INDEX</U></FONT></P>30413042<!-- MARKER FORMAT-SHEET="Para Hang" -->3043<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3044<TR VALIGN=TOP>3045<TD WIDTH=10%><FONT SIZE=2>3.1 </FONT></TD>3046<TD WIDTH=90%><FONT SIZE=2>Company’s3047Certificate of Incorporation as amended to date (incorporated by reference to Exhibit 3.13048to the Company’s Annual Report on Form 10-K for the year ended December 31, 19953049(the “1995 Form 10-K”)). </FONT></TD>3050</TR>3051</TABLE>3052<BR>30533054<!-- MARKER FORMAT-SHEET="Para Hang" -->3055<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3056<TR VALIGN=TOP>3057<TD WIDTH=10%><FONT SIZE=2>3.2 </FONT></TD>3058<TD WIDTH=90%><FONT SIZE=2>Company’s3059Amended and Restated By-Laws.</FONT></TD>3060</TR>3061</TABLE>3062<BR>30633064<!-- MARKER FORMAT-SHEET="Para Hang" -->3065<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3066<TR VALIGN=TOP>3067<TD WIDTH=10%><FONT SIZE=2>4.1 </FONT></TD>3068<TD WIDTH=90%><FONT SIZE=2>Form3069of Rights Agreement dated July 20, 1995 between CNS, Inc. and Norwest Bank Minnesota,3070N.A. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s3071Registration Statement on Form 8-A/A, Commission File No. 0-16612).</FONT></TD>3072</TR>3073</TABLE>3074<BR>30753076<!-- MARKER FORMAT-SHEET="Para Hang" -->3077<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3078<TR VALIGN=TOP>3079<TD WIDTH=10%><FONT SIZE=2>10.1* </FONT></TD>3080<TD WIDTH=90%><FONT SIZE=2>CNS,3081Inc. 1987 Employee Incentive Stock Option Plan (incorporated by reference to Exhibit 10.13082to the Company’s Registration Statement on Form S-18, Commission File No. 33-14052C).</FONT></TD>3083</TR>3084</TABLE>3085<BR>30863087<!-- MARKER FORMAT-SHEET="Para Hang" -->3088<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3089<TR VALIGN=TOP>3090<TD WIDTH=10%><FONT SIZE=2>10.2* </FONT></TD>3091<TD WIDTH=90%><FONT SIZE=2>CNS,3092Inc. 1989 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibits30934.1 and 4.2 to the Company’s Registration Statement on Form S-8, Commission File No.309433-68310).</FONT></TD>3095</TR>3096</TABLE>3097<BR>30983099<!-- MARKER FORMAT-SHEET="Para Hang" -->3100<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3101<TR VALIGN=TOP>3102<TD WIDTH=10%><FONT SIZE=2>10.3* </FONT></TD>3103<TD WIDTH=90%><FONT SIZE=2>CNS,3104Inc. 1990 Stock Plan (incorporated by reference to Exhibit 10.11 to the Company’s Annual3105Report on Form 10-K for the year ended December 31, 1990).</FONT></TD>3106</TR>3107</TABLE>3108<BR>31093110<!-- MARKER FORMAT-SHEET="Para Hang" -->3111<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3112<TR VALIGN=TOP>3113<TD WIDTH=10%><FONT SIZE=2>10.4* </FONT></TD>3114<TD WIDTH=90%><FONT SIZE=2>CNS,3115Inc. 1994 Amended Stock Plan (incorporated by reference to Exhibit 10.5 to the Company’s3116Annual Report on Form 10-K for the year ended December 31, 1997).</FONT></TD>3117</TR>3118</TABLE>3119<BR>31203121<!-- MARKER FORMAT-SHEET="Para Hang" -->3122<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3123<TR VALIGN=TOP>3124<TD WIDTH=10%><FONT SIZE=2>10.5* </FONT></TD>3125<TD WIDTH=90%><FONT SIZE=2>CNS,3126Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit A of the Definitive3127Proxy Statement for the Company’s Annual Meeting of Stockholders that was held on May 3,31282000).</FONT></TD>3129</TR>3130</TABLE>3131<BR>31323133<!-- MARKER FORMAT-SHEET="Para Hang" -->3134<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3135<TR VALIGN=TOP>3136<TD WIDTH=10%><FONT SIZE=2>10.6** </FONT></TD>3137<TD WIDTH=90%><FONT SIZE=2>License3138Agreement dated January 30, 1992 between the Company and Creative Integration and Design,3139Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement3140on Form S-2, Commission File No. 33-46120).</FONT></TD>3141</TR>3142</TABLE>3143<BR>31443145<!-- MARKER FORMAT-SHEET="Para Hang" -->3146<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3147<TR VALIGN=TOP>3148<TD WIDTH=10%><FONT SIZE=2>10.7** </FONT></TD>3149<TD WIDTH=90%><FONT SIZE=2>License3150Agreement dated November 10, 1997 between the Company and Onesta Nutrition, Inc.3151(incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form315210-K for the year ending December 31, 1999 (the “1999 Form 10-K”)). </FONT></TD>3153</TR>3154</TABLE>3155<BR>31563157<!-- MARKER FORMAT-SHEET="Para Hang" -->3158<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3159<TR VALIGN=TOP>3160<TD WIDTH=10%><FONT SIZE=2>10.8** </FONT></TD>3161<TD WIDTH=90%><FONT SIZE=2>License3162Agreement dated March 12, 1999 between the Company and WinEase LLC (incorporated by3163reference to Exhibit 10.10 to the Company’s 1999 Form 10-K). </FONT></TD>3164</TR>3165</TABLE>3166<BR>31673168<!-- MARKER FORMAT-SHEET="Para Hang" -->3169<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3170<TR VALIGN=TOP>3171<TD WIDTH=10%><FONT SIZE=2>10.9** </FONT></TD>3172<TD WIDTH=90%><FONT SIZE=2>Addendum3173to License Agreement between the Company and WinEase LLC dated March 21, 2002.</FONT></TD>3174</TR>3175</TABLE>3176<BR>31773178<!-- MARKER FORMAT-SHEET="Para Hang" -->3179<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3180<TR VALIGN=TOP>3181<TD WIDTH=10%><FONT SIZE=2>10.10** </FONT></TD>3182<TD WIDTH=90%><FONT SIZE=2>License3183Agreement dated June 21, 1999 between the Company and Peter Cronk and Kristen Cronk3184(incorporated by reference to Exhibit 10.11 of the 1999 Form 10-K). </FONT></TD>3185</TR>3186</TABLE>3187<BR>3188<BR><BR><BR>31893190<!-- MARKER FORMAT-SHEET="Para Center" -->3191<P ALIGN="CENTER"><FONT size=2>34</font></P>3192319331943195319631973198<!-- *************************************************************************** -->3199<!-- MARKER PAGE="sheet: 50; page: 50" -->3200<HR SIZE=5 COLOR=GRAY NOSHADE>320132023203320432053206<!-- MARKER FORMAT-SHEET="Para Hang" -->3207<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3208<TR VALIGN=TOP>3209<TD WIDTH=10%><FONT SIZE=2>10.11** </FONT></TD>3210<TD WIDTH=90%><FONT SIZE=2>License3211Agreement dated March 1, 2000 between the Company and Proctor and Gamble (incorporated by3212reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year3213ended December 31, 2000 (the “2000 Form 10-K”)). </FONT></TD>3214</TR>3215</TABLE>3216<BR>32173218<!-- MARKER FORMAT-SHEET="Para Hang" -->3219<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3220<TR VALIGN=TOP>3221<TD WIDTH=10%><FONT SIZE=2>10.12 </FONT></TD>3222<TD WIDTH=90%><FONT SIZE=2>Amendment3223to Trademark License Agreement effective as of March 20, 2001 by and between the Company3224and the Procter & Gamble Company (incorporated by reference to Exhibit 10.11 to the3225Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2001). </FONT></TD>3226</TR>3227</TABLE>3228<BR>32293230<!-- MARKER FORMAT-SHEET="Para Hang" -->3231<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3232<TR VALIGN=TOP>3233<TD WIDTH=10%><FONT SIZE=2>10.13** </FONT></TD>3234<TD WIDTH=90%><FONT SIZE=2>Second3235Amendment to Trademark License Agreement effective as of April 27, 2001 by and between3236the Company and the Procter & Gamble Company (incorporated by reference to Exhibit323710.12 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31,32382001). </FONT></TD>3239</TR>3240</TABLE>3241<BR>32423243<!-- MARKER FORMAT-SHEET="Para Hang" -->3244<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3245<TR VALIGN=TOP>3246<TD WIDTH=10%><FONT SIZE=2>10.14** </FONT></TD>3247<TD WIDTH=90%><FONT SIZE=2>Distributor3248Agreement between the Company and Eisai Co., Ltd. dated August 1, 2000 (incorporated by3249reference to Exhibit 10.11 to the Company’s 1999 Form 10-K).</FONT></TD>3250</TR>3251</TABLE>3252<BR>3253<!-- MARKER FORMAT-SHEET="Para Hang" -->3254<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3255<TR VALIGN=TOP>3256<TD WIDTH=10%><FONT SIZE=2>10.15** </FONT></TD>3257<TD WIDTH=90%><FONT SIZE=2>Repackaging Agreement between the Company and Herusu, Co., Ltd. dated August 1, 20003258(incorporated by reference to Exhibit 10.12 to the Company’s 2000 Form 10-K).</FONT></TD>3259</TR>3260</TABLE>3261<BR>32623263<!-- MARKER FORMAT-SHEET="Para Hang" -->3264<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3265<TR VALIGN=TOP>3266<TD WIDTH=10%><FONT SIZE=2>10.16** </FONT></TD>3267<TD WIDTH=90%><FONT SIZE=2>Supply3268Agreement between the Company and Tapemark, Inc. dated October 15, 2001 (incorporated by3269reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the3270period ended September 30, 2001 (the “September 30, 2001 Quarterly Report”)). </FONT></TD>3271</TR>3272</TABLE>3273<BR>32743275<!-- MARKER FORMAT-SHEET="Para Hang" -->3276<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3277<TR VALIGN=TOP>3278<TD WIDTH=10%><FONT SIZE=2>10.17** </FONT></TD>3279<TD WIDTH=90%><FONT SIZE=2>Supply3280Agreement between the Company and WebTec Converting, LLC dated October 5, 20013281(incorporated by reference to Exhibit 10.16 to the September 30, 2001 Quarterly Report). </FONT></TD>3282</TR>3283</TABLE>3284<BR>32853286<!-- MARKER FORMAT-SHEET="Para Hang" -->3287<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3288<TR VALIGN=TOP>3289<TD WIDTH=10%><FONT SIZE=2>10.18** </FONT></TD>3290<TD WIDTH=90%><FONT SIZE=2>Medical3291Specialties Material Purchase Agreement between the Company and Minnesota Mining and3292Manufacturing Company dated August 1, 2001 (incorporated by reference to Exhibit 10.17 to3293the September 30, 2001 Quarterly Report). </FONT></TD>3294</TR>3295</TABLE>3296<BR>32973298<!-- MARKER FORMAT-SHEET="Para Hang" -->3299<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3300<TR VALIGN=TOP>3301<TD WIDTH=10%><FONT SIZE=2>10.19* </FONT></TD>3302<TD WIDTH=90%><FONT SIZE=2>Employment3303Agreement between the Company and Daniel E. Cohen dated February 12, 1999 (incorporated3304by referenced to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the3305year ended December 31, 1998 (the “1998 Form 10-K”)). </FONT></TD>3306</TR>3307</TABLE>3308<BR>33093310<!-- MARKER FORMAT-SHEET="Para Hang" -->3311<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3312<TR VALIGN=TOP>3313<TD WIDTH=10%><FONT SIZE=2>10.20* </FONT></TD>3314<TD WIDTH=90%><FONT SIZE=2>First3315Amendment to Executive Employment Agreement between the Company and Daniel E. Cohen dated3316June 29, 2001 (incorporated by reference to Exhibit 10.19 to the September 30, 20013317Quarterly Report). </FONT></TD>3318</TR>3319</TABLE>3320<BR>33213322<!-- MARKER FORMAT-SHEET="Para Hang" -->3323<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3324<TR VALIGN=TOP>3325<TD WIDTH=10%><FONT SIZE=2>10.21* </FONT></TD>3326<TD WIDTH=90%><FONT SIZE=2>Employment3327Agreement between the Company and Marti Morfitt dated February 12, 1999 (incorporated by3328referenced to Exhibit 10.10 to the 1998 Form 10-K). </FONT></TD>3329</TR>3330</TABLE>3331<BR>33323333<!-- MARKER FORMAT-SHEET="Para Hang" -->3334<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3335<TR VALIGN=TOP>3336<TD WIDTH=10%><FONT SIZE=2>10.22* </FONT></TD>3337<TD WIDTH=90%><FONT SIZE=2>Employment3338Agreement between the Company and Kirk P. Hodgdon dated February 12, 1999 (incorporated3339by referenced to Exhibit 10.11 to the 1998 Form 10-K). </FONT></TD>3340</TR>3341</TABLE>3342<BR>33433344<!-- MARKER FORMAT-SHEET="Para Hang" -->3345<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3346<TR VALIGN=TOP>3347<TD WIDTH=10%><FONT SIZE=2>10.23* </FONT></TD>3348<TD WIDTH=90%><FONT SIZE=2>Employment3349Agreement between the Company and David J. Byrd dated February 12, 1999 (incorporated by3350referenced to Exhibit 10.12 to the 1998 Form 10-K). </FONT></TD>3351</TR>3352</TABLE>3353<BR>3354<BR><BR><BR>33553356<!-- MARKER FORMAT-SHEET="Head Major" -->3357<P ALIGN=CENTER><FONT SIZE=2>35</FONT></P>335833593360336133623363336433653366<!-- *************************************************************************** -->3367<!-- MARKER PAGE="sheet: 51; page: 51" -->3368<HR SIZE=5 COLOR=GRAY NOSHADE>3369337033713372<!-- MARKER FORMAT-SHEET="Para Hang" -->3373<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3374<TR VALIGN=TOP>3375<TD WIDTH=10%><FONT SIZE=2>10.24* </FONT></TD>3376<TD WIDTH=90%><FONT SIZE=2>Employment3377Agreement between the Company and John J. Keppeler dated February 12, 1999 (incorporated3378by referenced to Exhibit 10.13 to the 1998 Form 10-K). </FONT></TD>3379</TR>3380</TABLE>3381<BR>33823383<!-- MARKER FORMAT-SHEET="Para Hang" -->3384<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3385<TR VALIGN=TOP>3386<TD WIDTH=10%><FONT SIZE=2>10.25* </FONT></TD>3387<TD WIDTH=90%><FONT SIZE=2>Employment3388Agreement between the Company and Teri P. Osgood dated February 12, 1999 (incorporated by3389referenced to Exhibit 10.14 to the 1998 Form 10-K). </FONT></TD>3390</TR>3391</TABLE>3392<BR>33933394<!-- MARKER FORMAT-SHEET="Para Hang" -->3395<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3396<TR VALIGN=TOP>3397<TD WIDTH=10%><FONT SIZE=2>10.26* </FONT></TD>3398<TD WIDTH=90%><FONT SIZE=2>Employment3399Agreement between the Company and Carol J. Watzke dated February 12, 1999 (incorporated3400by referenced to Exhibit 10.15 to the 1998 Form 10-K). </FONT></TD>3401</TR>3402</TABLE>3403<BR>34043405<!-- MARKER FORMAT-SHEET="Para Hang" -->3406<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3407<TR VALIGN=TOP>3408<TD WIDTH=10%><FONT SIZE=2>10.27* </FONT></TD>3409<TD WIDTH=90%><FONT SIZE=2>Employment3410Agreement between the Company and M. W. Anderson dated February 12, 1999 (incorporated by3411referenced to Exhibit 10.17 to the 1998 Form 10-K).</FONT></TD>3412</TR>3413</TABLE>3414<BR>34153416<!-- MARKER FORMAT-SHEET="Para Hang" -->3417<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3418<TR VALIGN=TOP>3419<TD WIDTH=10%><FONT SIZE=2>10.28* </FONT></TD>3420<TD WIDTH=90%><FONT SIZE=2>Employment3421Agreement between the Company and Larry R. Muma dated January 2, 2001 (incorporated by3422reference to Exhibit 10.21 to the 2000 Form 10-K). </FONT></TD>3423</TR>3424</TABLE>3425<BR>34263427<!-- MARKER FORMAT-SHEET="Para Hang" -->3428<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3429<TR VALIGN=TOP>3430<TD WIDTH=10%><FONT SIZE=2>21.1 </FONT></TD>3431<TD WIDTH=90%><FONT SIZE=2>Subsidiaries3432of the Company (incorporated by reference to Exhibit 21.1 to the 1999 Form 10-K).</FONT></TD>3433</TR>3434</TABLE>3435<BR>34363437<!-- MARKER FORMAT-SHEET="Para Hang" -->3438<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3439<TR VALIGN=TOP>3440<TD WIDTH=10%><FONT SIZE=2>23.1 </FONT></TD>3441<TD WIDTH=90%><FONT SIZE=2>Consent3442of KPMG LLP.</FONT></TD>3443</TR>3444</TABLE>3445<BR>34463447<!-- MARKER FORMAT-SHEET="Para Hang" -->3448<TABLE WIDTH=100% CELLPADDING=0 CELLSPACING=0>3449<TR VALIGN=TOP>3450<TD WIDTH=10%><FONT SIZE=2>24.1 </FONT></TD>3451<TD WIDTH=90%><FONT SIZE=2>Powers3452of Attorney (included on signature page hereof). </FONT></TD>3453</TR>3454</TABLE>3455<BR>34563457<!-- MARKER FORMAT-SHEET="Footnote Rule" -->3458<P>__________</P>34593460<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3461<P><FONT SIZE=2>*Indicates Compensatory Agreement.</FONT></P>34623463<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3464<P><FONT SIZE=2>**Certain portions of this Exhibit have been deleted and filed separately3465with the Commission pursuant to a request for confidential treatment under Rule 24b-2.3466Spaces corresponding to the deleted portions are represented by brackets with asterisks. </FONT></P>3467<BR><BR><BR><BR><BR>3468<!-- MARKER FORMAT-SHEET="Para Center" -->3469<P ALIGN="CENTER"><FONT size=2>36</font></P>34703471<PAGE>3472347334743475347634773478<!-- MARKER FORMAT-SHEET="Para Center Bold" -->3479<P ALIGN="CENTER"><B>Independent Auditors’ Report</B></P>348034813482348334843485<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3486<P><FONT SIZE=2>The Board of Directors and Stockholders<BR>CNS, Inc.: </FONT></P>34873488<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3489<P><FONT SIZE=2>We have audited the accompanying consolidated balance sheets of3490CNS, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related3491consolidated statements of operations, stockholders’ equity and3492comprehensive income (loss), and cash flows for each of the years in the3493three-year period ended December 31, 2001. These consolidated financial3494statements are the responsibility of the Company’s management. Our3495responsibility is to express an opinion on these consolidated financial3496statements based on our audits. </FONT></P>34973498<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3499<P><FONT SIZE=2>We conducted our audits in accordance with auditing standards3500generally accepted in the United States of America. Those standards require that3501we plan and perform the audit to obtain reasonable assurance about whether the3502financial statements are free of material misstatement. An audit includes3503examining, on a test basis, evidence supporting the amounts and disclosures in3504the financial statements. An audit also includes assessing the accounting3505principles used and significant estimates made by management as well as3506evaluating the overall financial statement presentation. We believe that our3507audits provide a reasonable basis for our opinion. </FONT></P>35083509<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3510<P><FONT SIZE=2>In our opinion, the consolidated financial statements referred3511to above present fairly, in all material respects, the financial position of3512CNS, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of3513their operations and their cash flows for each of the years in the three-year3514period ended December 31, 2001 in conformity with accounting principles3515generally accepted in the United States of America. </FONT></P>3516351735183519<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->3520<P><FONT SIZE=2><B>/s/ KPMG LLP</B> </FONT></P>35213522<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3523<P><FONT SIZE=2>Minneapolis, Minnesota<BR>January 22, 2002 </FONT></P>3524<BR><BR><BR><BR><BR><BR>3525<!-- MARKER FORMAT-SHEET="Para Center" -->3526<P ALIGN="CENTER"><FONT size=2>F-1</font></P>35273528352935303531353235333534<PAGE>353535363537<!-- MARKER FORMAT-SHEET="Para Center" -->3538<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Operations<BR> Years3539ended December 2001, 2000 and 1999 <BR>(in thousands, except per share amounts)</FONT></P>35403541<PRE><FONT SIZE=-1>354235432001 2000 19993544- -------------------------------------------------------------------------------------------------35453546Net sales $ 83,934 $ 68,892 $ 46,0503547Cost of goods sold 27,698 24,907 18,3583548- ------------------------------------------------------ -------- --------- ---------3549Gross profit 56,236 43,985 27,6923550- ------------------------------------------------------ -------- --------- ---------3551Operating expenses:3552Advertising and promotion 41,948 46,694 28,1043553Selling, general and administrative 14,583 15,134 11,9383554Special charges 930 0 6,3453555- ------------------------------------------------------ -------- --------- ---------3556Total operating expenses 57,461 61,828 46,3873557- ------------------------------------------------------ -------- --------- ---------3558Operating loss (1,225) (17,843) (18,695)35593560Interest income 1,242 2,234 2,5963561Gain (loss) on sales of marketable securities 64 (51) 2423562- ------------------------------------------------------ -------- --------- ---------3563Income (loss) before income taxes 81 (15,660) (15,857)35643565Income tax benefit 0 0 2,1013566- ------------------------------------------------------ -------- --------- ---------3567Net income (loss) $ 81 $ (15,660) $ (13,756)3568====================================================== ======== ========= =========3569Basic net income (loss) per share $ .01 $ (1.09) $ (.89)3570====================================================== ======== ========= =========3571Weighted average number of common shares outstanding 14,131 14,372 15,4353572====================================================== ======== ========= =========3573Diluted net income (loss) per share $ .01 $ (1.09) $ (.89)3574====================================================== ======== ========= =========3575Weighted average number of common3576and assumed conversion shares outstanding 14,431 14,372 15,4353577====================================================== ======== ========= =========3578</font></PRE>35793580<!-- MARKER FORMAT-SHEET="Para Flush" -->3581<P>The accompanying notes are an integral part of the consolidated3582financial statements.</P>35833584<BR><BR><BR>3585<!-- MARKER FORMAT-SHEET="Para Center" -->3586<P ALIGN="CENTER"><FONT size=2>F-2</font></P>3587358835893590359135923593<!-- *************************************************************************** -->3594<!-- MARKER PAGE="sheet: 29; page: 29" -->3595<HR SIZE=5 COLOR=GRAY NOSHADE>3596359735983599<!-- MARKER FORMAT-SHEET="Para Center" -->3600<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B><BR> Consolidated Balance Sheets <BR>December 31, 20013601and 2000<BR> (in thousands, except per share amounts)</FONT></P>3602360336043605<PRE><FONT SIZE=-1>3606<B>Assets 2001 2000</B>3607- --------------------------------------------------------------------------------------------------------3608Current assets:3609Cash and cash equivalents $ 8,311 $ 2,0793610Marketable securities 18,984 29,2443611Accounts receivable, net of allowance for doubtful accounts3612of $500 in 2001 and $300 in 2000 12,307 12,5823613Inventories 5,822 4,7523614Prepaid expenses and other current assets 1,294 3,2573615- ----------------------------------------------------------------------------- --------- ---------3616Total current assets 46,718 51,9143617Property and equipment, net 2,631 3,2013618Product rights, net 1,269 1,2293619- ----------------------------------------------------------------------------- --------- ---------3620$ 50,618 $ 56,3443621============================================================================= ========= =========36223623<B>Liabilities and Stockholders’ Equity</B>3624- --------------------------------------------------------------------------------------------------------3625Current liabilities:3626Accounts payable $ 6,699 $ 12,6003627Accrued expenses 6,751 6,2513628Accrued income taxes 556 5563629- ----------------------------------------------------------------------------- --------- ---------3630Total current liabilities 14,006 19,4073631Stockholders’ equity:3632Preferred stock -- authorized 8,484 shares;3633none issued or outstanding 0 03634Common stock -- $.01 par value; authorized 50,000 shares;3635issued 19,295 shares in 2001 and 2000 193 1933636Additional paid-in capital 60,785 61,1823637Treasury shares -- at cost; 5,294 shares in 2001 and 5,179 shares in 2000 (23,550) (23,279)3638Retained deficit (1,178) (1,259)3639Accumulated other comprehensive income 362 1003640- ----------------------------------------------------------------------------- --------- ---------3641Total stockholders’ equity 36,612 36,9373642Commitments (notes 9 and 10)3643- ----------------------------------------------------------------------------- --------- ---------3644$ 50,618 $ 56,3443645============================================================================= ========= =========3646</FONT></PRE>3647<!-- MARKER FORMAT-SHEET="Para Flush" -->3648<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated financial3649statements. </FONT></P>3650<BR><BR><BR>3651<!-- MARKER FORMAT-SHEET="Para Center" -->3652<P ALIGN="CENTER"><FONT size=2>F-3</font></P>365336543655365636573658365936603661<!-- *************************************************************************** -->3662<!-- MARKER PAGE="sheet: 30; page: 30" -->3663<HR SIZE=5 COLOR=GRAY NOSHADE>366436653666<!-- MARKER FORMAT-SHEET="Para Center" -->3667<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Stockholders’Equity3668and Comprehensive Income (Loss)<BR>36693670Years ended December 31, 2001, 2000 and 1999<BR>3671(in thousands)</FONT></P>36723673367436753676<PRE><FONT SIZE=-2>3677<B>Common Stock Treasury Shares Accumulated3678------------------- Additional ------------------------- Retained Other Total3679Number Par Paid-in Number Earnings Comprehensive Stockholders’3680of Shares Value Capital of Shares Cost (Deficit) Income (Loss) Equity</B>3681- ------------------------------------------------------------------------------------------------------------------------------------------36823683Balance at December 31, 1998 19,295 $193 $61,933 2,692 $ (14,670) $ 28,157 $ 253 $ 75,8663684Stock issued in connection with3685Employee Stock Purchase Plan 0 0 (98) (18) 151 0 0 533686Stock options exercised 0 0 (414) (108) 860 0 0 4463687Warrants issued 0 0 110 0 0 0 0 1103688Treasury shares purchased 0 0 0 2,272 (8,562) 0 0 (8,562)3689Comprehensive loss:3690Net loss for the year 0 0 0 0 0 (13,756) 0 (13,756)3691Unrealized losses on marketable3692securities net of income tax3693effect of $154 0 0 0 0 0 0 (573) (573)3694----------3695Total comprehensive loss (14,329)3696- ------------------------------------------------------------------------------------------------------------------------------------------3697Balance at December 31, 1999 19,295 193 61,531 4,838 (22,221) 14,401 (320) 53,5843698Stock issued in connection with3699Employee Stock Purchase Plan 0 0 (131) (26) 214 0 0 833700Stock options exercised 0 0 (218) (29) 238 0 0 203701Treasury shares purchased 0 0 0 396 (1,510) 0 0 (1,510)3702Comprehensive loss:3703Net loss for the year 0 0 0 0 0 (15,660) 0 (15,660)3704Unrealized gains on marketable3705securities net of income tax3706effect of $0 0 0 0 0 0 0 420 4203707----------3708Total comprehensive loss (15,240)3709- ------------------------------------------------------------------------------------------------------------------------------------------3710Balance at December 31, 2000 19,295 193 61,182 5,179 (23,279) (1,259) 100 36,9373711Stock issued in connection with3712Employee Stock Purchase Plan 0 0 (189) (36) 303 0 0 1143713Stock options exercised 0 0 (262) (51) 436 0 0 1743714Other 0 0 54 0 0 0 0 543715Treasury shares purchased 0 0 0 202 (1,010) 0 0 (1,010)3716Comprehensive income:3717Net income for the year 0 0 0 0 0 81 0 813718Unrealized gains on marketable3719securities net of income tax3720effect of $0 0 0 0 0 0 0 262 2623721----------3722Total comprehensive income 3433723- ------------------------------------------------------------------------------------------------------------------------------------------3724Balance at December 31, 2001 19,295 $193 $60,785 5,294 $ (23,550) $ (1,178) $ 362 $ 36,6123725========================================================================================================================================37263727</FONT></PRE>37283729<!-- MARKER FORMAT-SHEET="Para Flush" -->3730<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated3731financial statements. <FONT></P>3732<BR><BR><BR>37333734<!-- MARKER FORMAT-SHEET="Para Center" -->3735<P ALIGN="CENTER"><FONT size=2>F-4</font></P>373637373738373937403741<!-- *************************************************************************** -->3742<!-- MARKER PAGE="sheet: 31; page: 31" -->3743<HR SIZE=5 COLOR=GRAY NOSHADE>374437453746<!-- MARKER FORMAT-SHEET="Para Center" -->3747<P ALIGN="CENTER"><FONT SIZE="2"><B>CNS, INC.</B> <BR>Consolidated Statements of Cash Flows<BR> Years3748ended December 31, 2001, 2000 and 1999 <BR>(in thousands)</FONT></P>37493750375137523753<PRE><FONT SIZE=-1>3754<B>2001 2000 1999</B>3755- ----------------------------------------------------------------------------------------------------37563757Operating activities:3758Net income (loss) $ 81 $ (15,660) $ (13,756)3759Adjustments to reconcile net income (loss) to net cash3760used in operating activities:3761Depreciation and amortization 1,244 1,051 1,0293762Deferred income taxes 0 0 1,4863763Other 90 81 1103764Changes in operating assets and liabilities:3765Accounts receivable 275 (1,212) (3,579)3766Inventories (1,070) 153 3,9183767Prepaid expenses and other current assets 1,964 3,546 (4,009)3768Accounts payable and accrued expenses (5,401) 7,654 2,6553769- -------------------------------------------------------- --------- --------- ---------3770Net cash used in operating activities (2,817) (4,387) (12,146)3771- -------------------------------------------------------- --------- --------- ---------3772Investing activities:3773Purchases of marketable securities (44,911) (63,151) (97,157)3774Sales and maturities of marketable securities 55,433 72,324 118,2303775Payments for purchases of property and equipment (394) (2,019) (330)3776Payments for product rights (357) (141) (259)3777- -------------------------------------------------------- --------- --------- ---------3778Net cash provided by investing activities 9,771 7,013 20,4843779- -------------------------------------------------------- --------- --------- ---------3780Financing activities:3781Proceeds from the issuance of common stock under3782Employee Stock Purchase Plan 114 83 533783Proceeds from the exercise of stock options 174 20 4463784Purchase of treasury shares (1,010) (1,510) (8,562)3785- -------------------------------------------------------- --------- --------- ---------3786Net cash used in financing activities (722) (1,407) (8,063)3787- -------------------------------------------------------- --------- --------- ---------3788Net increase in cash and cash equivalents 6,232 1,219 2753789Cash and cash equivalents:3790Beginning of year 2,079 860 5853791- -------------------------------------------------------- --------- --------- ---------3792End of year $ 8,311 $ 2,079 $ 8603793======================================================== ========= ========= =========3794Supplemental disclosure of cash flow information:3795Cash paid during the year for interest $ 0 $ 0 $ 03796Cash paid during the year for income taxes 0 0 3443797======================================================== ========= ========= =========3798</FONT></PRE>37993800<!-- MARKER FORMAT-SHEET="Para Flush" -->3801<P ALIGN="LEFT"><FONT SIZE=2>The accompanying notes are an integral part of the consolidated financial3802statements.</FONT> </P>38033804<!-- MARKER FORMAT-SHEET="Para Center" -->3805<P ALIGN="CENTER"><FONT size=2>F-5</font></P>380638073808380938103811<!-- *************************************************************************** -->3812<!-- MARKER PAGE="sheet: 32; page: 32" -->3813<HR SIZE=5 COLOR=GRAY NOSHADE>381438153816<!-- MARKER FORMAT-SHEET="Para Center Bold" -->3817<P ALIGN="CENTER"><B>CNS, INC. <BR>Notes to Consolidated Financial Statements <BR>December 31,38182001, 2000 and 1999</B></P>381938203821<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->3822<P><FONT SIZE="2"><B>(1) Summary of Significant Accounting Policies </B></FONT></P>382338243825<!-- MARKER FORMAT-SHEET="Para In 0" -->3826<P><FONT SIZE="2"> <B>Business </B>The3827Company designs, manufactures and markets consumer products, including Breathe3828Right® nasal strips and FiberChoice® tablets. The Company’s products3829are sold over-the-counter in retail outlets, including mass merchant, drug,3830grocery and club stores. The Company primarily uses international distributors3831to market Breathe Right nasal strips outside the U.S.</FONT></P>38323833<!-- MARKER FORMAT-SHEET="Para In 0" -->3834<P><FONT SIZE="2"> <B>Principles of3835Consolidation</B> The accompanying consolidated financial statements include the3836accounts of CNS, Inc. and its subsidiaries (“the Company”). All3837material intercompany accounts and transactions have been eliminated in3838consolidation.</FONT></P>38393840<!-- MARKER FORMAT-SHEET="Para In 0" -->3841<P><FONT SIZE="2"> <B>Accounting3842Estimates</B> The preparation of financial statements in conformity with accounting3843principles generally accepted in the United States of America requires3844management to make estimates and assumptions that affect the reported amounts of3845assets and liabilities and disclosure of contingent assets and liabilities at3846the date of the financial statements and the reported amounts of revenues and3847expenses during the reporting period. Actual results could differ from those3848estimates.</FONT></P>38493850<!-- MARKER FORMAT-SHEET="Para In 0" -->3851<P><FONT SIZE="2"> <B>Basis of3852Presentation</B> Certain amounts from prior years’ financial statements have3853been reclassified to conform to the current year presentation. These3854reclassifications had no impact on the operating loss or net loss for 2000 and38551999.</FONT></P>38563857<!-- MARKER FORMAT-SHEET="Para In 0" -->3858<P><FONT SIZE="2"> <B>Revenue3859Recognition</B> Revenue from sales is recognized at the time products are shipped3860less estimated sales returns and other allowances.</FONT></P>38613862<!-- MARKER FORMAT-SHEET="Para In 0" -->3863<P><FONT SIZE="2"> <B>Fair Value of3864Financial Instruments</B> All financial instruments are carried at amounts that3865approximate fair value.</FONT></P>38663867<!-- MARKER FORMAT-SHEET="Para In 0" -->3868<P><FONT SIZE="2"> <B>Cash Equivalents</B>3869Cash equivalents consist primarily of money market funds.</FONT></P>38703871<!-- MARKER FORMAT-SHEET="Para In 0" -->3872<P><FONT SIZE="2"> <B>Marketable3873Securities</B> The Company classifies its marketable debt securities as3874available-for-sale and records these securities at fair market value. Net3875realized and unrealized gains and losses are determined on the specific3876identification cost basis. Any unrealized gains and losses are reflected as a3877separate component of stockholders’ equity. A decline in the market value3878of any available-for-sale security below cost that is deemed other than3879temporary, results in a charge to operations resulting in the establishment of a3880new cost basis for the security.</FONT></P>38813882<!-- MARKER FORMAT-SHEET="Para In 0" -->3883<P><FONT SIZE="2"> <B>Inventories</B>3884Inventories are valued at the lower of cost (determined on a first-in, first-out3885basis) or market. Inventory reserves have been established for potential product3886obsolescence.</FONT></P>38873888<!-- MARKER FORMAT-SHEET="Para In 0" -->3889<P><FONT SIZE="2"> <B>Property and3890Equipment</B> Property and equipment are stated at cost. Equipment is depreciated3891using the straight-line method over five years. Leasehold improvements are3892amortized over the lesser of the estimated useful life of the improvement or the3893term of the lease.</FONT></P>38943895<!-- MARKER FORMAT-SHEET="Para In 0" -->3896<P><FONT SIZE="2"> <B>Product Rights</B>3897Product rights, consisting of patents, trademarks and other product rights, are3898stated at cost and are amortized over three to seven years using the3899straight-line method.</FONT></P>39003901<!-- MARKER FORMAT-SHEET="Para Center" -->3902<P ALIGN="CENTER"><FONT size=2>F-6</font></P>390339043905390639073908390939103911<!-- *************************************************************************** -->3912<!-- MARKER PAGE="sheet: 33; page: 33" -->3913<HR SIZE=5 COLOR=GRAY NOSHADE>39143915391639173918<!-- MARKER FORMAT-SHEET="Para In 0" -->3919<P><FONT SIZE="2"> <B>Stock Based3920Compensation </B>The Company follows the disclosure requirements for employee stock3921based compensation plans and, accordingly, no compensation expense has been3922recognized.</FONT></P>39233924<!-- MARKER FORMAT-SHEET="Para In 0" -->3925<P><FONT SIZE="2"> <B>Foreign Currency3926Transactions </B>Most foreign transactions are in U.S. dollars, although some are3927conducted in functional local currencies. The functional currency is translated3928into U.S. dollars for the balance sheet accounts using current exchange rates in3929effect at the balance sheet date and for revenue and expense accounts using a3930weighted average exchange rate during the fiscal year. Gains and losses3931resulting from transactions denominated in foreign currencies are included in3932the consolidated statements of operations.</FONT></P>39333934<!-- MARKER FORMAT-SHEET="Para In 0" -->3935<P><FONT SIZE="2"> <B>Advertising </B>The3936Company capitalizes the production costs of advertising and expenses these costs3937the first time the advertising runs.</FONT></P>39383939<!-- MARKER FORMAT-SHEET="Para In 0" -->3940<P><FONT SIZE="2"> <B>Income Taxes</B>3941Deferred tax assets and liabilities and the resultant provision for income taxes3942are determined based on the difference between the financial statement and tax3943bases of assets and liabilities using enacted tax rates in effect for the year3944in which the differences are expected to reverse.</FONT></P>39453946<!-- MARKER FORMAT-SHEET="Para In 0" -->3947<P><FONT SIZE="2"> <B>Net Income Per Share</B>3948Basic net income (loss) per share and diluted net income (loss) per share3949have been computed based upon the weighted average number of common shares3950outstanding during the year. Assumed conversion shares were excluded from the3951net loss per share computation as their effect is antidilutive. Common stock3952options could potentially dilute basic earnings per share in future periods if3953the Company generates net income. Diluted net income per share has been computed3954based upon the weighted average number of common and assumed conversion shares3955outstanding during the year.</FONT></P>39563957<!-- MARKER FORMAT-SHEET="Para In 0" -->3958<P><FONT SIZE="2"> <B>Comprehensive3959Income (Loss) </B>Comprehensive income (loss) consists of the Company’s net3960income (loss) and unrealized gains (losses) on marketable securities and is3961presented in the consolidated statements of stockholders’ equity and3962comprehensive income (loss).</FONT></P>39633964<!-- MARKER FORMAT-SHEET="Para In 0" -->3965<P><FONT SIZE="2"> <B>New Accounting3966Standards </B>In 2000, the Emerging Issues Task Force (“EITF”) reached a3967consensus on Issue No. 00-14, “Accounting for Certain Sales3968Incentives”. This EITF requires companies to present in their statements of3969operations, certain sales incentives as sales allowances, resulting in a3970reduction of net sales. The Company currently records sales incentives covered3971by this EITF as operating expenses. The Company will be required to adopt this3972EITF beginning with the quarter ending March 31, 2002. If the Company would have3973applied the presentation set forth in this issue in 2001, 2000 and 1999, net3974sales would have been reduced by $1,123,000, $1,527,000 and $3,126,000,3975respectively. Operating expenses would have also been reduced by the same3976amounts in the corresponding years. This issue does not impact operating income3977(loss) for any of these years.</FONT></P>39783979<!-- MARKER FORMAT-SHEET="Para In 0" -->3980<P><font size=2> In 2001, the3981EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement3982Characterization of Consideration Paid to a Reseller”. This EITF requires3983companies to present in their statements of operations, certain consideration3984paid to a purchaser of the company’s products as sales allowances,3985resulting in a reduction of net sales. The Company currently records costs3986covered by this EITF as operating expenses. The Company plans on adopting this3987EITF beginning with the quarter ending March 31, 2002. The Company is in the3988process of evaluating this EITF and its potential impact.</font></P>39893990<!-- MARKER FORMAT-SHEET="Para In 0" -->3991<P><font size=2> In 2001, the Financial3992Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”)3993No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”</font></P>3994<BR><BR><BR>3995<!-- MARKER FORMAT-SHEET="Para Center" -->3996<P ALIGN="CENTER"><FONT size=2>F-7</font></P>399739983999400040014002<!-- *************************************************************************** -->4003<!-- MARKER PAGE="sheet: 34; page: 34" -->4004<HR SIZE=5 COLOR=GRAY NOSHADE>400540064007<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->4008<P><FONT SIZE=2>This statement supercedes SFAS No. 121, “Accounting for the4009Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed4010Of”. The statement retains the previously existing accounting requirements4011related to the recognition and measurement of the impairment of long-lived4012assets to be held and used while expanding the measurement requirements of4013long-lived assets to be disposed of by sale. It also expands the previously4014existing reporting requirements for discontinued operations to include a4015component of an entity that either has been disposed of or is classified as held4016for sale. The Company is required to implement SFAS No. 144 beginning with the4017quarter ending March 31, 2002. Management does not expect this statement to have4018a material impact on the Company’s consolidated financial position or4019results of operations. </FONT></P>40204021<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4022<P><FONT SIZE=2><B>(2) Marketable Securities</B> </FONT></P>402340244025<!-- MARKER FORMAT-SHEET="Para In 0" -->4026<P><font size=2> Marketable4027securities, including estimated fair value based on quoted market prices or4028valuation models, are summarized as follows (in thousands):</font></P>40294030<PRE><FONT SIZE=-1>4031<B>December 31,4032----------------------------------------------------40332001 20004034------------------------- ------------------------4035Cost Fair Value Cost Fair Value</B>4036---------- ------------ ---------- -----------40374038Cash equivalents $ 1,419 $ 1,419 $ 2,166 $ 2,1664039Corporate bonds 12,544 12,879 24,308 24,4134040U.S. Government obligations 4,659 4,686 2,670 2,6654041- ------------------------------ -------- -------- -------- --------4042Total marketable securities $ 18,622 $ 18,984 $ 29,144 $ 29,2444043============================== ======== ======== ======== ========4044</FONT></PRE>40454046<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->4047<P><FONT SIZE=2>Maturities of marketable securities at December 31, 2001 are as follows4048(in thousands): </FONT></P>40494050<PRE><FONT SIZE=-1>4051<B>Cost Fair Value</B>4052----------- -----------40534054Due within one year $ 10,711 $ 10,8474055Due after one year through three years 7,911 8,1374056- ---------------------------------------- -------- --------4057Total marketable securities $ 18,622 $ 18,9844058======================================== ======== ========4059</FONT></PRE>4060<!-- MARKER FORMAT-SHEET="Para In 0" -->4061<P><font size=2> There were4062realized gains of $64,000 and $243,000 during 2001 and 1999, respectively and4063realized losses of $51,000 during 2000.</font></P>40644065<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4066<P><FONT SIZE=2><B>(3) Advertising</B> </FONT></P>40674068<!-- MARKER FORMAT-SHEET="Para In 0" -->4069<P><font size=2> At December 31,40702001 and 2000, $540,000 and $1,924,000, respectively, of advertising costs were4071reported as assets. Advertising expense was $19,486,000 in 2001, $26,027,000 in40722000, and $11,728,000 in 1999.</font></P>4073<BR><BR><BR>40744075<!-- MARKER FORMAT-SHEET="Para Center" -->4076<P ALIGN="CENTER"><FONT size=2>F-8</font></P>407740784079408040814082408340844085<!-- *************************************************************************** -->4086<!-- MARKER PAGE="sheet: 35; page: 35" -->4087<HR SIZE=5 COLOR=GRAY NOSHADE>408840894090<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4091<P><FONT SIZE=2><B>(4) Details of Selected Balance Sheet Accounts</B> </FONT></P>409240934094<!-- MARKER FORMAT-SHEET="Para In 0" -->4095<P><font size=2> Details of4096selected balance sheet accounts are as follows (in thousands):</font></P>40974098<PRE><FONT SIZE=-1>4099<B>2001 2000 1999</B>4100-------- -------- --------41014102Allowance for doubtful accounts:4103Balance beginning of year $ 300 $ 280 $ 2104104Plus provision for doubtful accounts 316 26 964105Less charge offs 116 6 264106- --------------------------------------- ----- ----- -----4107Balance end of year $ 500 $ 300 $ 2804108======================================= ===== ===== =====41094110<B>December 314111-----------------------41122001 2000</B>4113---------- ----------4114Inventories:4115Finished goods $ 3,421 $ 2,1394116Raw materials and component parts 2,401 2,6134117- ------------------------------------------- ------- -------4118Total inventories $ 5,822 $ 4,7524119=========================================== ======= =======4120Property and equipment:4121Warehouse and production equipment $ 760 $ 5564122Office equipment and information systems 3,642 3,6234123Leasehold improvements 1,050 1,0224124- ------------------------------------------- ------- -------41255,452 5,2014126Less accumulated depreciation 2,821 2,0004127- ------------------------------------------- ------- -------4128Property and equipment, net $ 2,631 $ 3,2014129=========================================== ======= =======4130Product rights:4131Product rights $ 2,905 $ 2,5484132Less accumulated amortization 1,636 1,3194133- ------------------------------------------- ------- -------4134Product rights, net $ 1,269 $ 1,2294135=========================================== ======= =======4136Accrued expenses:4137Promotions and allowances $ 3,511 $ 3,0854138Royalties and commissions 1,276 9544139Salaries, incentives and paid time off 1,501 2,0004140Restructuring costs 322 04141Other 141 2124142- ------------------------------------------- ------- -------4143Total accrued expenses $ 6,751 $ 6,2514144=========================================== ======= =======4145</FONT></PRE>41464147<BR><BR><BR>41484149<!-- MARKER FORMAT-SHEET="Para Center" -->4150<P ALIGN="CENTER"><FONT size=2>F-9</font></P>415141524153415441554156<!-- *************************************************************************** -->4157<!-- MARKER PAGE="sheet: 36; page: 36" -->4158<HR SIZE=5 COLOR=GRAY NOSHADE>415941604161<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4162<P><FONT SIZE=2><B>(5) Stockholders’Equity</B> </FONT></P>416341644165<!-- MARKER FORMAT-SHEET="Para In 0" -->4166<P><FONT SIZE="2"> <B>Stock Options</B>4167The Company’s stock option plans allow for the grant of options to4168officers, directors, and employees to purchase up to 3,650,000 shares of common4169stock at exercise prices not less than 100% of fair market value on the dates of4170grant. The term of the options may not exceed ten years and options vest in4171increments over 1 to 5 years from the grant date. The plans allow for the grant4172of shares of restricted common stock. No shares of restricted common stock have4173been granted under these plans as of December 31, 2001.</FONT></P>41744175<!-- MARKER FORMAT-SHEET="Para In 0" -->4176<P><font size=2> Stock option4177activity under these plans is summarized as follows:</font></P>41784179<PRE><FONT SIZE=-1>4180<B>Weighted-average Shares4181Exercise Price Shares Available4182Per Share Outstanding for Grant</B>4183------------------ ------------- -------------41844185Balance at December 31, 1998 $ 4.74 1,580,500 370,6504186Granted 3.05 353,000 (353,000)4187Exercised 4.16 (115,010) 04188Canceled 4.00 (47,100) 47,1004189- ------------------------------ -------- --------- --------4190Balance at December 31, 1999 4.47 1,771,390 64,7504191New 2000 Plan 0 700,0004192Granted 4.01 358,400 (358,400)4193Exercised 4.18 (69,690) 04194Canceled 5.18 (168,100) 168,1004195- ------------------------------ -------- --------- --------4196Balance at December 31, 2000 4.33 1,892,000 574,4504197Granted 4.26 345,960 (345,960)4198Exercised 3.36 (51,800)4199Canceled 4.47 (102,970) 102,9704200Expired 0 (7,280)4201- ------------------------------ --------- --------4202Balance at December 31, 2001 $ 4.33 2,083,190 324,1804203============================== ======== ========= ========4204</FONT></PRE>420542064207<!-- MARKER FORMAT-SHEET="Para In 0" -->4208<P><font size=2> Information on4209outstanding and currently exercisable options by price range as of December 31,42102001, is summarized as follows:</font></P>42114212<PRE><FONT SIZE=-1>4213<B> Weighted Weighted Weighted4214Total -Average -Average Exercisable -Average4215Price Range Number of Remaining Exercise Number of Exercise4216Per Share Shares Life (Years) Price Shares Price</B>4217- ------------------ ----------- -------------- ---------- ------------- -----------42184219$2.31 -- 2.81 242,500 6.9 $ 2.78 171,000 $ 2.7742203.10 -- 4.00 699,560 5.6 3.56 445,320 3.3842214.13 -- 5.00 580,680 7.9 4.52 264,800 4.6942225.44 -- 5.94 466,700 4.2 5.49 434,700 5.4942237.25 93,750 5.6 7.25 93,750 7.254224------- -------42252,083,190 1,409,5704226========= =========4227</FONT></PRE>42284229<!-- MARKER FORMAT-SHEET="Para In 0" -->4230<P><font size=2> At December 31,42312001, the weighted-average remaining contractual life of outstanding options was42326.1 years. At December 31, 2001, 2000 and 1999, currently exercisable options4233aggregated 1,409,570, 1,207,232 and 1,091,156 shares of common stock,4234respectively and the weighted-average exercise price of those options was $4.46,4235$4.55 and $4.73, respectively.</font></P>42364237<!-- MARKER FORMAT-SHEET="Para In 0" -->4238<P><font size=2> The per share4239weighted-average fair value of stock options granted during 2001, 2000 and 19994240is estimated as $2.55, $2.60 and $1.98, respectively on the date of grant using4241the Black-Scholes</font></P>4242<BR><BR><BR>4243<!-- MARKER FORMAT-SHEET="Para Center" -->4244<P ALIGN="CENTER"><FONT size=2>F-10</font></P>4245424642474248424942504251<!-- *************************************************************************** -->4252<!-- MARKER PAGE="sheet: 37; page: 37" -->4253<HR SIZE=5 COLOR=GRAY NOSHADE>42544255<!-- MARKER FORMAT-SHEET="Para Flush In 0" -->4256<P><FONT SIZE=2>option pricing model with the following assumptions: volatility4257of 60% in 2001 and 65% in 2000 and 1999; risk-free interest rate of 5.00% in42582001, 6.50% in 2000 and 6.00% in 1999, and an expected life of 6 years. </FONT></P>42594260<!-- MARKER FORMAT-SHEET="Para In 0" -->4261<P><font size=2> The Company4262applies APB No. 25, Accounting for Stock Issued to Employees, and related4263interpretations in accounting for its stock compensation plans. Accordingly, no4264compensation expense has been recognized for its stock-based compensation plans.4265Had the Company determined compensation cost based on the fair value at the4266grant date for its stock options under SFAS No. 123, Accounting for Stock-Based4267Compensation, the Company’s net income and diluted earnings per share would4268have been reduced by approximately $950,000, or $.07 per share in 2001,4269$900,000, or $.06 per share in 2000 and $950,000, or $.06 per share in 1999.</font></P>42704271<!-- MARKER FORMAT-SHEET="Para In 0" -->4272<P><FONT SIZE="2"> <B>Employee Stock4273Purchase Plan</B> The Employee Stock Purchase Plan allows eligible employees to4274purchase shares of the Company’s common stock through payroll deductions.4275The purchase price is the lower of 85% of the fair market value of the stock on4276the first or last day of each six-month period during which an employee4277participated in the plan. The Company has reserved 400,000 shares under the plan4278of which employees as of December 31, 2001 have purchased 224,367 shares.</FONT></P>42794280<!-- MARKER FORMAT-SHEET="Para In 0" -->4281<P><FONT SIZE="2"> <B>Warrants </B>In4282connection with agreements to license certain intellectual property rights to4283potential products, licensers were issued warrants. During 1999, warrants were4284issued to purchase 50,000 shares of the Company’s common stock exercisable4285at a price of $3.44 per share exercisable evenly over three years and for a4286period of 10 years. The issuance of the warrants resulted in an expense of4287$110,000. Warrants were issued during 1997 to purchase 25,000 shares at a price4288of $8.00 per share exercisable in 2000 and for a period of five years. Of these4289warrants, 48,000 shares are currently exercisable.</FONT></P>42904291<!-- MARKER FORMAT-SHEET="Para In 0" -->4292<P><FONT SIZE="2"> <B>Preferred Stock</B>4293At December 31, 2001, the Company is authorized to issue 1,000,000 shares of4294Series A Junior Participating Preferred Stock upon a triggering event under the4295Company’s stockholders’ rights plan and is authorized to issue up to4296an additional 7,483,589 shares of undesignated preferred stock.</FONT></P>4297<BR><BR><BR><BR><BR><BR>42984299<!-- MARKER FORMAT-SHEET="Para Center" -->4300<P ALIGN="CENTER"><FONT size=2>F-11</font></P>430143024303430443054306<!-- *************************************************************************** -->4307<!-- MARKER PAGE="sheet: 38; page: 38" -->4308<HR SIZE=5 COLOR=GRAY NOSHADE>430943104311<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4312<P><FONT SIZE=2><B>(6) Income Taxes</B> </FONT></P>431343144315<!-- MARKER FORMAT-SHEET="Para In 0" -->4316<P><font size=2> Income tax4317expense (benefit) for the three years ended December 31, 2001, is as follows (in4318thousands):</font></P>43194320<PRE><FONT SIZE=-1>43214322<B>Current Deferred Total</B>4323------------- ---------- ------------432443252001:4326Federal $ 0 $ 0 $ 04327State 0 0 04328- -------------------------------- --------- ------- ---------4329Income tax expense $ 0 $ 0 $ 04330================================ ========= ======= =========43312000:4332Federal $ 0 $ 0 $ 04333State 0 0 04334- -------------------------------- --------- ------- ---------4335Income tax expense $ 0 $ 0 $ 04336================================ ========= ======= =========43371999:4338Federal $ (3,917) $ 1,816 $ (2,101)4339State 0 0 04340- -------------------------------- --------- ------- ---------4341Income tax expense (benefit) $ (3,917) $ 1,816 $ (2,101)4342================================ ========= ======= =========4343</FONT></PRE>43444345<BR><BR><BR><BR><BR><BR>43464347<!-- MARKER FORMAT-SHEET="Para Center" -->4348<P ALIGN="CENTER"><FONT size=2>F-12</font></P>434943504351435243534354<!-- *************************************************************************** -->4355<!-- MARKER PAGE="sheet: 39; page: 39" -->4356<HR SIZE=5 COLOR=GRAY NOSHADE>435743584359<!-- MARKER FORMAT-SHEET="Para" -->4360<P ALIGN="LEFT"><FONT SIZE=2> Income tax expense (benefit)4361differed from the amounts computed by applying the U.S. federal income tax rate4362of 35% as a result of the following (in thousands): </FONT></P>43634364<PRE><FONT SIZE=-1>4365<B>2001 2000 1999</B>4366-------- ------------- -------------43674368Computed tax expense (benefit) $ 28 $ (5,481) $ (5,550)4369State taxes, net of federal benefit 0 (554) (431)4370Tax exempt interest 0 0 (178)4371Change in deferred tax valuation allowance (46) 6,018 3,9324372Other 18 17 1264373- -------------------------------------------- ----- --------- ---------4374Actual tax expense (benefit) $ 0 $ 0 $ (2,101)4375============================================ ===== ========= =========4376</FONT></PRE>437743784379<!-- MARKER FORMAT-SHEET="Para In 0" -->4380<P><font size=2> The tax effects4381of temporary differences that give rise to significant portions of the deferred4382tax assets and deferred tax liabilities for 2001 and 2000 are presented below4383(in thousands):</font></P>43844385<PRE><FONT SIZE=-1>4386<B>December 314387---------------------43882001 2000</B>4389-------- ----------43904391Deferred tax assets:4392Inventory items $ 339 $ 7954393Accounts receivable allowance 185 1114394Product rights 304 2464395Accrued expenses 2,109 1,5804396Net operating loss and credit carryforwards 6,654 7,4454397- ---------------------------------------------- ------ -------43989,591 10,1774399Less valuation allowance 9,273 9,9504400- ---------------------------------------------- ------ -------4401318 2274402------ -------4403Deferred tax liabilities:4404Unrealized gains on marketable securities (134) (35)4405Property and equipment (184) (192)4406- ---------------------------------------------- ------ -------4407(318) (227)4408------ -------4409Net deferred tax assets $ 0 $ 04410============================================== ====== =======4411</FONT></PRE>441244134414<!-- MARKER FORMAT-SHEET="Para In 0" -->4415<P><font size=2> In assessing the4416realization of deferred tax assets, management considers whether it is more4417likely than not that some portion or all of the deferred tax assets will not be4418realized. The ultimate realization of deferred tax assets is dependent upon the4419generation of future taxable income during the periods in which those temporary4420differences become deductible. Based on the level of historical taxable income4421and projections of future taxable income over the periods in which the deferred4422tax assets are deductible, management does not believe that it is more likely4423than not the Company will realize the benefits of these deductible differences.4424Accordingly, the Company has provided a valuation allowance against the net4425deferred assets as of December 31, 2001.</font></P>44264427<!-- MARKER FORMAT-SHEET="Para In 0" -->4428<P><font size=2> As of December442931, 2001, the Company has reported federal net operating loss carryforwards of4430approximately $17,000,000. The federal net operating loss carryforwards expire4431in 2019 and 2020. Additionally, the Company has a federal credit carryforward4432for alternative minimum tax of approximately $327,000 that has no expiration4433date.</font></P>4434<BR><BR><BR>4435<!-- MARKER FORMAT-SHEET="Para Center" -->4436<P ALIGN="CENTER"><FONT size=2>F-13</font></P>4437443844394440444144424443<!-- *************************************************************************** -->4444<!-- MARKER PAGE="sheet: 40; page: 40" -->4445<HR SIZE=5 COLOR=GRAY NOSHADE>4446444744484449<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4450<P><FONT SIZE=2><B>(7) Sales</B> </FONT></P>44514452<!-- MARKER FORMAT-SHEET="Para In 0" -->4453<P><font size=2> The Company had4454one significant customer who accounted for approximately 21%, 19% and 24% of net4455sales in 2001, 2000 and 1999, respectively. Accounts receivable from this4456customer as of December 31, 2001 and 2000 were $2,413,000 and $2,274,000,4457respectively.</font></P>44584459<!-- MARKER FORMAT-SHEET="Para In 0" -->4460<P><font size=2> Net sales by4461geographic area are as follows (in thousands):</font></P>44624463<PRE><font size=-1>44642001 2000 19994465----------- ----------- -----------44664467Domestic $ 67,712 $ 62,735 $ 45,0624468International 16,222 6,157 9884469- --------------- -------- -------- --------4470Net sales $ 83,934 $ 68,892 $ 46,0504471=============== ======== ======== ========4472</FONT></PRE>447344744475<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4476<P><FONT SIZE=2><B>(8) Special Charges</B> </FONT></P>447744784479<!-- MARKER FORMAT-SHEET="Para In 0" -->4480<P><font size=2> On June 26,44812001, the Company announced a plan to streamline and realign the Company’s4482resources to better match its strategic goals. The Company recorded a special4483charge of $930,000 for costs associated with this restructure plan.4484Approximately 20 jobs, or 25% of the workforce from throughout the Company, were4485eliminated. These cost-cutting actions are expected to result in annualized4486savings of approximately $2 to $2.5 million. Cost savings relating to this plan4487were realized beginning in July of 2001. During 2001, the Company utilized4488$608,000 of the $930,000 accrual, primarily for severance benefits. The4489remaining accrual of $322,000 will be utilized during 2002, primarily for4490severance benefits.</font></P>44914492<!-- MARKER FORMAT-SHEET="Para In 0" -->4493<P><font size=2> On September 30,44941999, the Company and the 3M Company (“3M”) amended an exclusive4495international distribution agreement in a manner that allowed the Company to4496regain control of the marketing, sales and distribution of Breathe Right nasal4497strips in international markets. In exchange for a one-time contract termination4498fee of $6,345,000 paid in 1999, the international distribution agreement with 3M4499terminated on June 30, 2000.</font></P>45004501<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4502<P><FONT SIZE=2><B>(9) License Agreements</B> </FONT></P>450345044505<!-- MARKER FORMAT-SHEET="Para In 0" -->4506<P><font size=2> The Company has4507agreements to exclusively license intellectual property rights to certain4508products. Royalties due under these agreements are based on various percentages4509of net sales. To maintain the Company’s licenses, it must make minimum4510royalty payments of $1,070,000 each year until patents for the products expire.4511Royalty expense was approximately $3,524,000 in 2001, $2,692,000 in 2000, and4512$1,477,000 in 1999.</font></P>4513<BR><BR><BR>45144515<!-- MARKER FORMAT-SHEET="Para Center" -->4516<P ALIGN="CENTER"><FONT size=2>F-14</font></P>451745184519452045214522<!-- *************************************************************************** -->4523<!-- MARKER PAGE="sheet: 41; page: 41" -->4524<HR SIZE=5 COLOR=GRAY NOSHADE>452545264527<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4528<P><FONT SIZE=2><B>(10) Operating Leases</B> </FONT></P>452945304531<!-- MARKER FORMAT-SHEET="Para In 0" -->4532<P><font size=2> The Company4533leases equipment and office space under noncancelable operating leases that have4534initial or noncancelable lease terms in excess of one year. Future minimum lease4535payments due in accordance with these leases as of December 31, 2001 are as4536follows (in thousands):</font></P>45374538<PRE><FONT SIZE=-1>45394540<B>Year Ending December 31, Amount</B>4541- --------------------------------- ----------454245432002 $ 73345442003 74445452004 72745462005 74045472006 7554548Later years 3,1044549- --------------------------------- -------4550Future minimum lease payments $ 6,8034551================================= =======4552</FONT></PRE>45534554<!-- MARKER FORMAT-SHEET="Para In 0" -->4555<P><font size=2> Total rental expense for4556operating leases was $789,000 in 2001, $559,000 in 2000 and $555,000 in 1999. </font></P>45574558<!-- MARKER FORMAT-SHEET="PARA FLUSH BOLD" -->4559<P><FONT SIZE=2><B>(11) Net Income (Loss) Per Share</B> </FONT></P>456045614562<!-- MARKER FORMAT-SHEET="Para In 0" -->4563<P><font size=2> A reconciliation of4564basic and diluted weighted average common shares outstanding is as follows (in4565thousands):</font></P>45664567<PRE><FONT SIZE=-1>4568<B>2001 2000 1999</B>4569-------- -------- ---------45704571Weighted average common shares outstanding 14,131 14,372 15,4354572Assumed conversion of stock options 300 0 04573- ---------------------------------------------- ------ ------ ------4574Average common and assumed conversion shares 14,431 14,372 15,4354575============================================== ====== ====== ======4576</FONT></PRE>45774578<!-- MARKER FORMAT-SHEET="Para In 0" -->4579<P><font size=2> Options and4580warrants to purchase 722,000 shares of common stock with a range of exercise4581prices from $5.00 to $8.00 per share were outstanding as of December 31, 20014582but were not included in the computation of diluted earnings per share because4583the exercise price was greater than the average market price of the common4584shares. The options expire from 2002 to 2011.</font></P>4585<BR><BR><BR>45864587<!-- MARKER FORMAT-SHEET="Para Center" -->4588<P ALIGN="CENTER"><FONT size=2>F-15</font></P>45894590459145924593459445954596</BODY>4597</HTML>45984599</TEXT>4600</DOCUMENT>4601<DOCUMENT>4602<TYPE>EX-3.14603<SEQUENCE>34604<FILENAME>cns021471_ex3-1.txt4605<DESCRIPTION>AMENDED AND RESTATED BY-LAWS4606<TEXT>4607Exhibit 3.146084609461046114612461346144615AMENDED AND RESTATED BY-LAWS4616461746184619OF46204621462246234624CNS, INC.46254626462746284629463046314632463346344635DATED JANUARY 23, 200246364637<PAGE>463846394640CONTENTS OF AMENDED AND RESTATED BY-LAWS4641OF4642CNS, INC.464346444645ARTICLE 1 - OFFICES............................................................146461.1) Registered Offices...........................................146471.2) Offices......................................................146484649ARTICLE 2 - CORPORATE SEAL.....................................................146504651ARTICLE 3 - SHAREHOLDERS.......................................................146523.1) Regular Meeting..............................................146533.2) Special Meetings.............................................246543.3) Quorum.......................................................246553.4) Voting.......................................................246563.5) Notice of Meeting............................................346573.6) Proxies......................................................346583.7) Closing Transfer Books.......................................346593.8) Record Date..................................................346603.9) Presiding Officer............................................346613.10) Conduct of Meetings of Shareholders..........................446623.11) Order of Business............................................446633.12) Inspectors of Election.......................................546643.13) Informal Action by Shareholders..............................546654666ARTICLE 4 - DIRECTORS..........................................................546674.1) General Powers...............................................546684.2) Number.......................................................546694.3) Qualifications and Term of Office............................546704.4) Quorum.......................................................546714.5) Regular Meetings.............................................646724.6) Telephonic Meetings..........................................646734.7) Special Meetings.............................................646744.8) Compensation.................................................646754.9) Salaries.....................................................646764.10) Committees...................................................646774.11) Committee of Disinterested Persons...........................746784.12) Vacancies....................................................746794.13) Order of Business............................................746804.14) Written Consent or Opposition in Advance of Meeting..........746814.15) Informal Action by Directors.................................846824.16) Nominations for Election of Directors........................846834684ARTICLE 5 - OFFICERS...........................................................846855.1) Number.......................................................846865.2) Election, Term of Office and Qualifications..................846874688<PAGE>4689469046915.3) Chairman of the Board........................................946925.4) President and Chief Executive Officer........................946935.5) Chief Operating Officer......................................946945.6) Vice President...............................................946955.7) Secretary....................................................946965.8) Treasurer and Chief Financial Officer........................946975.9) Assistant Officers..........................................1046985.10) Officers Shall Not Lend Corporate Credit....................1046994700ARTICLE 6 - INDEMNIFICATION...................................................1047014702ARTICLE 7 - SHARES AND THEIR TRANSFER.........................................1047037.1) Certificates of Stock.......................................1047047.2) Facsimile Signature.........................................1047057.3) Issuance of Shares..........................................1147067.4) Transfer of Shares..........................................1147077.5) Lost Certificates...........................................1147087.6) Treasury Stock..............................................1147097.7) Indebtedness of Shareholders................................1147107.8) Transfer Agent and Registrar................................1147114712ARTICLE 8 - BOOKS AND RECORDS.................................................1147138.1) Share Register; Dates of Issuance...........................1147148.2) Other Documents Required....................................1247158.3) Financial Records...........................................1247168.4) Right to Inspect............................................1247178.5) Cost of Copies..............................................1247188.6) Computerized Records........................................1347198.7) Financial Statements........................................1347204721ARTICLE 9 - DISTRIBUTIONS.....................................................1347229.1) Distributions...............................................1347239.2) Record Date.................................................1347249.3) Restrictions................................................1447254726ARTICLE 10 - FINANCIAL AND PROPERTY MANAGEMENT................................14472710.1) Fiscal Year.................................................14472810.2) Audit of Books and Accounts.................................14472910.3) Contracts...................................................14473010.4) Checks......................................................14473110.5) Deposits....................................................14473210.6) Voting Securities Held by Corporation.......................1447334734ARTICLE 11 - WAIVER OF NOTICE.................................................1547354736ARTICLE 12 - AMENDMENTS.......................................................1547374738<PAGE>473947404741AMENDED AND RESTATED BY-LAWS47424743OF47444745CNS, INC.47464747ARTICLE 147484749OFFICES475047511.1) Registered Offices - The address of the registered office of the4752corporation shall be established and maintained at the office of the Corporation4753Trust Center, 1209 Orange Street, in the City of Wilmington, County of New4754Castle, State of Delaware and the Corporation Trust Company shall be the4755registered agent of the corporation. The Board of Directors shall have authority4756to change the registered office of the corporation from time to time, and any4757such change shall be registered by the secretary with the Secretary of State of4758Delaware.475947601.2) Offices - The corporation may have such other offices, including4761its principal business office, either within or without the State of Delaware,4762as the Board of Directors may designate or as the business of the corporation4763may require from time to time.47644765ARTICLE 247664767CORPORATE SEAL47684769The corporate seal shall have thereon the name of the corporation, and4770the words "Corporate Seal" and when so directed by the Board of Directors a4771duplicate of the seal may be kept and used by the secretary or treasurer or by4772an assistant secretary or assistant treasurer.47734774ARTICLE 347754776SHAREHOLDERS477747783.1) Regular Meeting - The regular meeting of the shareholders of the4779corporation shall be an annual meeting held at the principal business office of4780the corporation, or at such place as is designated by the Board of Directors or4781by written consent of all the shareholders entitled to vote thereat, at which4782time the shareholders, voting as provided in the Articles of Incorporation,4783shall elect a Board of Directors for the ensuing year, and shall transact such4784other business as shall properly come before them. In the event the regular4785meeting is not held for a period of thirteen (13) months or more, a shareholder4786or director may apply to the Court of Chancery to summarily order a meeting to4787be held. To be properly brought before the annual meeting, business must be of a4788nature that is appropriate for consideration at an annual meeting and must be4789(i) specified in the notice of meeting (or any supplement thereto) given by or4790at the direction of the Board of Directors, (ii) otherwise properly brought4791before the meeting by a shareholder. In addition to any other applicable4792requirements, for business to be properly brought before the annual meeting by a47934794479514796<PAGE>479747984799shareholder, the shareholder must have given timely notice thereof in writing to4800the Secretary of the corporation. To be timely, each such notice must be given,4801either by personal delivery or by United States mail, postage prepaid, to the4802Secretary of the corporation, not less than 45 days nor more than 60 days prior4803to the date the proxy materials for the previous year's annual meeting were4804mailed to shareholders of the corporation. Each such notice to the Secretary4805shall set forth as to each matter the shareholder proposes to bring before the4806annual meeting (w) a brief description of the business desired to be brought4807before the annual meeting and the reasons for conducting such business at the4808annual meeting, (x) the name and address of record of the shareholders proposing4809such business, (y) the class or series (if any) and the number of shares of the4810corporation which are owned by the shareholder, and (z) any material interest of4811the shareholder in such business. Notwithstanding anything in these By-laws to4812the contrary, no business shall be transacted at the annual meeting except in4813accordance with the procedures set forth in this Article; provided, however,4814that nothing in this Article shall be deemed to preclude discussion by any4815shareholder of any business properly brought before the annual meeting, in4816accordance with these By-Laws.481748183.2) Special Meetings - Special meetings of the shareholders shall be4819called by the Secretary at any time upon request of the President, a4820Vice-President acting in the capacity of the President, the Treasurer or two (2)4821or more members of the Board of Directors, or upon a written request of4822shareholders holding ten percent (10%) or more of the capital stock entitled to4823vote. Notice shall be given in accordance with the provisions of Article 3.54824hereof.482548263.3) Quorum - The holders of fifty (50%) percent of the outstanding4827shares entitled to vote, represented either in person or by proxy, shall4828constitute a quorum for the transaction of business. The shareholders present at4829a duly called or held meeting, at which a quorum of the shareholders is present,4830may continue to transact business until adjournment notwithstanding the4831withdrawal of enough shareholders to leave less than a quorum. In case a quorum4832is not present at any meeting, those present shall have the power to adjourn the4833meeting from time to time, without notice or other announcement at the meeting,4834until the requisite number of voting shares shall be represented. Any business4835may be transacted at such reconvened meeting which might have been transacted at4836the meeting which was adjourned.483748383.4) Voting - At each meeting of the shareholders, every shareholder4839having the right to vote shall be entitled to vote in person or by proxy duly4840appointed by an instrument in writing subscribed by such shareholder. Each4841shareholder shall have one (1) vote for each share having voting power standing4842in his name on the books of the corporation. Shares owned by two (2) or more4843shareholders may be voted by any one of them unless the corporation receives4844written notice from any one of them denying the authority of that person to vote4845those shares. A holder of voting shares may vote any portion of the shares in4846any way the shareholder chooses. If a shareholder votes without designating the4847proportion or number of shares voted in a particular way, the shareholder is4848deemed to have voted all the shares in that way. Upon the demand of any4849shareholder, the vote for director, or the vote upon any question before the4850meeting shall be by ballot. All elections shall be had and all questions decided4851by a majority vote of the number of shares entitled to vote and represented at4852any meeting at which there is a quorum, except in such cases as shall otherwise4853be required or permitted by statute, the Certificate of Incorporation, these4854By-Laws or by agreement approved by a majority vote of the number of shares4855entitled to vote.48564857485824859<PAGE>4860486148623.5) Notice of Meeting - There shall be mailed to each shareholder4863shown by the books of the corporation to be a holder of record of voting shares,4864at his address as shown by the books of the corporation, a notice setting out4865the time and place of the regular meeting or any special meeting, which notice4866shall be mailed at least ten (10) days and not more than sixty (60) days prior4867thereto. Every notice of any special meeting shall state the purpose or purposes4868of the proposed meeting, and the business transacted at all special meetings4869shall be confined to purposes stated in the call. A shareholder may waive notice4870of a meeting of shareholders. A waiver of notice by a shareholder entitled to4871notice is effective whether given before, at, or after the meeting, or whether4872given in writing, orally, or by attendance. Attendance by a shareholder at a4873meeting is a waiver of notice of that meeting, except where the shareholder4874objects at the beginning of the meeting to the transaction of business because4875the meeting is not lawfully called or convened, or objects before a vote on an4876item of business because the item may not lawfully be considered at that meeting4877and does not participate in the consideration of the item at that meeting.487848793.6) Proxies - At all meetings of shareholders, a shareholder may vote4880by proxy executed in writing by the shareholder or by his duly authorized4881attorney-in-fact. Such proxies shall be filed with the Secretary of the4882corporation before or at the time of the meeting. No proxy shall be valid after4883eleven (11) months from the date of its execution, unless otherwise provided in4884the proxy. No appointment of a proxy is irrevocable unless the appointment is4885coupled with an interest in the shares of the corporation.488648873.7) Closing Transfer Books - The Board of Directors may close the4888stock transfer books for a period of time not exceeding sixty (60) days4889preceding the date of any meeting of shareholders, payment of dividend,4890allotment of rights, change, conversion or exchange of capital stock or the date4891of obtaining consent of shareholders for any purpose.489248933.8) Record Date - In lieu of closing the stock record books the Board4894of Directors may fix in advance a date, not exceeding sixty (60) days preceding4895the date of any of the aforesaid events, as a record date for the determination4896of shareholders entitled to notice of and to vote at any such meeting and any4897adjournment thereof, or to receive any such dividend or allotment or rights, or4898to exercise the rights in respect to any change, conversion or exchange of4899capital stock or to give such consent, and in such case only such shareholders4900on the record date so fixed shall be entitled to notice of and to vote at such4901meeting and any adjournment thereof, or to receive such dividend or allotment of4902rights, or to exercise such rights, or to give such consent, as the case may be,4903notwithstanding any transfer of any stock on the books of the corporation after4904any such record date so fixed. If the stock transfer books are not closed and no4905record date is fixed for such determination of the shareholders of record, the4906date on which notice of the meeting is mailed, or the date of adoption of a4907resolution of the Board of Directors declaring a dividend, allotment of rights,4908change, conversion or exchange of capital stock or to give such consent, as the4909case may be, shall be the record date for such determination of shareholders. A4910determination of shareholders entitled to vote shall apply to any adjournment of4911such meeting except when the date of determination or the closing of the stock4912transfer book exceeds sixty (60) days preceding such adjourned meeting, in which4913event a new meeting must be called.491449153.9) Presiding Officer - The appropriate officers of the corporation4916shall preside over all meetings of the shareholders; provided, however, that in4917the absence of an appropriate corporate49184919492034921<PAGE>492249234924officer at any meeting of the shareholders, the meeting shall choose any person4925present to act as presiding officer of the meeting.492649273.10) Conduct of Meetings of Shareholders - Subject to the following,4928meetings of shareholders generally shall follow accepted rules of parliamentary4929procedure:493049311. The chairman of the meeting shall have absolute authority over4932matters of procedure and there shall be no appeal from the4933ruling of the chairman. If the chairman, in his absolute4934discretion, deems it advisable to dispense with the rules of4935parliamentary procedure as to any one meeting of shareholders4936or part thereof the chairman shall so state and shall clearly4937state the rules under which the meeting or appropriate part4938thereof shall be conducted.493949402. If disorder should arise which prevents continuation of the4941legitimate business of the meeting, the chairman may quit the4942chair and announce the adjournment of the meeting; and upon4943his so doing, the meeting is immediately adjourned.494449453. The chairman may ask or require that anyone not a bona fide4946shareholder or proxy leave the meeting.494749484. A resolution or motion shall be considered for vote only if4949proposed by a shareholder or duly authorized proxy, and4950seconded by an individual who is a shareholder or a duly4951authorized proxy, other than the individual who proposed the4952resolution or motion; provided, however, that the chairman4953shall have the discretion to rule out of order any resolution4954or motion which seeks shareholder vote on (i) a proposal that4955has failed to comply with the requirements of Article 3.1, or4956(ii) any nomination(s) for the election of directors that4957fails to comply with Article 4.16.495849593.11) Order of Business - The suggested order of business at the4960regular meeting of shareholders, and so far as possible at all other meetings of4961the shareholders, shall be:496249631. Calling of roll.496449652. Proof of due notice of meeting, or unanimous waiver.496649673. Reading and disposal of any unapproved minutes.496849694. Annual reports of all officers and committees.497049715. Election of directors.497249736. Unfinished business.497449757. New business properly presented.497649778. Adjournment.49784979498044981<PAGE>4982498349843.12) Inspectors of Election - The Board of Directors in advance of any4985meeting of shareholders may appoint inspectors to act at such meeting or any4986adjournment thereof. If inspectors of election are not so appointed, the officer4987or person acting as chairman of any such meeting may, and on the request of any4988shareholder or his proxy, shall make such appointment. In case any person4989appointed as inspector shall fail to appear or act, the vacancy may be filled by4990appointment made by the Board of Directors in advance of the meeting, or at the4991meeting by the officer or person acting as chairman. The inspectors of election4992shall determine the number of shares outstanding, the voting power of each, the4993shares represented at the meeting, the existence of a quorum, the authenticity,4994validity and effect of proxies, receive votes, ballots, assents or consents,4995hear and determine all challenges and questions in any way arising and announce4996the result, and do such acts as may be proper to conduct the election or vote4997with fairness to all shareholders.49984999No inspector whether appointed by the Board of Directors or by the5000officer or person acting as chairman need be a shareholder.500150023.13) Informal Action by Shareholders - Any action required to be taken5003at a meeting of the shareholders, or any other action which may be taken at a5004meeting of the shareholders, may be taken without a meeting and notice thereof5005if a consent in writing, setting forth the action so taken, shall be signed by5006the holders of outstanding stock having not less than the minimum number of5007votes that would be necessary to authorize or take such action at a meeting at5008which all shares entitled to vote thereon were present and voted. The written5009action is effective when it has been signed by all of those shareholders, unless5010a different effective time is provided in the written action.50115012ARTICLE 450135014DIRECTORS501550164.1) General Powers - The property, affairs, and business of the5017corporation shall be managed by the Board of Directors.501850194.2) Number - The Board of Directors shall consist of such number of5020directors, not less than five (5) nor more than ten (10), the exact number to be5021fixed from time to time solely by resolution of the Board of Directors, acting5022by not less than a majority of the directors then in office.502350244.3) Qualifications and Term of Office - Directors need not be5025shareholders or residents of the State of Delaware. Directors shall be elected5026by the shareholders at the regular meeting for a term of one (1) year or until5027their successors are elected and qualified. Each of the directors of the5028corporation shall hold office until the regular meeting next following or5029closely coinciding with the expiration of his term of office and until his5030successor shall have been elected and shall qualify or until he shall resign, or5031shall have been removed as provided by statute.503250334.4) Quorum - A majority of the whole Board of Directors shall5034constitute a quorum for the transaction of business; provided, however, that if5035any vacancies exist by reason of death, resignation or otherwise, a majority of5036the remaining directors shall constitute a quorum for the conduct of business.5037If less than a quorum is present at any meeting, a majority of the directors5038present may adjourn the meeting from time to time without further notice. If a5039quorum is present when a duly called or held meeting is convened, the directors5040present may continue to transact50415042504355044<PAGE>504550465047business until adjournment, even though the withdrawal of a number of directors5048originally present leaves less than a majority.504950504.5) Regular Meetings - As soon as practical after each regular meeting5051of shareholders, the Board of Directors shall meet for the purposes of5052organization, choosing the officers of the corporation and for the transaction5053of other business at the place where the shareholders' meeting is held or at the5054place where regular meetings of the Board of Directors are held. No notice of5055such meeting need be given. Such first meeting may be held at any other time and5056place which shall be specified in a notice given as hereinafter provided for5057special meetings or in a consent and waiver of notice signed by all the5058directors.505950604.6) Telephonic Meetings - Any member or members of the Board of5061Directors, or any committee designated by such Board, may participate in a5062meeting of the Board of Directors or such committee by means of conference5063telephone or similar communications equipment by means of which all persons5064participating in the meeting can hear each other, and participation in a meeting5065pursuant to this paragraph shall constitute presence in person at such meeting.506650674.7) Special Meetings - Special meetings of the Board of Directors may5068be held at such time and place as may from time to time be designated in the5069notice or waiver of notice of the meeting. Special meetings of the Board of5070Directors may be called by the president, or by any director. Unless notice5071shall be waived by all directors entitled to notice, notice of the special5072meeting shall be given by the secretary, who shall give at least twenty-four5073(24) hours notice thereof to each director by mail, telegraph, telephone, or in5074person; provided, however, that meetings may be held without waiver of notice5075from or giving notice to any director while he is in the Armed Forces of the5076United States. Each director, by his attendance and his participation in the5077action taken at any directors' meeting, shall be deemed to have waived notice of5078such meeting.507950804.8) Compensation - Directors and any members of any committee of the5081corporation contemplated by these By-Laws or otherwise provided for by5082resolution of the Board of Directors, shall receive such compensation therefore5083as may be determined from time to time by resolution of the Board of Directors.5084Nothing herein contained shall be construed to preclude any director from5085serving the corporation in any other capacity and receiving proper compensation5086therefor.508750884.9) Salaries - Salaries and other compensation of all officers and5089employees of the corporation shall be fixed by the Board of Directors. Nothing5090herein contained shall be construed to preclude any officer from serving the5091corporation as a director, consultant or in any other capacity and receiving5092proper compensation therefor. In the event that any authority, such as the5093Internal Revenue Service, determines, and such determination is ultimately5094accepted, that any compensation paid to a director, officer or employee of the5095corporation is excessive and disallows the corporate deduction therefor, the5096recipient of the amounts so determined to be excessive shall repay the5097corporation said amount.509850994.10) Committees - A resolution approved by the affirmative vote of a5100majority of the Board of Directors may establish committees having the authority5101of the Board in the management of the business of the corporation to the extent5102provided in the resolution. Committees are subject at all times to the direction5103and control of the Board of Directors except as provided in Article 4.11. A5104committee shall consist of one or more natural persons, who are directors,5105appointed by51065107510865109<PAGE>511051115112affirmative vote of a majority of the directors present. A majority of the5113members of the committee present at a meeting is a quorum for the transaction of5114business unless a larger or smaller proportion is provided in a resolution5115approved by the affirmative vote of a majority of the directors present.511651174.11) Committee of Disinterested Persons - The Board of Directors may5118establish a committee composed of two or more disinterested directors or other5119disinterested persons to determine whether it is in the best interests of the5120corporation to pursue a particular legal right or remedy of the corporation and5121whether to cause the dismissal or discontinuance of a particular proceeding that5122seeks to assert a right or remedy on behalf of the corporation. A director or5123other person is "disinterested" if he is not an owner of more than one percent5124of the outstanding shares of, or a present or former officer, employee or agent5125of the corporation or of a related corporation and has not been made or5126threatened to be made a party to the proceeding in question. The committee, once5127established, is not subject to the direction or control of, or termination by,5128the Board of Directors. A vacancy on the committee may be filled by a majority5129vote of the remaining members. The good faith determinations of the committee5130are binding upon the corporation and its directors, officers and shareholders.5131The committee terminates when it issues a written report of its determinations.513251334.12) Vacancies - Any vacancy in the Board of Directors shall be filled5134by an affirmative vote of a majority of the remaining directors of the Board,5135though less than a quorum, and each person so elected shall be a director until5136his successor is elected by the shareholders, who may make such election at5137their next annual meeting or any meeting duly called for that purpose.513851394.13) Order of Business - The meetings shall be conducted in accordance5140with Roberts Rules of Order, Revised, and the suggested order of business at any5141meeting of the directors shall be:514251431. Roll call.514451452. Proof of due notice of meeting, or unanimous consent, or5146unanimous presence and declaration by president.514751483. Reading and disposal of any unapproved minutes.514951504. Reports of officers and committees.515151525. Election of officers.515351546. Unfinished business.515551567. New business.515751588. Adjournment.515951604.14) Written Consent or Opposition in Advance of Meeting - Any member5161of the Board of Directors or a committee thereof, may give advance written5162consent or opposition to a proposal or resolution stating an action to be taken5163by the Board or committee. Such consent or opposition shall be a vote in favor5164of or against the proposal or resolution if the proposal or resolution acted51655166516775168<PAGE>516951705171upon at the meeting is substantially the same or has substantially the same5172effect as the proposal or resolution to which the member of the Board or5173committee has consented or objected.517451754.15) Informal Action by Directors - Any action required or permitted5176to be taken at a meeting of the directors may be taken without a meeting and5177notice thereof if a consent in writing, setting forth the action so taken, shall5178be signed by all of the directors entitled to vote with respect to the subject5179matter set forth.518051814.16) Nominations for Election of Directors - Subject to the rights of5182holders of any class or series of stock having a preference over the common5183shares as to dividends or upon liquidation, nominations for the election of5184directors may be made by the Board of Directors or a committee appointed by the5185Board of Directors or by any shareholder entitled to vote generally in the5186election of directors. However, any shareholder entitled to vote generally in5187the election of directors may nominate one or more persons for election as5188directors at a meeting only if written notice of such shareholder's intent to5189make such nomination or nominations has been given, either by personal delivery5190or by United States mail, postage prepaid, to the Secretary of the corporation5191not less than 45 days nor more than 60 days prior to the date the proxy5192materials for the previous year's annual meeting were mailed to shareholders of5193the corporation. Each such notice to the Secretary shall set forth: (i) the name5194and address of record of the shareholder who intends to make the nomination;5195(ii) a representation that the shareholder is a holder of record of shares of5196the Corporation entitled to vote at such meeting and intends to appear in person5197or by proxy at the meeting to nominate the person or persons specified in the5198notice; (iii) the name, age, business and residence addresses, and principal5199occupation or employment of each nominee; (iv) a description of all arrangements5200or understandings between the shareholder and each nominee and any other person5201or persons (naming such person or persons) pursuant to which the nomination or5202nominations are to be made by the shareholder; (v) such other information5203regarding each nominee proposed by such shareholder as would be required to be5204included in a proxy statement filed pursuant to the proxy rules of the5205Securities and Exchange Commission; and (vi) the consent of each nominee to5206serve as a director of the corporation if so elected. The corporation may5207require any proposed nominee to furnish such other information as may reasonably5208be required by the corporation to determine the eligibility of such proposed5209nominee to serve as a director of the corporation. The chairman or presiding5210officer of the meeting may, if the facts warrant, determine that a nomination5211was not made in accordance with the foregoing procedure, and if the chair or5212presiding officer should so determine, he or she shall so declare to the meeting5213and the defective nomination shall be disregarded.52145215ARTICLE 552165217OFFICERS521852195.1) Number - The officers of the corporation shall include a president5220or chief executive officer, a treasurer or chief financial officer and a5221secretary and may include such other officers as may from time to time be chosen5222by the Board of Directors. Any two offices except those of president and5223vice-president may be held by one person.522452255.2) Election, Term of Office and Qualifications - At any regular5226meeting of the Board of Directors, the Board shall elect from their number a5227president or chief executive officer and shall, from within or without their5228number, elect a treasurer or chief financial officer and a secretary, and52295230523185232<PAGE>523352345235may, in addition, from within or without their number, elect one or more5236vice-presidents and such other officers and assistant officers as may be deemed5237advisable. Such officers shall hold office until the next regular meeting or5238until their successors are elected and qualified; provided, however, that any5239officer may be removed with or without cause by the affirmative vote of a5240majority of the whole Board of Directors.524152425.3) Chairman of the Board - The chairman of the board of directors5243shall preside at all meetings of shareholders and directors, and he shall have5244such other powers and perform such other duties as the Board of Directors may5245from time to time prescribe.524652475.4) President and Chief Executive Officer - The president shall have5248general and active management of the business under the supervision and5249direction of the Board of Directors, and he shall be responsible for carrying5250into effect all orders and resolutions of the Board of Directors. He shall be5251the chief executive officer of the corporation and shall perform all duties5252usually incident to the office of president and chief executive officer and such5253other duties as may be from time to time prescribed by the Board of Directors;5254except that if the Board of Directors elects a separate chief executive officer,5255then the president shall perform such duties usually incident to the office of5256president and the chief executive officer shall perform such duties usually5257incident to the office of the chief executive officer and each of them shall5258perform such duties as may be from time to time prescribed to each of them by5259the Board of Directors.526052615.5) Chief Operating Officer - The chief operating officer of the5262corporation shall be responsible for directing and supervising the corporation's5263overall business activities. He shall be the officer primarily responsible for5264planning and carrying out the business policies of the corporation and shall5265report to the Board of Directors thereon at each meeting of the Board of5266Directors. He shall have such other responsibilities and shall exercise such5267additional authority as may from time to time be assigned to him by the Board.526852695.6) Vice President - Each vice-president shall have such powers and5270shall perform such duties as may be specified in these By-Laws or prescribed by5271the Board of Directors. In the event of absence or disability of the president,5272a vice-president shall succeed to his powers and duties in the order in which5273they are elected or as otherwise prescribed by the Board of Directors. A vice-5274president who is not a director shall not succeed to the office of president.527552765.7) Secretary - The secretary shall be secretary of and shall attend5277all meetings of the shareholders and Board of Directors. He shall act as clerk5278thereof and shall record all the proceedings of such meetings in the minute book5279of the corporation. He shall give proper notice of meetings of shareholders and5280directors. He shall keep the seal of the corporation and shall affix the same to5281any instrument requiring it and shall attest the seal by his signature. He5282shall, with the president or any vice-president, acknowledge all certificates5283for shares of the corporation and shall perform such other duties as may be5284prescribed from time to time by the Board of Directors.528552865.8) Treasurer and Chief Financial Officer - The treasurer shall keep5287accurate accounts of all moneys of the corporation received or disbursed. He5288shall deposit all moneys, drafts, and checks in the name and to the credit of5289the corporation in such banks and depositories as the Board of Directors shall5290designate from time to time. He shall endorse for deposit all notes, checks and5291drafts received by the corporation as ordered by the Board of Directors, making5292proper vouchers therefor.52935294529595296<PAGE>529752985299He shall disburse the funds of the corporation as authorized by the Board of5300Directors. He shall render to the president and the Board of Directors, whenever5301required, an account of all of his transactions as treasurer and of the5302financial condition of the corporation and shall perform such other duties as5303may be prescribed by the Board of Directors from time to time.530453055.9) Assistant Officers - In the event of absence or disability of any5306vice-president, secretary, or treasurer, such assistants to such officers shall5307succeed to the powers and duties of the absent officer in the order in which5308they are elected or as otherwise prescribed by the Board of Directors until such5309principal officer shall resume his duties or a replacement is elected by the5310Board of Directors. Such assistant officers shall exercise such other powers and5311duties as may be delegated to them from time to time by the Board of Directors,5312but they shall be subordinate to the principal officer they are designated to5313assist.531453155.10) Officers Shall Not Lend Corporate Credit - Except for the proper5316use of the corporation, no officer of this corporation shall sign or endorse in5317the name or on behalf of this corporation, or in his official capacity, any5318obligations for the accommodation of any other party or parties, nor shall any5319check, note, bond, stock certificate or other security or thing of value5320belonging to this company be used by any officer or director as collateral for5321any obligation other than valid obligations of this corporation.53225323ARTICLE 653245325INDEMNIFICATION53265327Any person who at any time shall serve or shall have served as a5328director, officer, employee or agent of the Corporation, and the heirs,5329executors and administrators of such person shall be indemnified by the5330Corporation in accordance with, and the fullest extent permitted by, the5331provisions of the Delaware General Corporation Law, as it may be amended from5332time to time.53335334ARTICLE 753355336SHARES AND THEIR TRANSFER533753387.1) Certificates of Stock - Every owner of stock of the corporation5339shall be entitled to a certificate, to be in such form as the Board of Directors5340prescribe, certifying the number of shares of stock of the corporation owned by5341him. The certificates for such stock shall be numbered in the order in which5342they shall be issued and shall be signed in the name of the corporation by the5343president, and by the secretary, or by any other two (2) proper officers of the5344corporation authorized by the Board of Directors. A record shall be kept of the5345name of the person, firm or corporation owning the stock represented by each5346such certificate, and the respective issue date thereof, and in the case of5347cancellation, the respective dates of cancellation. Every certificate5348surrendered to the corporation for exchange or transfer shall be canceled and no5349other certificate or certificates shall be issued in exchange for any existing5350certificates until such existing certificate shall have been so canceled except5351in cases provided for in Article 7.5.535253537.2) Facsimile Signature - Where any certificate is manually signed by5354a transfer agent, a transfer clerk or by a registrar appointed by the Board of5355Directors to perform such duties, a535653575358105359<PAGE>536053615362facsimile or engraved signature of the president and secretary or other proper5363officer of the corporation authorized by the Board of Directors may be inscribed5364on the certificate in lieu of the actual signature of such officer. The fact5365that a certificate bears the facsimile signature of an officer who has ceased to5366hold office shall not affect the validity of such certificate if otherwise5367validly issued.536853697.3) Issuance of Shares - Subject to the provisions and limitations of5370Article 4 of the Certificate of Incorporation, the Board of Directors is5371authorized to cause to be issued shares of the corporation, to the full amount5372of such authorized shares, and at such times as may be determined by the Board5373of Directors and as may be permitted by law.537453757.4) Transfer of Shares - Transfer of shares on the books of the5376corporation may be authorized only by the shareholder named in the certificate,5377or by the shareholder's legal representative, or duly authorized5378attorney-in-fact, and upon surrender for cancellation of the certificate or5379certificates for such shares. The shareholder in whose name shares of stock5380stand on the books of the corporation shall be deemed the owner thereof for all5381purposes as regards the corporation; provided, that when any transfer of shares5382shall be made as collateral security, and not absolutely, such facts, if known5383to the secretary of the corporation, or to the transfer agent, shall be so5384expressed in the entry of transfer.538553867.5) Lost Certificates - Any shareholder claiming a certificate of5387stock to be lost or destroyed shall make an affidavit or affirmation of that5388fact in such form as the Board of Directors may require, and shall, if the5389directors so require, give the corporation a bond of indemnity in form and with5390one or more sureties satisfactory to the Board, in an amount determined by the5391Board of Directors not exceeding double the value of the stock represented by5392such certificate to indemnify the corporation, against any claim that may be5393made against it on account of the alleged loss or destruction of such5394certificate; whereupon a new certificate may be issued in the same tenor and for5395the same number of shares as the one alleged to have been destroyed or lost.539653977.6) Treasury Stock - Treasury stock shall be held by the corporation5398subject to disposal by the Board of Directors, in accordance with the5399Certificate of Incorporation and these By-Laws, and shall not have voting rights5400nor participate in dividends.540154027.7) Indebtedness of Shareholders - The corporation shall have a first5403lien on all the shares of its capital stock and upon all dividends declared upon5404the same for any indebtedness of the respective holders thereof to the5405corporation.540654077.8) Transfer Agent and Registrar - The Board of Directors may appoint5408one or more transfer agents or transfer clerks, and may require all certificates5409for shares to bear the signature or signatures of any of them.54105411ARTICLE 854125413BOOKS AND RECORDS541454158.1) Share Register; Dates of Issuance - The corporation shall keep at5416its principal business office, or at another place or places within the United5417States determined by the Board of Directors,541854195420115421<PAGE>542254235424a share register not more than one year old, containing the names and addresses5425of the shareholders and the number and classes of shares held by each5426shareholder. The corporation shall also keep, with the share register, a record5427of the dates on which certificates or transaction statements representing shares5428were issued.542954308.2) Other Documents Required - A corporation shall keep at its5431principal business office, or, if its principal business office is outside of5432this state, shall make available at its registered office within ten days after5433receipt by an officer of the corporation of a written demand for them made by a5434person described in Article 8.4, originals or copies of:543554361. Records of all proceedings of shareholders for the last three5437years;543854392. Records of all proceedings of the board for the last three5440years;544154423. Its articles and all amendments currently in effect;544354444. Its by-laws and all amendments currently in effect;544554465. Financial statements required by Article 8.7 and the financial5447statement for the most recent interim period prepared in the5448course of the operation of the corporation for distribution to5449the shareholders or to a governmental agency as a matter of5450public record;545154526. Reports made to shareholders generally within the last three5453years;545454557. A statement of the names and usual business addresses of its5456directors and principal officers;545754588. Voting trust agreements; and545954609. Shareholder control agreements.546154628.3) Financial Records - A corporation shall keep appropriate and5463complete financial records.546454658.4) Right to Inspect - A shareholder, beneficial owner, or a holder of5466a voting trust certificate has an absolute right, upon written demand, to5467examine and copy, in person or by a legal representative, during the usual hours5468for business, the share register and all documents referred to in Article 8.2. A5469shareholder, beneficial owner, or a holder of a voting trust certificate has a5470right, upon written demand, to examine and copy in person or by legal5471representative, other corporate records during the usual hours for business,5472only if the shareholder, beneficial owner, or holder of a voting trust5473certificate demonstrates a proper purpose for the examination. A "proper5474purpose" is one reasonably related to the person's interest as a shareholder,5475beneficial owner, or holder of a voting trust certificate of the corporation.547654778.5) Cost of Copies - Copies of all documents referred to in Article54788.2 shall be furnished at the expense of the corporation. A copy of the most5479recently generated share register shall be548054815482125483<PAGE>548454855486furnished at the expense of the corporation if the requesting party shows a5487proper purpose. In all other cases, the corporation may charge the requesting5488party a reasonable fee to cover the expenses of providing the copy.548954908.6) Computerized Records - The records maintained by the corporation,5491including its share register, financial records, and minute books, may utilize5492any information storage technique, including, for example, punched holes,5493printed or magnetized spots, or microimages, even though that makes them5494illegible visually, if the records can be converted, by machine and within a5495reasonable time, into a form that is legible visually and whose contents are5496assembled by related subject matter to permit convenient use by people in the5497normal course of business. The corporation shall convert any of the records5498referred to in Articles 8.1 and 8.2 upon the request of a person entitled to5499inspect them, and the expense of the conversion shall be borne by the person who5500bears the expense of copying pursuant to Article 8.5. A copy of the conversion5501is admissible in evidence, and shall be accepted for all other purposes, to the5502same extent as the existing or original records would be if they were legible5503visually.550455058.7) Financial Statements - The corporation shall upon written request5506by a shareholder stating a proper purpose therefor, furnish annual financial5507statements, including at least a balance sheet as of the end of each fiscal year5508and a statement of income for the fiscal year, which shall be prepared on the5509basis of accounting methods reasonable in the circumstances and may be5510consolidated statements of the corporation and one or more of its subsidiaries.5511In the case of statements audited by a public accountant, each copy shall be5512accompanied by a report setting forth the opinion of the accountant on the5513statements; in other cases, each copy shall be accompanied by a statement of the5514president or other person in charge of the corporation's financial records5515stating the reasonable belief of the person that the financial statements were5516prepared in accordance with accounting methods reasonable in the circumstances,5517describing the basis of presentation, and describing any respects in which the5518financial statements were not prepared on a basis consistent with those prepared5519for the previous year.55205521ARTICLE 955225523DISTRIBUTIONS552455259.1) Distributions - The Board of Directors may authorize distributions5526by the corporation from funds legally available therefor at such times and in5527such amounts as the Board shall deem reasonable.552855299.2) Record Date - Subject to any provisions of the Certificate of5530Incorporation, the Board of Directors may fix a date preceding the date fixed5531for the payment of any distribution or allotment of other rights as the record5532date for the determination of the shareholders entitled to receive payment of5533such distribution or allotment notwithstanding any transfer of shares on the5534books of the Corporation after such record date.553555365537135538<PAGE>5539554055419.3) Restrictions - A distribution may be made to the holders of a5542class or series of shares only if:554355441. All amounts payable to the holders of shares having a5545preference for the payment of that kind of distribution are5546paid; and554755482. The payment of the distribution does not reduce the remaining5549net assets of the corporation below the aggregate preferential5550amount payable in the event of liquidation to the holders of5551shares having preferential rights, unless the distribution is5552made to those shareholders in the order and to the extent of5553their respective priorities.555455553. The money or property available for distribution is5556insufficient to satisfy all preferences, the distributions5557shall be made pro rate according to the order of priority of5558preferences by classes and by series within those classes.55595560ARTICLE 1055615562FINANCIAL AND PROPERTY MANAGEMENT5563556410.1) Fiscal Year - The fiscal year of the corporation shall be set by5565the Board of Directors.5566556710.2) Audit of Books and Accounts - The books and accounts of the5568corporation shall be audited at such times as may be ordered by the Board of5569Directors.5570557110.3) Contracts - The Board of Directors may authorize any officer or5572officers, agent or agents, to enter into any contract or execute and deliver any5573instrument in the name of and on behalf of the corporation, and such authority5574may be general or confined to specific instances.5575557610.4) Checks - All checks, drafts, or other orders for the payment of5577money, notes, or other evidences of indebtedness issued in the name of the5578corporation shall be signed by the treasurer or such other officer or officers,5579agent or agents of the corporation and in such manner as shall from time to time5580be determined by resolution of the Board of Directors.5581558210.5) Deposits - All funds of the corporation not otherwise employed5583shall be deposited from time to time to the credit of the corporation in such5584banks, trust companies, or other depositories as the Board of Directors may5585select.5586558710.6) Voting Securities Held by Corporation - The president or other5588agent designated by the Board of Directors, shall have full power and authority5589on behalf of the corporation to attend, act and vote at any meeting of security5590holders of other corporations in which this corporation may hold securities. At5591such meeting the president, or such other agent, shall possess and exercise any5592and all rights and powers incident to the ownership of such securities which the5593corporation might possess and exercise.559455955596145597<PAGE>559855995600ARTICLE 1156015602WAIVER OF NOTICE56035604Whenever any notice whatsoever is required to be given by these By-Laws5605or the Certificate of Incorporation of the corporation or any of the corporate5606laws of the State of Delaware, a waiver thereof in writing, signed by the person5607or persons entitled to said notice, either before, at, or after the time stated5608therein, shall be deemed equivalent thereto.56095610ARTICLE 1256115612AMENDMENTS56135614Subject to the limitations set forth in the Delaware General5615Corporation Law, these By-Laws may be amended by a vote of the majority of the5616whole Board of Directors at any meeting, provided that notice of such proposed5617amendment shall have been included in the notice of such meeting given to the5618directors.561956205621The undersigned Secretary hereby certifies that the foregoing Amended5622and Restated By- Laws were adopted as the complete By-Laws of the corporation by5623the Board of Directors on this 23rd day of January, 2002.562456255626/s/ Patrick Delaney5627----------------------------------------5628Patrick Delaney, Secretary5629563056311556325633</TEXT>5634</DOCUMENT>5635<DOCUMENT>5636<TYPE>EX-10.95637<SEQUENCE>45638<FILENAME>cns021471_ex10-9.txt5639<DESCRIPTION>ADDENDUM TO LICENSE AGREEMENT5640<TEXT>56415642Exhibit 10.956435644CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH5645THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL5646TREATMENT UNDER RULE 24B-2.56475648EXECUTION COPY56495650ADDENDUM TO LICENSE AGREEMENT56515652THIS ADDENDUM TO LICENSE AGREEMENT (the "Addendum") is made and5653effective as of the 25th day of March, 2002 (the "Effective Date"), by and5654between CNS, Inc., a Delaware corporation ("Licensee"), and WinEase, L.L.C., a5655Minnesota limited liability company ("Licensor").56565657R E C I T A L S56585659WHEREAS, Licensor and Licensee are parties to that certain license5660agreement dated March 12, 1999 (the "License Agreement");56615662WHEREAS, Licensor granted to Licensee under the License Agreement an5663exclusive, worldwide, royalty bearing license under all of those Patent Rights,5664Know-how, Product Improvements and Trademark Rights relating to the development,5665manufacture, sale and use of the Products and Licensed Methods and other5666intellectual property rights relating to nasal support devices for animals;56675668WHEREAS, Licensee has been engaged in, among other things, the5669development, commercialization, production and marketing of the "Products" (as5670that term is defined in the License Agreement) in accordance with the License5671Agreement;56725673WHEREAS, Licensee desires to enter into an exclusive and worldwide5674distribution, marketing and selling relationship for the Products (the5675"Distribution Relationship") with a recognized distributor known as Merial5676Limited, a company registered in England and Wales and domesticated in the5677United States as Merial LLC ("Merial");56785679WHEREAS, Licensee will be entering into the Distribution Relationship5680with Merial substantially concurrently with the execution of this Addendum;56815682WHEREAS, Licensee represents that the total expenses that Licensee has5683incurred to date in connection with the development, commercialization,5684production and marketing of the Products have exceeded Net Sales by at least5685[***]; and56865687WHEREAS, Licensor and Licensee desire to address certain issues5688relating to the rights and relationship of the parties and desire to amend the5689License Agreement accordingly and further desire to provide for certain other5690agreements as set forth herein;56915692<PAGE>56935694NOW, THEREFORE, in consideration of these premises, and the mutual5695covenants and agreements set forth in the License Agreement and hereinafter set5696forth and other good and valuable consideration, the receipt and sufficiency of5697which are hereby acknowledged, the parties agree as follows:569856995700A. Amendments to License Agreement. The License Agreement is5701hereby amended as follows:570257031. General Definitions. Paragraph 1 is hereby amended to5704add the following after Paragraph 1.9:57055706"1.10 Other Definitions. The terms "Acquirer,"5707"Affiliate," "Effective Date," "Excess Amount," "Proceeds,"5708"Recoupment Amount," "Transfer," "Third-Party Transferee" and5709any other terms not defined in this Paragraph 1 shall have the5710meanings ascribed to the terms elsewhere in this Agreement."571157122. Assignments. Paragraph 2.4 of the License Agreement5713is hereby amended and restated in its entirety to5714read as follows:57155716"(a) Licensee may sell, assign, convey or transfer5717any and all of its rights under this Agreement ("Transfer") to5718a successor in interest of all, or substantially all, of the5719assets or capital stock of Licensee (the "Acquirer"). In the5720event of such a Transfer, any such Acquirer shall assume all5721of the obligations of Licensee hereunder and this Agreement5722shall be binding upon and inure to the benefit of such5723Acquirer. No other Transfer may be made by Licensee or5724Acquirer without complying with subsections (b) and (c) of5725this Paragraph.57265727(b) Except as otherwise set forth in or contemplated5728by Paragraph 2.3 above, no other Transfer may be made by5729Licensee or the Acquirer without Licensor's prior written5730consent unless Licensee or the Acquirer grants Licensor an5731exclusive right of first refusal to purchase all of the rights5732conferred under this Agreement in accordance with the5733following procedure:57345735(i) First, Licensee shall give Licensor5736written notification of its intention to enter into a5737transaction which operates to effectuate a Transfer5738to a third party that is not an Acquirer5739("Third-Party Transferee") and shall not enter into5740any such transaction without first disclosing all5741material information about the proposed transaction5742to Licensor and offering to enter into a transaction5743on substantially identical terms with Licensor; and5744then57455746(ii) Second, Licensor shall, unless5747otherwise waived in writing by Licensor, have a5748period of thirty (30) days after receipt of written5749notification provided in accordance with subsection5750(b)(i) above to exercise its right of first refusal5751by providing written notice to Licensee575257535754575525756<PAGE>57575758and agree to consummate a Transfer on substantially5759identical terms. The right of first refusal procedure5760outlined in this Paragraph 2.4 shall be repeated5761prior to entering into by Licensee of any transaction5762that is (a) on terms less favorable in a material5763respect to the Licensee or the Acquirer than5764specified in an earlier written notice to Licensor,5765or (b) with a party other than that specified in an5766earlier written notice.57675768(c) In the event that Licensee, after complying with5769the right of first refusal procedure set forth in subsections5770(b)(i) through (b)(ii) of Paragraph 2.4, consummates a5771Transfer with a Third-Party Transferee in a transaction that5772results in Licensee receiving "Proceeds" (defined to mean5773cash, stock or other consideration solely attributable to the5774Transfer) from and on account of such a Transfer having a fair5775market value on the date of the closing of the transaction in5776an amount that is in excess of the Recoupment Amount (as5777defined in Paragraph 4.3.1 below) (the "Excess Amount"),5778Licensee agrees to pay Licensor an amount equal to [***]% of5779the Excess Amount.57805781(d) In the event that Licensee, after complying with5782the applicable provisions of subsections (b)(i) through5783(b)(ii) of Paragraph 2.4, consummates a Transfer with a5784Third-Party Transferee, the terms of Paragraph 4.3.25785pertaining to royalties to be paid by such Third-Party5786Transferee on account of Net Sales of Products shall come into5787effect. In the event of such a Transfer with a Third-Party5788Transferee, any such Third-Party Transferee shall assume all5789of the obligations of Licensee hereunder and this Agreement5790shall be binding upon and inure to the benefit of such5791Third-Party Transferee."579257933. Additional License Fees. Paragraph 4.2 of the License5794Agreement is hereby amended to strike the period at5795the end of subsection (c) and add the following after5796the word "aggregate":57975798"; and57995800(d) the sum of $[***] which sum shall be5801payable without regard to the limitation set forth in5802the preamble of this Section 4.2 relating to5803termination and which sum shall be payable in four5804(4) equal installments of $[***] on the following5805dates: (i) the Effective Date; (ii) April 30, 2002;5806(iii) July 31, 2002; and (iv) October 31, 2002.58075808Paragraph 4.8 of the Agreement shall be applicable to5809any payments that are overdue and payable to Licensor5810under Paragraph 4.2(d) of this Agreement."581158124. Royalties on Account of Net Sales. Paragraph 4.3 of5813the License Agreement is hereby amended and restated5814in its entirety to add the following after the5815heading of Paragraph 4.3:58165817"4.3.1 Net Sales Made by Licensee.581858195820582135822<PAGE>58235824(a) Licensee agrees to pay Licensor5825royalties as follows based on the annual Net Sales5826from the sale of Products: (i) [***]% of Net Sales5827until Licensee has received on account of Net Sales a5828total amount equal to the Recoupment Amount (as5829defined below), then (ii) [***]% of all Net Sales in5830excess of the Recoupment Amount.58315832(b) For purposes of this Agreement, the term5833"Recoupment Amount" shall mean the amount derived5834from the following calculation:58355836Recoupment Amount = $[***] U.S. PLUS ($[***]5837TIMES the number of Products sold from and5838after the Effective Date MINUS $[***] TIMES5839the number of Products in Licensee's5840inventory on the Effective Date) PLUS5841(Earned Royalties paid to Licensor from and5842after the Effective Date) MINUS (the5843Proceeds, if any, that Licensee receives5844from Merial as an upfront fee or other5845payment for entering into the Distribution5846Agreement).584758484.3.2 Net Sales Made by a Third-Party Transferee in5849the Event of a Transfer.58505851(a) In the event that a Transfer with a5852Third-Party Transferee is consummated, the5853Third-Party Transferee shall, notwithstanding and5854without regard to Paragraph 4.3.1, pay Licensor a5855royalty of [***] of Net Sales from the sale of5856Products by such Third-Party Transferee or its5857Affiliate (as hereinafter defined), whichever is5858greater. The term "Affiliate" shall mean (i) any5859business entity fifty percent (50%) or more of which5860is owned directly or indirectly by a Third-Party5861Transferee; (ii) any business entity which directly5862or indirectly owns fifty percent (50%) or more of a5863Third-Party Transferee; or (iii) any business entity5864under the direct or indirect control of any business5865entity described in (i) or (ii) above.58665867(b) In the event that a Transfer with a5868Third-Party Transferee is consummated, Paragraphs58692.4(c) and 4.3.1 shall no longer apply or be of any5870force or effect with respect to any Third-Party5871Transferee.587258734.3.3 Net Sales Made by an Acquirer in the Event of a5874Transfer.58755876(a) In the event that a Transfer with an5877Acquirer is consummated, the Acquirer shall,5878notwithstanding and without regard to Paragraph58794.3.1, pay Licensor a royalty of [***]% of Net Sales5880from the sale of Products by such Acquirer.58815882(b) In the event that a Transfer with an5883Acquirer is consummated, Paragraph 4.3.1 shall no5884longer apply or be of any force or effect with5885respect to any Acquirer."58865887588845889<PAGE>589058915. Minimum Obligations in the Event of a Transfer.5892Paragraph 4.5 of the License Agreement is hereby5893amended and restated in its entirety to read as5894follows:58955896"4.5 Minimum Royalty Obligation of "Third-Party5897Transferee" in the Event of a Transfer. In the event5898that a Transfer with a Third-Party Transferee is5899consummated, the Third-Party Transferee shall, in5900order to maintain its rights hereunder, pay Licensor5901minimum royalties in accordance with Paragraphs 4.4,59024.7 and the following:59035904Minimum Royalty Payment Minimum Royalty Payment5905Per Contract Year Per Contract Quarter5906----------------- --------------------5907$[***] $[***]"590859096. Termination. Paragraph 7.2 of the License Agreement5910is hereby amended and restated as follows:59115912"(a) If Licensee is in material default of5913any of its obligations under this Agreement, Licensor5914shall have the right to terminate this Agreement by5915giving thirty (30) days' written notice of5916termination specifying the reason for termination,5917provided that such notice will be of no effect and5918termination will not occur if the specified default5919is cured prior to the expiration of said thirty (30)5920day period.59215922(b) In the event that Licensee does not sell5923an "average" of [***] Products each calendar year5924commencing January 1, 2002 through December 31, 2004,5925measured on a cumulative basis and adjusted each5926calendar year during the term hereof in order to5927account for fluctuations in sales from year to year,5928Licensor shall have, as its sole and exclusive remedy5929and without any other recourse against Licensee as a5930result of such event, the right to terminate this5931Agreement by giving thirty (30) days' written notice5932of termination.59335934(c) In the event that Licensee does not sell5935Products in each calendar year following December 31,59362004 sufficient to generate annual Net Sales of at5937least $[***], Licensor shall have, as its sole and5938exclusive remedy and without any other recourse5939against Licensee as a result of such event, the right5940to terminate this Agreement by giving thirty (30)5941days' written notice of termination.59425943(d) In the event that a Transfer with an5944Acquirer is consummated and such Licensee does not5945either sell Products in each calendar year following5946December 31, 2003 sufficient to generate annual Net5947Sales of at least $[***], or, alternatively, pay5948Licensor the minimum royalties applicable to a5949Third-Party Transferee set forth and contemplated by5950Paragraphs 4.5 and 4.7, Licensor shall have, as its5951sole and exclusive5952595359545955595655957<PAGE>59585959remedy and without any other recourse against5960Licensee as a result of such event, the right to5961terminate this Agreement by giving thirty (30) days'5962written notice of termination."596359647. Continued Obligations. Paragraph 7.4 of the License5965Agreement is hereby amended to add the number5966"4.2(d)" after the number 3 and before the number 55967in the Paragraph such that Paragraph 4.2(d) as5968amended in Section A.3. of this Addendum shall5969survive the termination of the License Agreement.597059718. Notices. Paragraph 9.5 of the License Agreement is5972amended to change the mailing and facsimile address5973of the Licensee such that the following shall be5974substituted for that which is currently set forth5975therein:59765977"If to Licensee: CNS, Inc.59787615 Smetana Lane5979Eden Prairie, MN 553445980Attn: Marti Morfitt5981Fax No.: (952) 229-1701"59825983B. Waiver and Release. In furtherance and not in limitation of the5984amendment set forth in and contemplated by Section A.5. above, Licensor hereby5985waives any and all right under the License Agreement to any minimum royalties5986that may be due, become due or have accrued or become due on or before the5987Effective Date, and hereby releases Licensee from any obligation, liability or5988responsibility with respect to the same.59895990C. Permitted Sublicense in Favor of Merial or its Affiliates. To the5991extent that the grant of a sublicense by Licensee of any of the rights granted5992by Licensor to Licensee under or in connection with the License Agreement is5993necessary or desirable for Licensee to implement the Distribution Relationship5994with Merial or its Affiliates, Paragraph 2.3 of the License Agreement is hereby5995amended to permit Licensee to grant any such a sublicense to Merial or its5996Affiliates.59975998D. Limited Cross-Licenses.599960001. CNS. In the event that (i) Licensee terminates the License Agreement6001in accordance with Paragraph 7.3(a), or (ii) Licensor terminates the License6002Agreement in accordance with 7.2, the parties hereto agree that the following6003shall apply:60046005a. License and Field of Use Restriction. Licensee shall grant6006to Licensor a limited, exclusive and worldwide license and/or6007sublicense to make, have made, use, sell or offer for sale products6008utilizing any of the inventions within the scope of any valid claim in6009the United States Patents identified on Schedule A (the "CNS Licensed6010Patents") or from any continuations, re-exams or re-issues relating to6011those patents together with any and all foreign counterparts; provided,6012however, that the license and/or sublicense granted hereunder shall be6013limited solely to the field of equine nasal support products or devices6014("Licensor's Field of Use").601560166017601866019<PAGE>60206021b. Further Sublicenses and Assignments. Except as may be6022necessary or desirable to manufacture or have manufactured the equine6023nasal support products or devices, Licensor shall have no right to6024sublicense or assign any of the rights granted by Licensee to Licensor6025with respect to any of the CNS Licensed Patents; provided, however,6026that Licensor may assign, convey or transfer any and all of its rights6027under this Section D of this Addendum to a successor in interest to all6028of the assets, capital securities or membership interests of Licensor.60296030c. Term. The licenses and/or sublicenses granted hereunder6031shall commence upon the termination of the License Agreement by6032Licensor or Licensee in accordance with Paragraph 7 and shall expire,6033unless earlier terminated pursuant to subsection (e) below, upon the6034earlier of: (i) the expiration of the last of the CNS Licensed Patents6035to expire; or (ii) the termination of Licensee's rights with respect6036any of the CNS Licensed Patents.60376038d. Royalties. Licensor agrees to pay Licensee royalties based6039upon the Net Sales from the sale of equine nasal support products or6040devices of [***]% of Net Sales that, but for the license granted6041hereunder, would infringe any claims of the CNS Licensed Patents. All6042payments shall be due and payable to Licensee on a quarterly basis, and6043the provisions of Paragraphs 4.4, 4.8, 4.9 and 4.10 of the License6044Agreement shall be applicable and inure to the benefit of Licensee.60456046e. Termination. If Licensor is in material default of any of6047its obligations under this Section D.1., Licensee shall have the right6048to terminate the licenses and/or sublicenses granted hereunder by6049giving thirty (30) days' written notice of termination specifying the6050reason for termination, provided that such notice will be of no effect6051and termination will not occur if the specified default is cured prior6052to the expiration of said thirty (30) day notice period.605360542. WinEase. In the event that (i) Licensee terminates the License6055Agreement in accordance with Paragraph 7.3(a), (ii) Licensor terminates the6056License Agreement in accordance with 7.2, or (iii) Licensee enters into a6057transaction that operates to effectuate a Transfer with a Third-Party6058Transferee, the parties hereto agree that the following shall apply:60596060a. License and Field of Use Restriction. Licensor shall grant6061to Licensee a limited, exclusive and worldwide license and/or6062sublicense to make, have made, use, sell or offer for sale products6063utilizing any of the inventions within the scope of any valid claim in6064the United States patents and any patents which issue or have issued6065from the applications listed on Schedule B of this Addendum or from any6066continuations, re-exams or re-issues relating to those patents and6067applications, together with any and all foreign counterparts (the6068"WinEase Patents"); provided, however, that the licenses and/or6069sublicenses granted hereunder shall be limited solely to the field of6070human nasal dilation products or devices ("Licensee's Field of Use").60716072b. Further Sublicenses and Assignments. Except as may be6073necessary or desirable to manufacture or have manufactured any human6074nasal dilation products or devices, Licensee shall have no right to6075sublicense or assign any of the rights granted by6076607760786079608076081<PAGE>60826083Licensor to Licensee with respect to any of the WinEase Patents;6084provided, however, that Licensee may assign, convey or transfer any and6085all of its rights under Section D of this Addendum to a successor in6086interest to all of the assets of Licensee relating to its human nasal6087dilation business or to all of its capital stock.60886089c. Term. The licenses and/or sublicenses granted hereunder6090shall commence upon the termination of the License Agreement by6091Licensor or Licensee in accordance with Paragraph 7 and shall expire,6092unless earlier terminated pursuant to subsection (e) below, upon the6093expiration of the last of the WinEase Patents to expire.60946095d. Royalties. Licensee agrees to pay Licensor royalties of6096[***]% of Net Sales from the sale of those human nasal dilation6097products or devices that, but for the license granted hereunder, would6098infringe any claims of the WinEase Patents (the "Covered CNS6099Products"); provided, however, that Licensee shall not be obligated to6100pay any royalties with respect to the sale of any Covered CNS Products6101or with respect to the use of any of WinEase Patents that relate to or6102result from any patent application filed between March 13, 1999 and the6103Effective Date (the "Excluded Patents"), it being understood and agreed6104that the licenses and/or sublicenses granted by Licensor to Licensee6105with respect to such Excluded Patents shall be on a royalty-free basis.6106All payments shall be due and payable to Licensor on a quarterly basis,6107and the provisions of Paragraphs 4.4, 4.8, 4.9 and 4.10 of the License6108Agreement shall be applicable and inure to the benefit of Licensor.61096110e. Termination. If Licensee is in material default of any of6111its obligations under this Section D.1., Licensor shall have the right6112to terminate the licenses and/or sublicenses granted hereunder by6113giving thirty (30) days' written notice of termination specifying the6114reason for termination, provided that such notice will be of no effect6115and termination will not occur if the specified default is cured prior6116to the expiration of said thirty (30) day notice period.611761183. Miscellaneous. The following provisions shall apply in the event6119that the either paragraph 1 or paragraph 2 of this Section D becomes applicable:61206121a. Right to Abate Infringement of Excluded Patents. In the6122event that either Licensor or Licensee become aware of any activity on6123the part of any third party which may constitute infringement of any of6124the Excluded Patents, such party shall give the other party written6125notice thereof. In the event of an infringement in Licensee's Field of6126Use, Licensee shall (for so long as its rights under Paragraph D.2 are6127in force and effect), at its sole discretion and expense, have the6128first exclusive right to initiate and thereafter maintain reasonable6129efforts to prevent and abate such infringement, including the6130initiation of appropriate civil action for infringement and the taking6131of such other action as it may determine to be necessary or desirable6132to enforce any of the Excluded Patents and/or any rights thereunder or6133relating thereto. In such event, (i) Licensor agrees to fully cooperate6134with Licensee and will permit the use of its name in, and as a party6135to, all such suits and execute all pleadings, documents and other6136papers necessary or desirable in conjunction therewith, and (ii)6137Licensee shall receive the full benefits of any action it takes6138pursuant to this paragraph, including retaining all sums recovered in6139any6140614161426143614486145<PAGE>61466147such suit or in settlement thereof. In the event that Licensee fails or6148refuses to take or cause to be taken any such measures against any6149third party after six (6) months from the date of receipt of written6150notice to Licensee by Licensor of such infringement, Licensor may take6151such legal action in its own name and at its own expense upon giving6152twenty-one (21) days advance, written notice of its intention to do so.6153In this case, all damages recovered as a result of such action by6154Licensor shall be and become the property of Licensor. In the event6155that Licensor takes any action to prevent or abate an infringement by a6156third party of any of the Excluded Patents under this paragraph or6157otherwise, Licensee will fully cooperate with Licensor and, to the6158extent necessary to maintain suit under applicable law, permit the use6159of its name in, and as a party to, all such suits and execute all6160pleadings, documents and other papers necessary or desirable in6161conjunction therewith. If Licensee litigates any matter relating to the6162Excluded Patents under this paragraph or otherwise, it shall first6163provide Licensor with ten (10) days advance written notice of its6164intention to commence such litigation which notice shall identify the6165name of the alleged third-party infringer, the infringing product and6166the patent involved. If either party litigates any matter relating to6167the Excluded Patents, the other party may, at its option and its cost6168and expense, participate in meetings with the litigating party and/or6169its counsel and receive all pleadings, documents and other related6170papers useful for the purposes of keeping the other party informed of6171the status of any proceedings commenced by the litigating party.61726173b. General Provisions. All of the provisions of Section 9 of6174the License Agreement shall apply to the agreements contained in6175Section D of this Addendum.61766177c. Survival. Section D of this Addendum shall survive the6178termination of the License Agreement.61796180E. No Impairment. The provisions set forth in the License Agreement and6181not amended or altered by this Addendum shall remain in full force and effect6182and shall apply to this Addendum unless to do so would be inconsistent with the6183intentions of the parties as expressed in this Addendum. This Addendum6184supersedes and replaces any and all other amendments, whether written or oral,6185to the License Agreement that have been entered into by the parties prior to the6186date hereof.61876188F. Further Assurances. The parties agree to cooperate and take such6189actions and execute such other documents and instruments as may be reasonably6190requested by the other party hereto in order to consummate the transactions and6191agreements set forth in or contemplated by this Addendum.61926193G. Recitals. The Recitals set forth in this Addendum are true and6194correct, incorporated herein and made a part of the Addendum and the parties'6195agreement as set forth above.61966197H. Capitalized Terms. Capitalized terms in this Addendum that are not6198defined shall have the meaning ascribed to such terms in the License Agreement6199unless the context requires otherwise.6200620162026203620496205<PAGE>620662076208IN WITNESS WHEREOF, the parties hereto have executed this Addendum as6209of the day and year first above written.62106211CNS, INC.621262136214By: /s/ Daniel E. Cohen6215---------------------------------------6216Its: Chairman6217--------------------------------------621862196220WINEASE, LLC622162226223By: /s/ Edward F. Blach6224---------------------------------------6225Its: President/CEO6226--------------------------------------622762286229623062316232623362346235623662376238623962406241624262436244624562466247106248<PAGE>624962506251SCHEDULE A6252----------62536254CNS LICENSED PATENTS6255--------------------625662576258United States Patent Nos.:625962601. 5,533,49962612. 5,533,50362623. 5,653,22462634. 5,476,09162645. 5,549,10362656. 5,611,33362667. 6,318,3626267626862696270116271627262736274627562766277627862796280628162826283628462856286<PAGE>6287628862896290SCHEDULE B6291----------62926293WINEASE PATENTS6294---------------629562966297United States Patent Nos.:629862991. 5,913,87363002. 6,017,45763013. 6,203,56063024. 6,033,42263036304United States Pending Patent Application Nos.:630563061. 09/438,67663072. 09/264,46463083. 09/379,42563094. 09/713,30863106311631263136314631563166317631863196320632163226323632463256326632763281263296330</TEXT>6331</DOCUMENT>6332<DOCUMENT>6333<TYPE>EX-23.16334<SEQUENCE>56335<FILENAME>cns021471_ex23.txt6336<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT6337<TEXT>63386339Exhibit 23.1634063416342INDEPENDENT AUDITORS' CONSENT634363446345The Board of Directors6346CNS, Inc.:63476348We consent to incorporation by reference in the registration statements Nos.6349333-60017, 33-29454, 33- 42971 and 33-59719 on Form S-8 of CNS, Inc. of our6350report dated January 22, 2002, relating to the consolidated balance sheets of6351CNS, Inc. and subsidiaries as of December 31, 2001, and 2000, and the related6352consolidated statements of operations, stockholders' equity and comprehensive6353income (loss), and cash flows for each of the years in the three-year period6354ended December 31, 2001, which report is included in the December 31, 2001,6355annual report on Form 10-K of CNS, Inc.6356635763586359/s/ KPMG LLP6360636163626363Minneapolis, Minnesota6364March 25, 20026365636663676368</TEXT>6369</DOCUMENT>6370</SEC-DOCUMENT>6371-----END PRIVACY-ENHANCED MESSAGE-----637263736374