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 March 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from to
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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 April 30, 2001, the Company had outstanding 14,126,669 shares of common
stock, $.01 par value per share.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, December 31,
2001 2000
----------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 701 $ 2,079
Marketable securities 19,019 29,244
Accounts receivable, net 13,764 12,582
Inventories 6,519 4,752
Prepaid expenses and other current assets 2,896 3,257
-------- --------
Total current assets 42,899 51,914
Property and equipment, net 3,262 3,201
Product rights, net 1,300 1,229
-------- --------
$ 47,461 $ 56,344
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 13,864 19,407
-------- --------
Total current liabilities 13,864 19,407
Stockholders' equity:
Preferred stock - authorized 8,484 shares;
none issued or outstanding 0 0
Common stock - $.01 par value; authorized 50,000 shares;
issued and outstanding, 19,295 shares 193 193
Additional paid-in capital 61,050 61,182
Treasury shares - at cost; 4,907 at March 31, 2001 and
4,838 at December 31, 2000 (23,110) (23,279)
Retained deficit (4,836) (1,259)
Accumulated other comprehensive income 300 100
-------- --------
Total stockholders' equity 33,597 36,937
-------- --------
$ 47,461 $ 56,344
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
2
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Net sales $ 27,112 $ 14,634
Cost of goods sold 8,706 4,846
-------- --------
Gross profit 18,406 9,788
-------- --------
Operating expenses:
Marketing and selling 20,201 14,312
General and administrative 1,517 1,173
Product development 627 488
-------- --------
Total operating expenses 22,345 15,973
-------- --------
Operating loss (3,939) (6,185)
Interest income 362 498
-------- --------
Loss before income taxes (3,577) (5,687)
Income tax (provision) benefit 0 0
-------- --------
Net loss $ (3,577) $ (5,687)
======== ========
Basic net loss per share $ (.25) $ (.39)
======== ========
Diluted net loss per share $ (.25) $ (.39)
======== ========
Weighted average number of common
shares outstanding 14,123 14,400
======== ========
Weighted average number of common and
assumed conversion shares outstanding 14,123 14,400
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Operating activities:
Net loss $ (3,577) $ (5,687)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 271 251
Changes in operating assets and liabilities:
Accounts receivable (1,182) 4,579
Inventories (1,767) 918
Prepaid expenses and other current assets 362 1,770
Accounts payable and accrued expenses (5,544) (6,672)
-------- --------
Net cash from operating activities (11,437) (4,841)
-------- --------
Investing activities:
Net change in marketable securities 10,425 4,330
Payments for purchases of property and equipment (255) (47)
Payments for product rights (148) (17)
-------- --------
Net cash from investing activities 10,022 4,266
-------- --------
Financing activities:
Proceeds from issuance of common stock
under stock plans 88 0
Purchase of treasury shares (51) (249)
-------- --------
Net cash from financing activities 37 (249)
-------- --------
Net change in cash and cash equivalents (1,378) (824)
Cash and cash equivalents:
Beginning of period 2,079 860
-------- --------
End of period $ 701 $ 36
======== ========
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 March 31,
2001 and 2000 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 Annual
Report on Form 10-K for the year ended December 31, 2000, and reference is
hereby made to that report for detailed information on accounting policies.
Note 2 - Comprehensive Income (Loss)
A reconciliation of total comprehensive income (loss) is as follows (in
thousands):
Three Months Ended
March 31,
---------------------
2001 2000
------- -------
Net loss ($3,577) ($5,687)
Change in unrealized gain on marketable
securities, net of income tax 200 0
------- -------
Total comprehensive loss ($3,377) ($5,687)
------- -------
Note 3 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows (in thousands):
Three Months Ended
March 31,
---------------------
2001 2000
------- -------
Average common shares outstanding 14,123 14,400
Assumed conversion of stock options 0 0
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Average common and assumed
Conversion shares 14,123 14,400
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Note 4 - Recent Accounting Pronouncements
In 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives". This EITF requires
companies to present in their statements of operations, certain sales incentives
as sales allowances, resulting in a reduction of net sales. The Company
currently records sales incentives covered by this EITF as operating expenses.
The Company will be required to adopt this EITF beginning with the quarter
ending March 31, 2002. If the Company would have applied the presentation set
forth in this issue in the quarter ending March 31, 2001 and 2000, net sales
would have been reduced by $308,000 and $298,000, respectively. Operating
expenses would have also been
5
reduced by the same amounts in the corresponding years. This issue does not
impact operating income (loss) for any of these periods.
In 2001, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
No. 00-25, "Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services". This EITF requires companies to
present in their statements of operations, certain consideration paid to a
purchaser of the company's products as sales allowances, resulting in a
reduction of net sales. The Company currently records costs covered by this EITF
as operating expenses. The Company will be required to adopt this EITF beginning
with the quarter ending March 31, 2002. The Company is in the process of
evaluating this EITF and its potential impact.
6
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(R) chewable tablets, an
innovative bulk fiber supplement in the second quarter of 2000.
Results of Operations
Net sales increased 85.3% to $27.1 million for the first quarter of 2001
compared to $14.6 million for the same quarter of 2000. Domestic sales increased
55.2% to $22.3 million from $14.4 million in the first quarter of 2000.
Increased sales reflect increased Breathe Right nasal strip sales and sales of
FiberChoice chewable tablets, first shipped to customers in the second quarter
of 2000. Breathe Right strip sales continued to grow due to the Company's new
mentholated and kids strips and the growth of the core Breathe Right nasal strip
business.
International sales were $4.8 million for the first quarter of 2001 compared to
$296,000 for the same quarter of 2000. The higher level of international sales
for 2001 resulted from new international distributors in Japan, Europe and
Australia and the Company's international marketing efforts.
Gross profit was $18.4 million for the first quarter of 2001 compared to $9.8
million for the same quarter of 2000. Gross profit as a percentage of net sales
increased to 67.9% for the first quarter of 2001 compared to 66.9% for the same
quarter of 2000. The higher gross profit percentage resulted primarily from
improved margins on Breathe Right nasal strips partially offset by the lower
gross profit percentage on FiberChoice tablets.
Marketing and selling expenses were $20.2 million for the first quarter of 2001
compared to $14.3 million for the same quarter of 2000. The increase resulted
primarily from planned advertising and sales support for the launch of
FiberChoice chewable tablets and relaunch of Breathe Right nasal strips in
international markets. The majority of our advertising for the Breathe Right
brand is during the cough/cold season, which is the Company's first and fourth
calendar quarters. Marketing and selling expenses also include marketing
development funds ("MDF") provided to retail customers. In order to obtain the
greatest benefit from those expenses, the Company works with retail customers to
concentrate those expenditures in the cough/cold season. For that reason, the
Company expensed an additional $1 million for MDF in the first quarter of this
year. This additional first quarter expense is not expected to impact total MDF
expenses planned for 2001.
General and administrative expenses were $1.5 million for the first quarter of
2001 compared to $1.2 million for the same quarter of 2000. This increase
resulted primarily from the expenses associated with increasing the Company's
infrastructure to support the growing business and business development expenses
associated with the identification of future product opportunities.
7
Product development expenses were $627,000 for the first quarter of 2001
compared to $488,000 for the same quarter of 2000. The increase represents
expenses for the investigation of potential new products and improvements to
existing products. No new product launches are expected in 2001.
Operating loss for the first quarter of 2001 was $3.9 million compared to $6.2
million for the same quarter of 2000.
Investment income was $362,000 for the first quarter of 2001 compared to
$498,000 for the same quarter of 2000. The decrease was primarily the result of
a decrease in investable funds.
There was no income tax benefit for the first quarter of 2001 due to tax loss
carryforwards.
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 March 31, 2001, the Company had cash, cash equivalents and marketable
securities of $19.7 million and working capital of $29.0 million.
The Company used cash in operations of $11.4 million for the first quarter of
2001 compared with $4.8 million for the same quarter of 2000. The use of cash in
2001 was due to the net loss plus an increase in operating assets and payment of
operating liabilities.
The Company had net sales of $10.4 million of marketable securities in the first
quarter of 2001.
The Company believes that its existing funds and funds generated from operations
will be sufficient to support its planned operations for the foreseeable future.
Recent Accounting Pronouncements
See Note 4 to Condensed Consolidated Financial Statements.
Forward-Looking Statements
Certain statements contained in this Quarterly 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,"
8
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'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 the patents on its
Breathe Right nasal strip technology which have been, and in the future could
be, the subject of litigation and may be narrowed as a result of the outcome of
the reexamination of one such patent by the United States Patent and Trademark
Office; (iv) the Company has faced and, in the future could face, challenges in
successfully developing and introducing new products; (v) the Company operates
in competitive markets where recent and potential entrants into the nasal
dilator segment pose competitive challenges; (vi) the Company is dependent upon
contract manufacturers for the production of substantially all of its products;
(vii) 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 that has the right to discontinue the
production and sale of the materials at any time; and (viii) the risk factors
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
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, 2000. See Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
9
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) Exhibits:
See "Exhibit Index" on the page following the Signature Page.
(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: May 9, 2001 By: /s/ Marti Morfitt
----------------------- -------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: May 9, 2001 By: /s/ David J. Byrd
----------------------- -------------------------------
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
11
CNS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Company's Certificate of Incorporation as amended to date
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (the
"1995 Form 10-K")).
3.2 Company's Amended and Restated By-Laws (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 (the "1999 Form 10-K")).
10.1* CNS, Inc. 1987 Employee Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-18, Commission File No. 33-14052C).
10.2* CNS, Inc. 1989 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-8, Commission File No. 33-29454).
10.3* CNS, Inc. 1990 Stock Plan (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
10.4* CNS, Inc. 1994 Amended Stock Plan (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.5* CNS, Inc. 2000 Stock Option Plan (incorporated by reference to
Exhibit A of the Definitive Proxy Statement for the Company's
Annual Meeting of Stockholders that was held on May 3, 2000).
10.6** License Agreement dated January 30, 1992 between the Company and
Creative Integration and Design, Inc. (incorporated by reference
to Exhibit 10.11 to the Company's Registration Statement on Form
S-2, File No. 33-46120).
10.7** License Agreement dated November 10, 1997 between the Company and
Onesta Nutrition, Inc. (incorporated by reference to Exhibit 10.9
to the Company's 1999 Form 10-K).
10.8** License Agreement dated March 12, 1999 between the Company and
WinEase LLC (incorporated by reference to Exhibit 10.10 of the
1999 Form 10-K).
10.9** License Agreement dated June 21, 1999 between the Company and
Peter Cronk and Kristen Cronk (incorporated by reference to
Exhibit 10.11 of the 1999 Form 10-K).
10.10** License Agreement dated March 1, 2000 between the Company and
Proctor and Gamble (incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (the "2000 Form 10-K")).
10.11 Amendment to Trademark License Agreement effective as of March
20, 2001 by and between the Company and the Procter & Gamble
Company.
10.12** Second Amendment to Trademark License Agreement effective as of
April 27, 2001 by and between the Company and the Procter &
Gamble Company.
10.13** Distributor Agreement between the Company and Eisai Co., Ltd.
dated August 1, 2000 (incorporated by reference to Exhibit 10.11
to the 2000 Form 10-K).
10.14** Repackaging Agreement between the Company and Herusu, Co., Ltd.
dated August 1, 2000 (incorporated by reference to Exhibit 10.12
to the 2000 Form 10-K).
10.15* Employment Agreement between the Company and Daniel E. Cohen
dated February 12, 1999 (incorporated by referenced to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Form 10-K")).
10.16* Employment Agreement between the Company and Marti Morfitt dated
February 12, 1999 (incorporated by referenced to Exhibit 10.10 to
the 1998 Form 10-K).
10.17* Employment Agreement between the Company and Kirk P. Hodgdon
dated February 12, 1999 (incorporated by referenced to Exhibit
10.11 to the 1998 Form 10-K).
10.18* Employment Agreement between the Company and David J. Byrd dated
February 12, 1999 (incorporated by referenced to Exhibit 10.12 to
the 1998 Form 10-K).
10.19* Employment Agreement between the Company and John J. Keppeler
dated February 12, 1999 (incorporated by referenced to Exhibit
10.13 to the 1998 Form 10-K).
10.20* Employment Agreement between the Company and Teri P. Osgood dated
February 12, 1999 (incorporated by referenced to Exhibit 10.14 to
the 1998 Form 10-K).
10.21* Employment Agreement between the Company and Carol J. Watzke
dated February 12, 1999 (incorporated by referenced to Exhibit
10.15 to the 1998 Form 10-K).
10.22* Employment Agreement between the Company and M. W. Anderson dated
February 12, 1999 (incorporated by referenced to Exhibit 10.17 to
the 1998 Form 10-K).
10.23* Employment Agreement between the Company and Larry R. Muma dated
January 2, 2001 (incorporated by reference to Exhibit 10.21 to
the 2000 Form 10-K).
* Indicates Compensatory Agreement
** Certain portions of this Exhibit have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment
under Rule 24b-2. Spaces corresponding to the deleted portions are
represented by brackets with asterisks.