10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

[ X ]

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

For the Period Ended June 30, 2003.

[    ]

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

Commission File Number:   0 - 16612

CNS, INC.

(Exact name of registrant as specified in its charter)

Delaware

41-1580270

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

7615 Smetana Lane

Eden Prairie, MN  55344

(Address of principal executive offices including zip code)

(952) 229-1500

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  

   X   

NO       

Indicated by check mark whether the registration is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  

NO    X   

At July 31, 2003, the Company had outstanding 13,561,318 shares of common stock, $.01 par value per share.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)

	June 30, 2003			March 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	15,838		$	16,554
Marketable securities		25,307			25,061
Accounts receivable, net		9,638			11,011
Inventories		4,872			3,266
Deferred income taxes		3,026			4,660
Prepaid expenses and other current assets		723			1,035
Total current assets		59,404			61,587
Property and equipment, net		1,478			1,605
Product rights, net		1,199			1,293
Deferred income taxes		890			890
	$	62,971		$	65,375
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	10,685		$	16,321
Total current liabilities		10,685			16,321
Stockholders’ equity:
Preferred stock - authorized 8,484 shares;
none issued or outstanding		0			0
Common stock - $.01 par value; authorized 50,000 shares;
issued 19,295 shares; outstanding 13,437 shares at           June 30, 2003 and 13,306 shares at March 31, 2003		193			193
Additional paid-in capital		59,285			59,879
Treasury shares - at cost; 5,858 at June 30, 2003 and
5,989 at March 31, 2003		(25,649	)		(26,694	)
Retained earnings		18,253			15,472
Accumulated other comprehensive income		204			204
Total stockholders’ equity		52,286			49,054
	$	62,971		$	65,375

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

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CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

	Three Months Ended June 30,
	2003		2002
Net sales	$	17,497	$	14,523
Cost of goods sold		5,470		5,319
Gross profit		12,027		9,204
Operating expenses:
Advertising and promotion		4,465		4,115
Selling, general and administrative		3,341		2,763
Total operating expenses		7,806		6,878
Operating income		4,221		2,326
Interest income		194		229
Income before income taxes		4,415		2,555
Income tax expense		1,634		1,000
Net income	$	2,781	$	1,555
Basic net income per share	$	.21	$	.11
Diluted net income per share	$	.20	$	.11
Weighted average number of common
shares outstanding		13,357		13,556
Weighted average number of common and
assumed conversion shares outstanding		14,238		14,193

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

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CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

	Three Months Ended June 30,
	2003			2002
Operating activities:
Net income	$	2,781		$	1,555
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization		240			313
Deferred income taxes		1,634			1,000
Changes in operating assets and liabilities:
Accounts receivable		1,373			3,279
Inventories		(1,606	)		268
Prepaid expenses and other current assets		312			(37	)
Accounts payable and accrued expenses		(5,636	)		(1,245	)
Net cash from operating activities		(902	)		5,133
Investing activities:
Purchases of marketable securities		(14,204	)		(16,067	)
Sales of marketable securities		13,958			10,938
Payments for purchases of property and equipment		(4	)		(25	)
Payments for product rights		(15	)		(120	)
Net cash from investing activities		(265	)		(5,274	)
Financing activities:
Proceeds from issuance of common stock
under stock plans		451			312
Purchase of treasury shares		0			(475	)
Net cash from financing activities		451			(163	)
Net change in cash and cash equivalents		(716	)		(304	)
Cash and cash equivalents:
Beginning of period		16,554			5,553
End of period	$	15,838		$	5,249

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements as of June 30, 2003 and 2002 and March 31, 2003 are unaudited but, in the opinion of management, include all adjustments (consisting only of normal, recurring accruals) necessary for a fair presentation of results for the periods presented.

Note 1 — Accounting Principles
The accounting principles followed in the preparation of the financial information contained herein are the same as those described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2003 with the exception of the following new pronouncement, being adopted during the quarter ended June 30, 2003:

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation”. This statement supercedes SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, the statement amends disclosure requirements to require prominent disclosures in annual and interim financial statements about the method of accounting used for stock-based employee compensation and the effect of the method used on reported results. The interim disclosure provisions became effective for the Company for the interim period beginning January 1, 2003. The annual disclosure provisions became effective for the Company for the year ended March 31, 2003.

The Company implemented SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” for financial instruments entered into or modified after May 31, 2003. There was no material impact on the Company’s consolidated financial position or results of operations as the result of implementing this standard.

Refer to the Annual Report on Form 10-K for detailed information on accounting policies.

Note 2 — Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is determined based on the difference, if any, on the grant date between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Accordingly, no compensation expense associated with the fair market value of stock option grants or shares sold to employees under the Employee Stock Purchase Plan has been recognized in the Company’s financial statements.

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

	For the Three Months Ended June 30,
	2003		2002
Net income, as reported	$	2,781		1,555
Deduct: Total stock-based compensation expense
determined under the fair value based method for all awards,
net of tax		98		129
Proforma net income	$	2,683		1,426
Earnings per share:
Basic — as reported	$	.21	$	.11
Basic — proforma	$	.20	$	.11
Diluted — as reported	$	.20	$	.11
Diluted — proforma	$	.19	$	.10

Note 3 — Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory reserves have been established for potential product obsolescence. The components of inventories are as follows:

	June 30, 2003		March 31, 2003
Finished goods	$	3,372	$	2,225
Raw materials and component parts		1,500		1,041
Total inventories	$	4,872	$	3,266

Note 4 — Comprehensive Income
A reconciliation of total comprehensive income is as follows (in thousands):

	Three Months Ended June 30,
	2003		2002
Net income	$	2,781	$	1,555
Change in unrealized gain on marketable securities,
net of income tax		0		63
Total comprehensive income	$	2,781	$	1,618

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Note 5 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares outstanding is as follows (in thousands):

	Three Months Ended June 30,
	2003		2002
Average common shares outstanding		13,357		13,556
Assumed conversion of stock options		881		637
Average common and assumed
conversion shares		14,238		14,193

Note 6 — Income Taxes
As part of the process of preparing financial statements, the Company is required to estimate income taxes, both state and federal. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be utilized to offset future taxable income during the periods in which these temporary differences are deductible. Management believes that as of June 30, 2003, based on the level of historical taxable income and projections of future taxable income for the periods in which the deferred tax assets are deductible, that it is more likely than not the Company will realize the benefits of these deductible differences.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended March 31, 2003.

The Company’s revenues are derived primarily from the manufacture and sale of the Breathe Right® nasal strip, which is a nonprescription, disposable device designed to improve nasal breathing and temporarily relieve nasal congestion, and to reduce or eliminate snoring and breathing difficulties due to a deviated nasal septum. The Company began marketing FiberChoice® chewable tablets, an innovative bulk fiber supplement in March of 2000. The Company began marketing Breathe Right Snore Relief™ throat spray in March of 2002. Snore Relief spray lubricates and soothes dry throats, while a natural astringent firms loose tissue to reduce the vibrations that cause snoring.

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

Results of Operations

Net sales for the June 2003 quarter were $17.5 million versus $14.5 million in the June 2002 quarter. Net sales for the June 2003 quarter was impacted by $485,000 primarily relating to a reduction of estimated promotional spending liabilities.

Domestic sales for the June quarter of 2003 were $14.6 million compared to $12.7 million for the same quarter of 2002. Sales for the 2003 June quarter were higher due to a full quarter of sales of Snore Relief throat spray, as well as increased sales of other Breathe Right branded products and FiberChoice chewable tablets.

International sales were $2.9 million for the June quarter of 2003 compared to $1.8 million for the same quarter of 2002. Sales for the 2003 June quarter were higher primarily due to new product shipments in several countries, allergy season promotion activity and unusually low sales to Japan for the same quarter of 2002 as the Japanese distributor worked through excess inventory.

Gross profit was $12.0 million for the June quarter of 2003 compared to $9.2 million for the same quarter of 2002. Gross profit as a percentage of net sales increased to 68.7% for the June quarter of 2003 compared to 63.4% for the same quarter of 2002. The higher gross profit percentage in 2003 resulted primarily from lower material costs and reduced freight expense.

Advertising and promotion expenses were $4.5 million for the June quarter of 2003 compared to $4.1 million for the same quarter of 2002. Expenditures for the Breathe Right brand declined by $1.3 million, due primarily to a switch in the quarter to spot television advertising which is less expensive than direct response television advertising and sampling that was used in the prior

8

year. Expenditures for the FiberChoice brand increased by $1.2 million as a result of expanding the advertising efforts to reach 68% of the United States. International advertising and promotion expenses increased by $500,000 due to snoring advertising in Japan.

Selling, general and administrative expenses were $3.3 million or 19.1% of sales for the June quarter of 2003 compared to $2.8 million or 19.0% of sales for the same quarter of 2002. This increase was primarily the result of increased spending in the June 2003 quarter for new product development.

Operating income for the June quarter of 2003 was $4.2 million compared to $2.3 million for the same quarter of 2002.

Investment income was $194,000 for the June quarter of 2003 compared to $229,000 for the same quarter of 2002. The decrease was primarily the result of lower market interest rates, partially offset by higher balances of interest bearing assets.

Net income for the June quarter of 2003 was $2.8 million compared to $1.6 million for the same quarter of 2002. Income tax expense was $1.6 million or 37% of income before taxes for the June quarter of 2003 compared to $1.0 million or 39% of income before taxes for the same quarter of 2002.

Seasonality

The Company believes that a portion of Breathe Right nasal strip use is for the temporary relief of nasal congestion and congestion-related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons because of increased use during the cough and cold seasons.

Liquidity and Capital Resources

At June 30, 2003, the Company had cash, cash equivalents and marketable securities of $41.1 million and working capital of $48.7 million.

Company operations used cash of $902,000 for the June quarter of 2003 compared with cash provided of $5.1 million for the same quarter of 2002. Net income, that included non cash deferred tax expense of $1.6 million and a decrease in accounts receivable of $1.4 million was more than offset by an increase in inventories of $1.6 million and the payment of operating liabilities of $5.6 million causing the negative impact on cash for the June 2003 quarter.

The Company had net purchases of $246,000 of marketable securities in the June quarter of 2003 compared to net purchases of $5.1 million for the same quarter of 2002.

The Company issued 255,526 shares of common stock for $1.1 million during the June quarter of 2003 under its Employee Stock Purchase Plan. The Company did not repurchase any shares of common stock in the June quarter of 2003. There remain 531,600 shares of common stock that

9

can be repurchased by the Company in connection with the repurchase program that was authorized by the board of directors.

The Company believes that its existing funds and funds generated from operations will be sufficient to support its planned operations for the foreseeable future.

Accounting Policies and Recent Accounting Pronouncements

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States, management must make decisions which impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgement based on its understanding and analysis of the relevant circumstances. Note 1 to the condensed consolidated financial statements and the critical accounting policies section in the Company’s Annual Report on Form 10-K for the year ended March 31, 2003 provide important information about the significant accounting policies followed in the preparation of the Company’s financial statements and accounting pronouncements applicable to the Company.

Forward-Looking Statements

Certain statements contained in this Report on Form 10-Q and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts but provide current expectations or forecasts of future events. As such, they are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. Such forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expect,” “plan,” “intend,”“anticipate,” “estimate,” or “continue” or similar words or expressions. It is not possible to foresee or identify all factors affecting the Company’s forward-looking statements and investors therefore should not consider any list of factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, the following factors: (i) the Company’s revenue and profitability is reliant on sales of Breathe Right nasal strips; (ii) the Company currently has a seasonal pattern of sales that is typically higher in the fiscal third and fourth quarters of each year due to increased nasal strip usage during the cough/cold season and its revenues and earnings may be impacted by the relative severity of such season; (iii) the Company’s success and future growth will depend significantly on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets for additional products; (iv) the Company’s competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of the patents on its Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation and could be narrowed as a result of the outcome of the reexamination of one such patent by the United States Patent and Trademark Office; (v) the Company has faced and will continue to face challenges in successfully developing and introducing new products; (vi) the Company operates in competitive markets where recent and potential entrants into the nasal dilator segment pose competitive

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challenges; (vii) the Company is dependent upon contract manufacturers for the production of substantially all of its products; and (viii) the Company currently purchases most of its major components for its nasal strip products from different contract manufacturers that obtain the raw materials from a single supplier.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s market risk exposure is primarily interest rate risk related to its cash, cash equivalents and investments in marketable securities. The Company’s risk to interest rate fluctuations has not materially changed since March 31, 2003. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2003.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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

(b) Changes in Internal Control Over Financial Reporting.

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Changes in Securities

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are filed as part of this Report:

3.1 Amended and Restated Bylaws of CNS, Inc. (as amended on July 15, 2003)

31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2 Certifications of interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. §1350).

(b) Reports on Form 8-K

        During the quarter covered by this report, the Company furnished a Current Report on
Form 8-K dated April 24, 2003 reporting, under Item 12, the disclosure of information regarding its results of operations for its fiscal year and quarter ended March 31, 2003 and attaching as an exhibit a press release regarding its results of operations for that period under Item 7.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

           CNS, Inc.           

           Registrant

Date:

August 12, 2003

By:  

/s/  Marti Morfitt

Marti Morfitt

President & Chief Executive Officer

Date:

August 12, 2003

By:  

/s/  Marcia L. O’Brien

Marcia L. O’Brien

Interim Chief Financial Officer

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EX-3.1

Exhibit 3.1

AMENDED AND RESTATED BY-LAWS

OF

CNS, INC.

(As amended on July 15, 2003)

ARTICLE 1

OFFICES

    1.1) Registered Offices — The address of the registered office of the corporation shall be established and maintained at the office of the Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware and the Corporation Trust Company shall be the registered agent of the corporation. The Board of Directors shall have authority to change the registered office of the corporation from time to time, and any such change shall be registered by the secretary with the Secretary of State of Delaware.

    1.2) Offices — The corporation may have such other offices, including its principal business office, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the corporation may require from time to time.

ARTICLE 2

CORPORATE SEAL

        The corporate seal shall have thereon the name of the corporation, and the words “Corporate Seal” and when so directed by the Board of Directors a duplicate of the seal may be kept and used by the secretary or treasurer or by an assistant secretary or assistant treasurer.

ARTICLE 3

SHAREHOLDERS

        3.1) Regular Meeting — The regular meeting of the shareholders of the corporation shall be an annual meeting held at the principal business office of the corporation, or at such place as is designated by the Board of Directors or by written consent of all the shareholders entitled to vote thereat, at which time the shareholders, voting as provided in the Articles of Incorporation, shall elect a Board of Directors for the ensuing year, and shall transact such other business as shall properly come before them. In the event the regular meeting is not held for a period of thirteen

(13) months or more, a shareholder or director may apply to the Court of Chancery to summarily order a meeting to be held. To be properly brought before the annual meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation, not less than 45 days nor more than 60 days prior to the date the proxy materials for the previous year’s annual meeting were mailed to shareholders of the corporation. Each such notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (w) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (x) the name and address of record of the shareholders proposing such business, (y) the class or series (if any) and the number of shares of the corporation which are owned by the shareholder, and (z) any material interest of the shareholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these By-Laws.

        3.2) Special Meetings — Special meetings of the shareholders shall be called by the Secretary at any time upon request of the President, a Vice-President acting in the capacity of the President, the Treasurer or two (2) or more members of the Board of Directors, or upon a written request of shareholders holding ten percent (10%) or more of the capital stock entitled to vote. Notice shall be given in accordance with the provisions of Article 3.5 hereof.

        3.3) Quorum — The holders of fifty (50%) percent of the outstanding shares entitled to vote, represented either in person or by proxy, shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting, at which a quorum of the shareholders is present, may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. In case a quorum is not present at any meeting, those present shall have the power to adjourn the meeting from time to time, without notice or other announcement at the meeting, until the requisite number of voting shares shall be represented. Any business may be transacted at such reconvened meeting which might have been transacted at the meeting which was adjourned.

        3.4) Voting — At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one (1) vote for each share having voting power standing in his name on the books of the corporation. Shares owned by two (2) or more shareholders may be voted by any one of them unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. A holder of voting shares may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular

2

way, the shareholder is deemed to have voted all the shares in that way. Upon the demand of any shareholder, the vote for director, or the vote upon any question before the meeting shall be by ballot. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.

        3.5) Notice of Meeting — There shall be mailed to each shareholder shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of the regular meeting or any special meeting, which notice shall be mailed at least ten (10) days and not more than sixty (60) days prior thereto. Every notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to purposes stated in the call. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, or whether given in writing, orally, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.

        3.6) Proxies — At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. No appointment of a proxy is irrevocable unless the appointment is coupled with an interest in the shares of the corporation.

        3.7) Closing Transfer Books — The Board of Directors may close the stock transfer books for a period of time not exceeding sixty (60) days preceding the date of any meeting of shareholders, payment of dividend, allotment of rights, change, conversion or exchange of capital stock or the date of obtaining consent of shareholders for any purpose.

        3.8) Record Date — In lieu of closing the stock record books the Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any of the aforesaid events, as a record date for the determination of shareholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or allotment or rights, or to exercise the rights in respect to any change, conversion or exchange of capital stock or to give such consent, and in such case only such shareholders on the record date so fixed shall be entitled to notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date so fixed. If the stock transfer books are not closed and no record date is fixed for such determination of the shareholders of record, the date on which notice of the meeting is

3

mailed, or the date of adoption of a resolution of the Board of Directors declaring a dividend, allotment of rights, change, conversion or exchange of capital stock or to give such consent, as the case may be, shall be the record date for such determination of shareholders. A determination of shareholders entitled to vote shall apply to any adjournment of such meeting except when the date of determination or the closing of the stock transfer book exceeds sixty (60) days preceding such adjourned meeting, in which event a new meeting must be called.

        3.9) Presiding Officer — The appropriate officers of the corporation shall preside over all meetings of the shareholders; provided, however, that in the absence of an appropriate corporate officer at any meeting of the shareholders, the meeting shall choose any person present to act as presiding officer of the meeting.

        3.10) Conduct of Meetings of Shareholders — Subject to the following, meetings of shareholders generally shall follow accepted rules of parliamentary procedure:

1. The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. If the chairman, in his absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of shareholders or part thereof the chairman shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted.

2. If disorder should arise which prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is immediately adjourned.

3. chairman may ask or require that anyone not a bona fide shareholder or proxy leave the meeting.

4. A resolution or motion shall be considered for vote only if proposed by a shareholder or duly authorized proxy, and seconded by an individual who is a shareholder or a duly authorized proxy, other than the individual who proposed the resolution or motion; provided, however, that the chairman shall have the discretion to rule out of order any resolution or motion which seeks shareholder vote on (i) a proposal that has failed to comply with the requirements of Article 3.1, or (ii) any nomination(s) for the election of directors that fails to comply with Article 4.16.

        3.11) Order of Business — The suggested order of business at the regular meeting of shareholders, and so far as possible at all other meetings of the shareholders, shall be:

1. Calling of roll.

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2. Proof of due notice of meeting, or unanimous waiver.

3. Reading and disposal of any unapproved minutes.

4. Annual reports of all officers and committees.

5. Election of directors.

6. Unfinished business.

7. New business properly presented.

8. Adjournment.

        3.12) Inspectors of Election — The Board of Directors in advance of any meeting of shareholders may appoint inspectors to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the officer or person acting as chairman of any such meeting may, and on the request of any shareholder or his proxy, shall make such appointment. In case any person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting, or at the meeting by the officer or person acting as chairman. The inspectors of election shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots, assents or consents, hear and determine all challenges and questions in any way arising and announce the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders.

        No inspector whether appointed by the Board of Directors or by the officer or person acting as chairman need be a shareholder.

        3.13) Informal Action by Shareholders — Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action.

ARTICLE 4

DIRECTORS

        4.1) General Powers — The property, affairs, and business of the corporation shall be managed by the Board of Directors.

        4.2) Number — The Board of Directors shall consist of such number of directors, not less than five (5) nor more than ten (10), the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office.

        4.3) Qualifications and Term of Office — Directors need not be shareholders or residents of the State of Delaware. Directors shall be elected by the shareholders at the regular meeting for a term of one (1) year or until their successors are elected and qualified. Each of the directors of

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the corporation shall hold office until the regular meeting next following or closely coinciding with the expiration of his term of office and until his successor shall have been elected and shall qualify or until he shall resign, or shall have been removed as provided by statute.

        4.4) Quorum — A majority of the whole Board of Directors shall constitute a quorum for the transaction of business; provided, however, that if any vacancies exist by reason of death, resignation or otherwise, a majority of the remaining directors shall constitute a quorum for the conduct of business. If less than a quorum is present at any meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than a majority.

        4.5) Regular Meetings — As soon as practical after each regular meeting of shareholders, the Board of Directors shall meet for the purposes of organization, choosing the officers of the corporation and for the transaction of other business at the place where the shareholders’ meeting is held or at the place where regular meetings of the Board of Directors are held. No notice of such meeting need be given. Such first meeting may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings or in a consent and waiver of notice signed by all the directors.

        4.6) Telephonic Meetings — Any member or members of the Board of Directors, or any committee designated by such Board, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this paragraph shall constitute presence in person at such meeting.

        4.7) Special Meetings — Special meetings of the Board of Directors may be held at such time and place as may from time to time be designated in the notice or waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the president, or by any director. Unless notice shall be waived by all directors entitled to notice, notice of the special meeting shall be given by the secretary, who shall give at least twenty-four (24) hours notice thereof to each director by mail, telegraph, telephone, or in person; provided, however, that meetings may be held without waiver of notice from or giving notice to any director while he is in the Armed Forces of the United States. Each director, by his attendance and his participation in the action taken at any directors’ meeting, shall be deemed to have waived notice of such meeting.

        4.8) Compensation — Directors and any members of any committee of the corporation contemplated by these By-Laws or otherwise provided for by resolution of the Board of Directors, shall receive such compensation therefore as may be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving proper compensation therefor.

        4.9) Salaries — Salaries and other compensation of all officers and employees of the

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corporation shall be fixed by the Board of Directors. Nothing herein contained shall be construed to preclude any officer from serving the corporation as a director, consultant or in any other capacity and receiving proper compensation therefor. In the event that any authority, such as the Internal Revenue Service, determines, and such determination is ultimately accepted, that any compensation paid to a director, officer or employee of the corporation is excessive and disallows the corporate deduction therefor, the recipient of the amounts so determined to be excessive shall repay the corporation said amount.

        4.10) Committees — A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the corporation to the extent provided in the resolution. Committees are subject at all times to the direction and control of the Board of Directors except as provided in Article 4.11. A committee shall consist of one or more natural persons, who are directors, appointed by affirmative vote of a majority of the directors present. A majority of the members of the committee present at a meeting is a quorum for the transaction of business unless a larger or smaller proportion is provided in a resolution approved by the affirmative vote of a majority of the directors present.

        4.11) Committee of Disinterested Persons — The Board of Directors may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the corporation. A director or other person is “disinterested” if he is not an owner of more than one percent of the outstanding shares of, or a present or former officer, employee or agent of the corporation or of a related corporation and has not been made or threatened to be made a party to the proceeding in question. The committee, once established, is not subject to the direction or control of, or termination by, the Board of Directors. A vacancy on the committee may be filled by a majority vote of the remaining members. The good faith determinations of the committee are binding upon the corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations.

        4.12) Vacancies — Any vacancy in the Board of Directors shall be filled by an affirmative vote of a majority of the remaining directors of the Board, though less than a quorum, and each person so elected shall be a director until his successor is elected by the shareholders, who may make such election at their next annual meeting or any meeting duly called for that purpose.

        4.13) Order of Business — The meetings shall be conducted in accordance with Roberts Rules of Order, Revised, and the suggested order of business at any meeting of the directors shall be:

1. Roll call.

2. Proof of due notice of meeting, or unanimous consent, or unanimous presence and declaration by president.

3. Reading and disposal of any unapproved minutes.

4. Reports of officers and committees.

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5. Election of officers.

6. Unfinished business.

7. New business.

8. Adjournment.

        4.14) Written Consent or Opposition in Advance of Meeting — Any member of the Board of Directors or a committee thereof, may give advance written consent or opposition to a proposal or resolution stating an action to be taken by the Board or committee. Such consent or opposition shall be a vote in favor of or against the proposal or resolution if the proposal or resolution acted upon at the meeting is substantially the same or has substantially the same effect as the proposal or resolution to which the member of the Board or committee has consented or objected.

        4.15) Informal Action by Directors — Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter set forth.

        4.16) Nominations for Election of Directors — Subject to the rights of holders of any class or series of stock having a preference over the common shares as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of directors. However, any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder’s intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not less than 45 days nor more than 60 days prior to the date the proxy materials for the previous year’s annual meeting were mailed to shareholders of the corporation. Each such notice to the Secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The chairman or presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if the chair or presiding officer should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded.

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ARTICLE 5

OFFICERS

        5.1) Number — The officers of the corporation shall include a president or chief executive officer, a treasurer or chief financial officer and a secretary and may include such other officers as may from time to time be chosen by the Board of Directors. Any two offices except those of president and vice-president may be held by one person.

        5.2) Election, Term of Office and Qualifications — At any regular meeting of the Board of Directors, the Board shall elect from their number a president or chief executive officer and shall, from within or without their number, elect a treasurer or chief financial officer and a secretary, and may, in addition, from within or without their number, elect one or more vice-presidents and such other officers and assistant officers as may be deemed advisable. Such officers shall hold office until the next regular meeting or until their successors are elected and qualified; provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the whole Board of Directors.

        5.3) Chairman of the Board — The chairman of the board of directors shall preside at all meetings of shareholders and directors, and he shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe.

        5.4) President and Chief Executive Officer — The president shall have general and active management of the business under the supervision and direction of the Board of Directors, and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall be the chief executive officer of the corporation and shall perform all duties usually incident to the office of president and chief executive officer and such other duties as may be from time to time prescribed by the Board of Directors; except that if the Board of Directors elects a separate chief executive officer, then the president shall perform such duties usually incident to the office of president and the chief executive officer shall perform such duties usually incident to the office of the chief executive officer and each of them shall perform such duties as may be from time to time prescribed to each of them by the Board of Directors.

        5.5) Chief Operating Officer — The chief operating officer of the corporation shall be responsible for directing and supervising the corporation’s overall business activities. He shall be the officer primarily responsible for planning and carrying out the business policies of the corporation and shall report to the Board of Directors thereon at each meeting of the Board of Directors. He shall have such other responsibilities and shall exercise such additional authority as may from time to time be assigned to him by the Board.

        5.6) Vice President — Each vice-president shall have such powers and shall perform such duties as may be specified in these By-Laws or prescribed by the Board of Directors. In the event of absence or disability of the president, a vice-president shall succeed to his powers and duties in the order in which they are elected or as otherwise prescribed by the Board of Directors. A vice- president who is not a director shall not succeed to the office of president.

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        5.7) Secretary — The secretary shall be secretary of and shall attend all meetings of the shareholders and Board of Directors. He shall act as clerk thereof and shall record all the proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall keep the seal of the corporation and shall affix the same to any instrument requiring it and shall attest the seal by his signature. He shall, with the president or any vice-president, acknowledge all certificates for shares of the corporation and shall perform such other duties as may be prescribed from time to time by the Board of Directors.

        5.8) Treasurer and Chief Financial Officer — The treasurer shall keep accurate accounts of all moneys of the corporation received or disbursed. He shall deposit all moneys, drafts, and checks in the name and to the credit of the corporation in such banks and depositories as the Board of Directors shall designate from time to time. He shall endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor. He shall disburse the funds of the corporation as authorized by the Board of Directors. He shall render to the president and the Board of Directors, whenever required, an account of all of his transactions as treasurer and of the financial condition of the corporation and shall perform such other duties as may be prescribed by the Board of Directors from time to time.

        5.9) Assistant Officers — In the event of absence or disability of any vice-president, secretary, or treasurer, such assistants to such officers shall succeed to the powers and duties of the absent officer in the order in which they are elected or as otherwise prescribed by the Board of Directors until such principal officer shall resume his duties or a replacement is elected by the Board of Directors. Such assistant officers shall exercise such other powers and duties as may be delegated to them from time to time by the Board of Directors, but they shall be subordinate to the principal officer they are designated to assist.

        5.10) Officers Shall Not Lend Corporate Credit — Except for the proper use of the corporation, no officer of this corporation shall sign or endorse in the name or on behalf of this corporation, or in his official capacity, any obligations for the accommodation of any other party or parties, nor shall any check, note, bond, stock certificate or other security or thing of value belonging to this company be used by any officer or director as collateral for any obligation other than valid obligations of this corporation.

ARTICLE 6

INDEMNIFICATION

        Any person who at any time shall serve or shall have served as a director, officer, employee or agent of the Corporation, and the heirs, executors and administrators of such person shall be indemnified by the Corporation in accordance with, and the fullest extent permitted by, the provisions of the Delaware General Corporation Law, as it may be amended from time to time.

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ARTICLE 7

SHARES AND THEIR TRANSFER

        7.1) Certificates of Stock — Every owner of stock of the corporation shall be entitled to a certificate, to be in such form as the Board of Directors prescribe, certifying the number of shares of stock of the corporation owned by him. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the corporation by the president, and by the secretary, or by any other two (2) proper officers of the corporation authorized by the Board of Directors. A record shall be kept of the name of the person, firm or corporation owning the stock represented by each such certificate, and the respective issue date thereof, and in the case of cancellation, the respective dates of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be canceled and no other certificate or certificates shall be issued in exchange for any existing certificates until such existing certificate shall have been so canceled except in cases provided for in Article 7.5.

        7.2) Facsimile Signature — Where any certificate is manually signed by a transfer agent, a transfer clerk or by a registrar appointed by the Board of Directors to perform such duties, a facsimile or engraved signature of the president and secretary or other proper officer of the corporation authorized by the Board of Directors may be inscribed on the certificate in lieu of the actual signature of such officer. The fact that a certificate bears the facsimile signature of an officer who has ceased to hold office shall not affect the validity of such certificate if otherwise validly issued.

        7.3) Issuance of Shares — Subject to the provisions and limitations of Article 4 of the Certificate of Incorporation, the Board of Directors is authorized to cause to be issued shares of the corporation, to the full amount of such authorized shares, and at such times as may be determined by the Board of Directors and as may be permitted by law.

        7.4) Transfer of Shares — Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or by the shareholder’s legal representative, or duly authorized attorney-in-fact, and upon surrender for cancellation of the certificate or certificates for such shares. The shareholder in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of shares shall be made as collateral security, and not absolutely, such facts, if known to the secretary of the corporation, or to the transfer agent, shall be so expressed in the entry of transfer.

        7.5) Lost Certificates — Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board, in an amount determined by the Board of Directors not exceeding double the value of the stock represented by such certificate to indemnify the corporation, against any claim that may be made against it on account of the alleged loss or destruction of such certificate; whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost.

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        7.6) Treasury Stock — Treasury stock shall be held by the corporation subject to disposal by the Board of Directors, in accordance with the Certificate of Incorporation and these By-Laws, and shall not have voting rights nor participate in dividends.

        7.7) Indebtedness of Shareholders — The corporation shall have a first lien on all the shares of its capital stock and upon all dividends declared upon the same for any indebtedness of the respective holders thereof to the corporation.

        7.8) Transfer Agent and Registrar — The Board of Directors may appoint one or more transfer agents or transfer clerks, and may require all certificates for shares to bear the signature or signatures of any of them.

ARTICLE 8

BOOKS AND RECORDS

        8.1) Share Register; Dates of Issuance — The corporation shall keep at its principal business office, or at another place or places within the United States determined by the Board of Directors, a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder. The corporation shall also keep, with the share register, a record of the dates on which certificates or transaction statements representing shares were issued.

        8.2) Other Documents Required — A corporation shall keep at its principal business office, or, if its principal business office is outside of this state, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a person described in Article 8.4, originals or copies of:

1. Records of all proceedings of shareholders for the last three years;

2. Records of all proceedings of the board for the last three years;

3. Its articles and all amendments currently in effect;

4. Its by-laws and all amendments currently in effect;

5. Financial statements required by Article 8.7 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record;

6. Reports made to shareholders generally within the last three years;

7. A statement of the names and usual business addresses of its directors and principal officers;

8. Voting trust agreements; and

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9. Shareholder control agreements.

        8.3) Financial Records — A corporation shall keep appropriate and complete financial records.

        8.4) Right to Inspect — A shareholder, beneficial owner, or a holder of a voting trust certificate has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, during the usual hours for business, the share register and all documents referred to in Article 8.2. A shareholder, beneficial owner, or a holder of a voting trust certificate has a right, upon written demand, to examine and copy in person or by legal representative, other corporate records during the usual hours for business, only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination. A “proper purpose” is one reasonably related to the person’s interest as a shareholder, beneficial owner, or holder of a voting trust certificate of the corporation.

        8.5) Cost of Copies — Copies of all documents referred to in Article 8.2 shall be furnished at the expense of the corporation. A copy of the most recently generated share register shall be furnished at the expense of the corporation if the requesting party shows a proper purpose. In all other cases, the corporation may charge the requesting party a reasonable fee to cover the expenses of providing the copy.

        8.6) Computerized Records — The records maintained by the corporation, including its share register, financial records, and minute books, may utilize any information storage technique, including, for example, punched holes, printed or magnetized spots, or microimages, even though that makes them illegible visually, if the records can be converted, by machine and within a reasonable time, into a form that is legible visually and whose contents are assembled by related subject matter to permit convenient use by people in the normal course of business. The corporation shall convert any of the records referred to in Articles 8.1 and 8.2 upon the request of a person entitled to inspect them, and the expense of the conversion shall be borne by the person who bears the expense of copying pursuant to Article 8.5. A copy of the conversion is admissible in evidence, and shall be accepted for all other purposes, to the same extent as the existing or original records would be if they were legible visually.

        8.7) Financial Statements — The corporation shall upon written request by a shareholder stating a proper purpose therefor, furnish annual financial statements, including at least a balance sheet as of the end of each fiscal year and a statement of income for the fiscal year, which shall be prepared on the basis of accounting methods reasonable in the circumstances and may be consolidated statements of the corporation and one or more of its subsidiaries. In the case of statements audited by a public accountant, each copy shall be accompanied by a report setting forth the opinion of the accountant on the statements; in other cases, each copy shall be accompanied by a statement of the president or other person in charge of the corporation’s financial records stating the reasonable belief of the person that the financial statements were prepared in accordance with accounting methods reasonable in the circumstances, describing the basis of presentation, and describing any respects in which the financial statements were not prepared on a basis consistent with those prepared for the previous year.

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ARTICLE 9

DISTRIBUTIONS

        9.1) Distributions — The Board of Directors may authorize distributions by the corporation from funds legally available therefor at such times and in such amounts as the Board shall deem reasonable.

        9.2) Record Date — Subject to any provisions of the Certificate of Incorporation, the Board of Directors may fix a date preceding the date fixed for the payment of any distribution or allotment of other rights as the record date for the determination of the shareholders entitled to receive payment of such distribution or allotment notwithstanding any transfer of shares on the books of the Corporation after such record date.

        9.3) Restrictions — A distribution may be made to the holders of a class or series of shares only if:

1. All amounts payable to the holders of shares having a preference for the payment of that kind of distribution are paid; and

2. The payment of the distribution does not reduce the remaining net assets of the corporation below the aggregate preferential amount payable in the event of liquidation to the holders of shares having preferential rights, unless the distribution is made to those shareholders in the order and to the extent of their respective priorities.

3. The money or property available for distribution is insufficient to satisfy all preferences, the distributions shall be made pro rate according to the order of priority of preferences by classes and by series within those classes.

ARTICLE 10

FINANCIAL AND PROPERTY MANAGEMENT

        10.1) Fiscal Year — The fiscal year of the corporation shall be set by the Board of Directors.

        10.2) Audit of Books and Accounts — The books and accounts of the corporation shall be audited at such times as may be ordered by the Board of Directors.

        10.3) Contracts — The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

        10.4) Checks — All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation shall be signed by the treasurer

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or such other officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

    10.5) Deposits — All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select.

    10.6) Voting Securities Held by Corporation — The president or other agent designated by the Board of Directors, shall have full power and authority on behalf of the corporation to attend, act and vote at any meeting of security holders of other corporations in which this corporation may hold securities. At such meeting the president, or such other agent, shall possess and exercise any and all rights and powers incident to the ownership of such securities which the corporation might possess and exercise.

ARTICLE 11

WAIVER OF NOTICE

        Whenever any notice whatsoever is required to be given by these By-Laws or the Certificate of Incorporation of the corporation or any of the corporate laws of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to said notice, either before, at, or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE 12

AMENDMENTS

        Subject to the limitations set forth in the Delaware General Corporation Law, these By-Laws may be amended by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been included in the notice of such meeting given to the directors.

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Marti Morfitt, certify that:

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

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

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

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

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

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

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

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

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

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

Date: August 12, 2003 By: /s/ Marti Morfitt    
Marti Morfitt
President & Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Marcia O’Brien, certify that:

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

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

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

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

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

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

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

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

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

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

Date: August 12, 2003 By: /s/ Marcia O’Brien    
Marcia O’Brien
Interim Chief Financial Officer

EX-32

Exhibit 32

Certification

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

(1) The accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2003, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

Date: August 12, 2003	By: /s/ Marti Morfitt     Marti Morfitt President & Chief Executive Officer
Date: August 12, 2003	By: /s/ Marcia L. O’Brien     Marcia L. O’Brien Interim Chief Financial Officer