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, 2001.
[ ] 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 July 27, 2001, the Company had outstanding 14,149,765 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)
June 30, December 31,
2001 2000
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 961 $ 2,079
Marketable securities 18,353 29,244
Accounts receivable, net 9,920 12,582
Inventories 6,696 4,752
Prepaid expenses and other current assets 1,744 3,257
------------ ------------
Total current assets 37,674 51,914
Property and equipment, net 3,108 3,201
Product rights, net 1,229 1,229
------------ ------------
$ 42,011 $ 56,344
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 11,340 19,407
------------ ------------
Total current liabilities 11,340 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 60,932 61,182
Treasury shares - at cost; 5,145 at June 30, 2001 and
5,179 at December 31, 2000 (22,914) (23,279)
Accumulated deficit (7,825) (1,259)
Accumulated other comprehensive income 285 100
------------ ------------
Total stockholders' equity 30,671 36,937
------------ ------------
$ 42,011 $ 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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 15,476 $ 13,303 $ 42,588 $ 27,936
Cost of goods sold 5,557 5,110 14,263 9,955
------------ ------------ ------------ ------------
Gross profit 9,919 8,193 28,325 17,981
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling 10,447 7,876 30,649 22,188
General and administrative 1,260 1,178 2,777 2,352
Product development 447 414 1,073 901
Special charge 1,100 0 1,100 0
------------ ------------ ------------ ------------
Total operating expenses 13,254 9,468 35,599 25,441
------------ ------------ ------------ ------------
Operating loss (3,335) (1,275) (7,274) (7,460)
Interest income 345 566 707 1,064
------------ ------------ ------------ ------------
Net loss $ (2,990) $ (709) $ (6,567) $ (6,396)
============ ============ ============ ============
Basic net loss per share $ (.21) $ (.05) $ (.46) $ (.44)
============ ============ ============ ============
Diluted net loss per share $ (.21) $ (.05) $ (.46) $ (.44)
============ ============ ============ ============
Weighted average number of common
shares outstanding 14,128 14,397 14,126 14,413
============ ============ ============ ============
Weighted average number of common and
assumed conversion shares outstanding 14,128 14,397 14,126 14,413
============ ============ ============ ============
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)
Six Months Ended
June 30,
-----------------------------
2001 2000
------------ ------------
Operating activities:
Net loss $ (6,567) $ (6,396)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 581 505
Changes in operating assets and liabilities:
Accounts receivable 2,662 5,079
Inventories (1,943) 974
Prepaid expenses and other current assets 1,513 1,237
Accounts payable and accrued expenses (8,067) (2,880)
------------ ------------
Net cash from operating activities (11,821) (1,481)
------------ ------------
Investing activities:
Change in marketable securities 11,076 3,513
Payments for purchases of property and equipment (332) (101)
Payments for product rights (156) (124)
------------ ------------
Net cash from investing activities 10,588 3,288
------------ ------------
Financing activities:
Proceeds from issuance of common stock
under stock plans 166 38
Purchase of treasury shares (51) (303)
------------ ------------
Net cash from financing activities 115 (265)
------------ ------------
Net change in cash and cash equivalents (1,118) 1,542
Cash and cash equivalents:
Beginning of period 2,079 860
------------ ------------
End of period $ 961 $ 2,402
============ ============
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying condensed consolidated financial statements as of June 30, 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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss ($ 2,990) ($ 709) ($ 6,567) ($ 6,396)
Unrealized gain (loss) on marketable
Securities net of income tax (15) 0 185 0
------------ ------------ ------------ ------------
Total comprehensive loss ($ 3,005) ($ 709) ($ 6,382) ($ 6,396)
------------ ------------ ------------ ------------
Note 3 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Average common shares outstanding 14,128 14,397 14,126 14,413
Assumed conversion of stock options 0 0 0 0
------------ ------------ ------------ ------------
Average common and assumed
Conversion shares 14,128 14,397 14,126 14,413
------------ ------------ ------------ ------------
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
5
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 quarters ended June 30,
2001 and 2000, net sales would have been reduced by $349,000 and $372,000,
respectively. Operating expenses would have also been 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 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 June 30, 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 16.3% to $15.5 million for the second quarter of 2001
compared to $13.3 million for the same quarter of 2000 and increased 52.4% to
$42.6 million for the first six months of 2001 compared to $27.9 million for the
same period of 2000.
Domestic net sales were $12.5 million for the second quarter of 2001 comparable
to $12.7 for the second quarter of 2000. Sales of Breathe Right nasal strips
increased, offset by lower sales of FiberChoice chewable tablets. Sales of
FiberChoice tablets in the second quarter of 2000 represented primarily initial
shipments to retailers while 2001 second quarter sales represent primarily sell
through to consumers. For the first six months of 2001, domestic net sales
increased 28.8% to $34.8 million compared to $27.0 million for the same period
of 2000. Domestic Breathe Right nasal strip sales were $30 million and
FiberChoice tablet sales were $5 million.
International sales were $2.9 million for the second quarter of 2001 compared to
$606,000 for the same quarter of 2000 and were $7.8 million for the first six
months of 2001 compared to $902,000 for the same period of 2000. The higher
level of international sales for 2001 resulted primarily from new international
distribution in Japan beginning in the third quarter of 2000 and the Company's
international marketing efforts.
Gross profit was $9.9 million for the second quarter of 2001 compared to $8.2
million for the same quarter of 2000, and was $28.3 million for the first six
months of 2001 compared to $18.0 million for the same period of 2000. Gross
profit as a percentage of net sales increased to 64.1% for the second quarter of
2001 compared to 61.6% for the same quarter of 2000, and was 66.5% for the first
six months of 2001 compared to 64.4% for the same period of 2000. The higher
gross profit percentage resulted primarily from improved margins on Breathe
Right nasal strips.
Marketing and selling expenses were $10.4 million for the second quarter of 2001
compared to $7.9 million for the same quarter of 2000, and were $30.6 million
for the first six months of 2001 compared to $22.2 million for the same period
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.
General and administrative expenses were $1.3 million for the second quarter of
2001 comparable to $1.2 million for the same quarter of 2000, and were $2.8
million for the first six
7
months of 2001 compared to $2.4 million for the same period of 2000. This
increase resulted primarily from the expenses associated with the Company's
infrastructure and business development expenses associated with the
identification of future product opportunities.
Product development expenses were $447,000 for the second quarter of 2001
comparable to $414,000 for the same quarter of 2000, and were $1.1 million for
the first six months of 2001 compared to $901,000 for the same period 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.
During the second quarter of 2001, the Company recorded a special charge for
restructuring of $1.1 million. At the end of the quarter, the Company announced
a plan to streamline and realign the Company's resources to better match its
strategic goals. Approximately 20 jobs, or 25% of the workforce from throughout
the Company, were eliminated. These cost-cutting actions are expected to result
in annualized savings of approximately $2 to $2.5 million with some beneficial
impact beginning in the third quarter.
Operating loss for the second quarter of 2001 was $3.3 million compared to $1.3
million for the same quarter of 2000, and was $7.3 million for the first six
months of 2001 compared to $7.5 million for the same period of 2000.
Investment income was $345,000 for the second quarter of 2001 compared to
$566,000 for the same quarter of 2000, and was $707,000 for the first six months
of 2001 compared to $1.1 million for the same period of 2000. The decrease was
primarily the result of a decrease in funds available for investment.
There was no income tax benefit 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 June 30, 2001, the Company had cash, cash equivalents and marketable
securities of $19.3 million and working capital of $26.3 million.
The Company used cash in operations of $11.8 million for the first six months of
2001 compared with $1.5 million for the same quarter of 2000. The use of cash in
2001 was due to the net loss plus payment of operating liabilities. The use of
cash in 2000 was due to the net loss offset by a decrease in operating assets.
The Company had net sales of $11.1 million of marketable securities and $488,000
of purchases for property and equipment and product rights in the first six
months of 2001.
8
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," 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
On May 23, 2001, CNS, Inc. held its annual meeting of
stockholders. Of the 14,126,669 shares of Common Stock eligible to
vote, 13,468,222 were represented in person or by proxy at the
meeting and shares were voted on the following matters:
1. The votes cast for the seven (7) directors to serve until the
next annual meeting of shareholders were:
Name Votes For Votes Withheld
---- --------- --------------
Daniel E. Cohen 12,705,174 763,048
Patrick Delaney 11,604,946 1,863,276
R. Hunt Greene 11,859,596 1,608,626
Andrew J. Greenshields 12,268,856 1,199,366
H. Robert Hawthorne 12,133,426 1,334,796
Marti Morfitt 12,819,596 648,626
Richard W. Perkins 12,271,566 1,196,656
2. The votes cast to ratify and approve an amendment to the CNS,
Inc. 1989 Employee Stock Purchase Plan in order to increase the
number of shares available for issuance from 200,000 to 400,000
were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
12,288,852 1,138,442 40,928
3. The votes cast to ratify and approve the appointment of KPMG
LLP as independent auditors for the fiscal year ending December
31, 2001 were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
12,723,113 719,726 25,383
10
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
11
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 13, 2001 By: /s/ Marti Morfitt
-------------------------- ------------------------------------
Marti Morfitt
President & Chief Executive Officer
Date: August 13, 2001 By: /s/ David J. Byrd
-------------------------- ------------------------------------
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
12
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
ending December 31, 1999 (the "1999 Form 10-K"))
4.1 Form of Rights Agreement dated July 20, 1995 between CNS, Inc. and
Norwest Bank Minnesota, N.A. as Rights Agent (incorporated by reference
to Exhibit 1 to the Company's Registration Statement on Form 8-A,
Commission File No. 0-16612).
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")).
13
10.11 Amendment to Trademark License Agreement effective as of March 20, 2001
by and between the Company and the Procter & Gamble Company
(incorporated by reference to Exhibit 10.11 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 2001).
10.12** Second Amendment to Trademark License Agreement effective as of April
27, 2001 by and between the Company and the Procter & Gamble Company
(incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 2001).
10.13** Distributor Agreement between the Company and Eisai Co., Ltd. dated
August 1, 2000 (incorporated by reference to Exhibit 10.11 to the 1999
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
Company's 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.
14