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, 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)
(612) 820-6696
(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 14, 2000, 14,420,902 shares of common stock were outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,402,104 $ 859,852
Marketable securities 34,484,076 37,997,409
Accounts receivable, net 6,290,395 11,369,815
Income taxes receivable 0 3,177,771
Inventories 3,932,046 4,905,449
Prepaid expenses and other current assets 2,388,378 3,625,373
------------ ------------
Total current assets 49,496,999 61,935,669
Property and equipment, net 1,754,952 2,010,059
Product rights, net 1,367,210 1,391,107
------------ ------------
$ 52,619,161 $ 65,336,835
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 5,695,617 11,752,761
------------ ------------
Total current liabilities 5,695,617 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 61,284,774 61,530,522
Treasury shares - at cost; 4,873,668 at June 30, 2000 and
4,838,098 at December 31, 1999 (22,239,293) (22,220,537)
Retained earnings 8,005,117 14,401,143
Accumulated other comprehensive loss (320,000) (320,000)
------------ ------------
Total stockholders' equity 46,923,544 53,584,074
------------ ------------
$ 52,619,161 $ 65,336,835
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE>
CNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 13,303,403 $ 8,184,611 $ 27,936,449 $ 20,119,048
Cost of goods sold 5,110,029 3,629,295 9,955,530 8,317,636
------------ ------------ ------------ ------------
Gross profit 8,193,374 4,555,316 17,980,919 11,801,412
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling 7,876,120 4,360,526 22,188,166 15,766,465
General and administrative 1,177,695 779,387 2,351,644 1,604,292
Product development 414,297 888,059 901,432 1,868,867
------------ ------------ ------------ ------------
Total operating expenses 9,468,112 6,027,972 25,441,242 19,239,624
------------ ------------ ------------ ------------
Operating loss (1,274,738) (1,472,656) (7,460,323) (7,438,212)
Investment income 565,884 698,431 1,064,297 1,597,078
------------ ------------ ------------ ------------
Loss before income taxes (708,854) (774,225) (6,396,026) (5,841,134)
Income tax benefit 0 250,000 0 2,350,000
Net loss $ (708,854) $ (524,225) $ (6,396,026) $ (3,491,134)
============ ============ ============ ============
Basic and diluted net loss per share $ (.05) $ (.03) $ (.44) $ (.22)
============ ============ ============ ============
Weighted average number of common
shares outstanding 14,397,000 15,570,000 14,413,000 15,991,000
============ ============ ============ ============
Weighted average number of common and
assumed conversion shares outstanding 14,397,000 15,570,000 14,413,000 15,991,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
CNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $ (6,396,026) $ (3,491,134)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 505,012 516,196
Changes in operating assets and liabilities:
Accounts receivable 5,079,420 4,152,785
Inventories 973,403 1,504,440
Prepaid expenses and other current assets 1,236,995 990,186
Accounts payable and accrued expenses (2,879,735) (4,309,564)
------------ ------------
Net cash from operating activities (1,480,931) (637,091)
------------ ------------
Investing activities:
Change in marketable securities 3,513,333 5,709,595
Payments for purchases of property and equipment (101,577) (208,113)
Payments for product rights (124,069) (115)
------------ ------------
Net cash from investing activities 3,287,687 5,501,367
------------ ------------
Financing activities:
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 38,183 16,332
Purchase of treasury shares (302,687) (4,546,829)
------------ ------------
Net cash from financing activities (264,504) (4,530,497)
------------ ------------
Net change in cash and cash equivalents 1,542,252 333,779
Cash and cash equivalents:
Beginning of period 859,852 584,718
------------ ------------
End of period $ 2,402,104 $ 918,497
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of June 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $ (708,854) $ (524,225) $ (6,396,026) $ (3,491,134)
Unrealized loss on marketable
Securities net of income tax 0 (140,000) 0 (140,000)
------------------------------------------------------------------
Total comprehensive loss $ (708,854) $ (664,225) $ (6,396,026) $ (3,631,134)
------------------------------------------------------------------
</TABLE>
Note 3 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average common shares outstanding 14,397,000 15,570,000 14,413,000 15,991,000
Assumed conversion of stock options 0 0 0 0
------------------------------------------------------------------
Average common and assumed
Conversion shares 14,397,000 15,570,000 14,413,000 15,991,000
------------------------------------------------------------------
</TABLE>
5
<PAGE>
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 $13.3 million for the second quarter of 2000 compared to $8.2
million for the same quarter of 1999 and were $27.9 million for the first six
months of 2000 compared to $20.1 million for the same period of 1999.
Domestic sales increased to $12.7 million from $8.0 million in the second
quarter of 1999 and for the first six months of 2000 were $27.0 million compared
to $19.8 million for the same period of 1999. Increased sales this period
reflect initial shipments of FiberChoice chewable tablets to retailers and
increased Breathe Right nasal strip sales. Breathe Right strip sales continued
to grow, in part, due to congestion related advertising during the previous
cough/cold season. In addition, 1999 second quarter sales were reduced by
reserves for anticipated returns of product in connection with the introduction
of new packaging last year.
International sales were $606,000 for the second quarter of 2000 compared to
$191,000 for the same quarter of 1999 and were $902,000 for the first six months
of 2000 compared to $314,000 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 distributors in Europe and Australia.
Gross profit was $8.2 million or 61.6% of net sales for the second quarter of
2000 compared to $4.6 million or 55.7% for the same quarter of 1999 and was
$18.0 million or 64.4% for the first six months of 2000 compared to $11.8
million or 58.7% for the same period of 1999. The second quarter 2000 gross
profit was impacted by the lower gross profit on FiberChoice sales, especially
the 10-count trial size. The lower gross profit percentage in 1999 was primarily
due to costs for the transition of Breathe Right nasal strips to new product
packaging.
Marketing and selling expenses were $7.9 million for the second quarter of 2000
compared to $4.4 million for the same quarter of 1999 and were $22.2 million for
the first six months of 2000 compared to $15.8 million for the same period in
1999. The increase for the second quarter resulted primarily from advertising
and promotion spending for the FiberChoice launch and Breathe Right nasal strip
snoring related advertising and promotion.
General and administrative expenses were $1.2 million for the second quarter of
2000 compared to $779,000 for the same quarter of 1999 and were $2.4 million for
the first six months of 2000
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<PAGE>
compared to $1.6 million for the same period in 1999. This increase resulted
primarily from business development expenses.
Product development expenses were $414,000 for the second quarter of 2000
compared to $888,000 for the same quarter of 1999 and were $901,000 for the
first six months of 2000 compared to $1.9 million for the same period in 1999.
This decrease represents the substantial completion of development expenses for
new products the Company is introducing this year.
Investment income was $566,000 for the second quarter of 2000 compared to
$698,000 for the same quarter of 1999 and was $1.1 million for the first six
months of 2000 compared to $1.6 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 second quarter of 2000 was $709,000 or $.05 per share compared
to $524,000 or $.03 per share for the same quarter of 1999 and was a loss of
$6.4 million or $.44 per share for the first six months of 2000 compared to $3.5
million or $.22 per share for the same period of 1999. This decrease was due
primarily to no income tax benefit and lower investment income in 2000.
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, 2000, the Company had cash and cash equivalents and marketable
securities of $36.9 million and working capital of $43.8 million.
The Company used cash for operations of $1.5 million for the first six months of
2000 compared to $637,000 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 $3.5 million of marketable securities and purchased
$225,000 of property, equipment and property rights in the first six months of
2000.
The Company repurchased 70,000 shares of common stock for $303,000 in the first
six 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.
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<PAGE>
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 could be, the subject of litigation, and may
be impacted by the outcome of the pending 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 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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 20, 1999, the Company commenced a civil action in the United
States District Court for the District of Minnesota, Case No.
99-CV-111 JMR/JGL, against JMS Labs Limited (USA), LLC, a/k/a JMS
Labs Limited ("JMS"), asserting claims of patent infringement and
Lanham Act violations. The Company contends that nasal strips
manufactured, sold and/or offered for sale by JMS infringe a patent
licensed by the Company in connection with its Breathe Right(R) nasal
strips and identified as United States Patent No. 5,533,499 (the "499
Patent"), and that JMS has made false and/or misleading statements
concerning the characteristics and qualities of its own products and
the Company's nasal strip products. In response to the Company's
complaint, JMS filed an answer and counterclaim denying the Company's
claims and asserting a counterclaim for declaratory judgment that the
499 Patent is invalid, unenforceable and not infringed, and that the
complained of statements are not false and misleading. The Company
denied the allegations raised by JMS in its counterclaim.
In light of the pending re-examination of the 499 Patent, the Company
and JMS have agreed to dismiss the litigation without prejudice to
reinstate the action and advance the claims and counterclaims
asserted in the proceeding at a future date. The parties' agreement
dismissing the lawsuit is subject to the preparation of definitive
documentation and approval of the court.
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
On May 3, 2000, CNS, Inc. held its annual meeting of stockholders. Of
the 14,431,561 shares of Common Stock eligible to vote, 13,322,285
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 13,162,606 159,679
Patrick Delaney 13,147,641 174,644
R. Hunt Greene 13,153,915 168,370
Andrew J. Greenshields 13,154,591 167,694
H. Robert Hawthorne 13,145,381 176,904
Marti Morfitt 13,021,887 300,398
Richard W. Perkins 13,164,932 157,353
2. The votes cast to ratify and approve the CNS, Inc. 2000 Stock
Option Plan were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
11,933,721 1,328,206 60,358
3. The votes cast to ratify and approve the appointment of KPMG LLP
as independent auditors for the fiscal year ending December 31, 2000
were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
13,213,720 82,870 25,695
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
9
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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: July 24, 2000 By: /s/ Marti Morfitt
----------------------------- -----------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: July 24, 2000 By: /s/ David J. Byrd
----------------------------- -----------------------------------
David J. Byrd
Vice President of Finance,
Chief Financial Officer and
Treasurer
10
