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 September 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to __________
COMMISSION FILE NUMBER: 0 - 16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MN 55439
(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 _______
At October 30, 2000, 14,352,702 shares of common stock were outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 358,549 $ 859,852
Marketable securities 34,216,083 37,997,409
Accounts receivable, net 11,410,971 11,369,815
Income taxes receivable 0 3,177,771
Inventories 2,716,308 4,905,449
Prepaid expenses and other current assets 3,140,204 3,625,373
------------ ------------
Total current assets 51,842,115 61,935,669
Property and equipment, net 1,943,350 2,010,059
Product rights, net 1,302,051 1,391,107
------------ ------------
$ 55,087,516 $ 65,336,835
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 8,429,741 11,752,761
------------ ------------
Total current liabilities 8,429,741 11,752,761
Stockholders' equity:
Preferred stock - authorized 8,483,589 shares;
none issued or outstanding 0 0
Common stock - $.01 par value; authorized 50,000,000 shares;
issued and outstanding, 19,294,570 shares 192,946 192,946
Additional paid-in capital 61,287,481 61,530,522
Treasury shares - at cost; 4,907,168 at September 30, 2000 and
4,838,098 at December 31, 1999 (22,394,856) (22,220,537)
Retained earnings 7,612,204 14,401,143
Accumulated other comprehensive loss (40,000) (320,000)
------------ ------------
Total stockholders' equity 46,657,775 53,584,074
------------ ------------
$ 55,087,516 $ 65,336,835
============ ============
The accompanying notes are an integral part
of the condensed consolidated financial statements.
2
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net sales $ 19,220,891 $ 10,463,038 $ 47,157,341 $ 30,582,086
Cost of goods sold 6,874,958 3,992,442 16,830,488 12,310,078
------------ ------------ ------------ ------------
Gross profit 12,345,933 6,470,596 30,326,853 18,272,008
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling 11,606,181 4,644,002 33,794,347 20,410,465
General and administrative 1,236,310 940,667 3,587,955 2,567,747
Product development 403,216 782,240 1,304,649 2,628,321
Contract termination fee 0 6,345,000 0 6,345,000
------------ ------------ ------------ ------------
Total operating expenses 13,245,707 12,711,909 38,686,951 31,951,533
------------ ------------ ------------ ------------
Operating loss (899,774) (6,241,313) (8,360,098) (13,679,525)
Interest income 506,862 643,536 1,571,159 2,240,613
------------ ------------ ------------ ------------
Loss before income taxes (392,912) (5,597,777) (6,788,939) (11,438,912)
Income tax (provision) benefit 0 (248,861) 0 2,101,139
------------ ------------ ------------ ------------
Net loss $ (392,912) $ (5,846,638) $ (6,788,939) $ (9,337,773)
============ ============ ============ ============
Basic net loss per share $ (.03) $ (.39) $ (.47) $ (.60)
============ ============ ============ ============
Diluted net loss per share $ (.03) $ (.39) $ (.47) $ (.60)
============ ============ ============ ============
Weighted average number of common
shares outstanding 14,405,000 15,107,000 14,410,000 15,693,000
============ ============ ============ ============
Weighted average number of common and
assumed conversion shares outstanding 14,405,000 15,107,000 14,410,000 15,693,000
============ ============ ============ ============
The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
Operating activities:
Net loss $ (6,788,939) $ (9,337,773)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 761,395 773,152
Deferred income taxes 362 1,486,000
Changes in operating assets and liabilities:
Accounts receivable (41,156) 1,604,038
Inventories 2,189,141 3,186,698
Prepaid expenses and other current assets 485,169 (3,842,408)
Accounts payable and accrued expenses (145,611) 4,902,327
------------ ------------
Net cash from operating activities (3,539,639) (1,227,966)
------------ ------------
Investing activities:
Change in marketable securities 4,061,326 13,288,728
Payments for purchases of property and equipment (469,326) (273,693)
Payments for product rights (136,303) (115)
------------ ------------
Net cash from investing activities 3,455,697 13,014,920
------------ ------------
Financing activities:
Proceeds from issuance of common stock
under stock plans 40,889 16,332
Purchase of treasury shares (458,250) (6,646,479)
------------ ------------
Net cash from financing activities (417,361) (6,630,147)
------------ ------------
Net change in cash and cash equivalents (501,303) 5,156,807
Cash and cash equivalents:
Beginning of period 859,852 584,718
------------ ------------
End of period $ 358,549 $ 5,741,525
============ ============
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements as of September 30,
2000 and 1999 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 interim 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 Form 10-K
report for the year ended December 31, 1999, and reference is hereby made to
that report for detailed information on accounting policies.
Note 2 - Comprehensive Loss
A reconciliation of total comprehensive loss is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------
Net loss ($ 392,912) ($ 5,846,638) ($ 6,788,939) ($ 9,337,773)
Unrealized gain(loss) on marketable
Securities net of income tax 280,000 (85,000) 280,000 (478,000)
---------------------------------------------------------------
Total comprehensive loss ($ 112,912) ($ 5,931,638) ($ 6,508,939) ($ 9,815,773)
---------------------------------------------------------------
Note 3 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------
Average common shares outstanding 14,405,000 15,107,000 14,410,000 15,693,000
Assumed conversion of stock options 0 0 0 0
---------------------------------------------------------------
Average common and assumed
Conversion shares 14,405,000 15,107,000 14,410,000 15,693,000
---------------------------------------------------------------
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's revenues are derived primarily from the manufacture and sale of
the Breathe Right(R) 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(TM) chewable tablets, an
innovative bulk fiber supplement, in the second quarter of 2000.
Results of Operations
Net sales were $19.2 million for the third quarter of 2000 compared to $10.5
million for the same quarter of 1999 and were $47.2 million for the first nine
months of 2000 compared to $30.6 million for the same period of 1999.
Domestic sales increased to $16.6 million from $10.2 million in the third
quarter of 1999 and for the first nine months of 2000 were $43.7 million
compared to $30.0 million for the same period of 1999. Increased sales this
period reflect increased Breathe Right nasal strip sales and continuing
shipments of FiberChoice chewable tablets to retailers. Breathe Right strip
sales continued to grow due to initial shipments of the Company's new
mentholated and kids strips and the growth of the core Breathe Right nasal strip
business. In addition, 1999 sales were reduced by reserves for anticipated
returns of product in connection with the introduction of new packaging last
year.
International sales were $2.6 million for the third quarter of 2000 compared to
$312,000 for the same quarter of 1999 and were $3.5 million for the first nine
months of 2000 compared to $626,000 for the same period of 1999. The higher
level of international sales for 2000 represents initial shipments of Breathe
Right nasal strips to the Company's new international distributor in Japan and
continued shipments to distributors in Europe and Australia.
Gross profit was $12.3 million or 64.2% of net sales for the third quarter of
2000 compared to $6.5 million or 61.9% for the same quarter of 1999 and was
$30.3 million or 64.3% for the first nine months of 2000 compared to $18.3
million or 59.8% for the same period of 1999. The third quarter 2000 gross
profit was impacted by the lower gross profit on FiberChoice chewable tablets
sales, especially the 10-count trial size and one-time costs associated with
expediting inventory purchases and deliveries. During the third quarter customer
orders exceeded forecasts, resulting in additional costs to meet customer
delivery schedules. The gross profit percentage was lower in 1999 primarily due
to costs for the transition of Breathe Right nasal strips to new product
packaging.
Marketing and selling expenses were $11.6 million for the third quarter of 2000
compared to $4.6 million for the same quarter of 1999 and were $33.8 million for
the first nine months of 2000 compared to $20.4 million for the same period in
1999. The increases resulted primarily
6
from planned advertising and sales support for the launch of FiberChoice
chewable tablets and Breathe Right nasal strip snoring related advertising and
promotion.
General and administrative expenses were $1.2 million for the third quarter of
2000 compared to $941,000 for the same quarter of 1999 and were $3.6 million for
the first nine months of 2000 compared to $2.6 million for the same period in
1999. This increase resulted in part from business development expenses
associated with the identification of future product opportunities.
Product development expenses were $403,000 for the third quarter of 2000
compared to $782,000 for the same quarter of 1999 and were $1.3 million for the
first nine months of 2000 compared to $2.6 million for the same period in 1999.
This decrease represents the substantial completion of development expenses for
new products the Company has introduced in 2000 and a shift in emphasis to
business development efforts.
The 1999 contract termination fee of $6.3 million represents a one-time payment
to the Company's former international distributor to terminate the international
distribution agreement. The amount paid was negotiated, and was less than the
amount called for in the contract. The agreement enabled the Company to assume
the international selling, marketing and distribution of its nasal strip
products.
Investment income was $507,000 for the third quarter of 2000 compared to
$644,000 for the same quarter of 1999 and was $1.6 million for the first nine
months of 2000 compared to $2.2 million for the same period in 1999. The
decrease was due to a lower level of invested funds in 2000 and net gains last
year on the sale of marketable securities resulting from the repositioning of
the investment portfolio to taxable investments.
There was no income tax benefit in 2000 due to tax loss carryforwards.
Net loss for the third quarter of 2000 was $393,000 or $.03 per share compared
to $5.8 million or $.39 per share for the same quarter of 1999 and was a loss of
$6.8 million or $.47 per share for the first nine months of 2000 compared to
$9.3 million or $.60 per share for the same period of 1999.
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 cold and allergy seasons.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash and cash equivalents and marketable
securities of $34.6 million and working capital of $43.4 million.
7
The Company used cash for operations of $3.5 million for the first nine months
of 2000 compared to $1.2 million for the same period of 1999. The use of cash in
2000 was due to the net loss offset by a net decrease in operating assets and
liabilities.
The Company had net sales of $4.1 million of marketable securities and purchased
$606,000 of property, equipment and property rights in the first nine months of
2000.
The Company repurchased 103,500 shares of common stock for $458,000 in the first
nine months of 2000. Since 1997, the Company has repurchased 5.3 million shares
at an average price per share of $4.84. The shares of common stock are available
for use by the Company to meet its obligations under its employee stock
ownership plan and stock option plans, and for possible future acquisitions.
The Company believes that it's existing funds and funds generated from
operations will be sufficient to support its planned operations for the
foreseeable future.
Forward-Looking Statements
Certain statements contained in this 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 primarily reliant on sales of Breathe Right(R) nasal strips;
(ii) 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; (iii) the Company's
competitive position will, to some extent, be dependent on the enforceability
and comprehensiveness of its patents on the Breathe Right nasal strip technology
which have been, and in the future may be, the subject of litigation, and may be
impacted by the outcome of the re-examination of one such patent by the United
States patent and Trademark Office; (iv) the Company operates in competitive
markets where recent and potential entrants in the nasal dilation segment pose
greater competitive challenges than those faced by the Company in the past; (v)
the Company has faced and will continue to face challenges in successfully
developing and introducing new products and anticipates that there will be
substantial costs, expenses and risks associated with the introduction of new
products during 2000, including those associated with the introduction of the
Company's FiberChoice(TM) chewable fiber tablets; (vii) the Company is currently
establishing its own channels for distributing its nasal strip products in
international markets, and there can be no assurance that
8
the Company's efforts to develop its international distribution will be
successful; (viii) the Company is dependent upon contract manufacturers for the
production of substantially all of its products; and (ix) the risk factors
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk exposure is primarily interest rate risk related to
its cash and cash equivalents and investments in marketable securities. The
Company's risk to interest rate fluctuations has not materially changed since
December 31, 1999. See Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 14, 2000, the United States District Court for the District
of Minnesota approved a Stipulation and Order of Dismissal without
prejudice in the matter of CNS, Inc. v. JMS Labs Ltd. (USA), LLC. The
case was dismissed without prejudice based on the pendency of
reexamination proceedings concerning United States Patent No.
5,5553,499 which CNS asserted against JMS. See Item 1 "Legal
Proceedings" in the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 2000.
On September 29, 2000, the United States Patent and Trademark Office
issued an Office Action in Reexamination for United States Patent No.
5,5553,499. Certain of the claims pending in reexamination were
rejected by the patent office. Other claims that were not subject to
reexamination remain in effect. The Company now has the opportunity to
respond to this office action and will respond appropriately. The
Company believes it has and will maintain significant patent protection
based on its current patent protfolio both pending and issued.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 27, Financial Data Schedule
(b) Reports on Form 8-K
None
10
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: November 10, 2000 By: /s/ Marti Morfitt
---------------------- -----------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: November 10, 2000 By: /s/ David J. Byrd
---------------------- -----------------------------------
David J. Byrd
Vice President of Finance,
Chief Financial Officer and
Treasurer
11