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, 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 April 30, 2000, 14,396,561 shares of common stock were outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,942 $ 859,852
Marketable securities 33,666,962 37,997,409
Accounts receivable, net 6,790,467 11,369,815
Income taxes receivable 3,179,644 3,177,771
Inventories 3,987,838 4,905,449
Prepaid expenses and other current assets 1,855,822 3,625,373
------------ ------------
Total current assets 49,516,675 61,935,669
Property and equipment, net 1,879,395 2,010,059
Product rights, net 1,335,629 1,391,107
------------ ------------
$ 52,731,699 $ 65,336,835
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 5,083,484 11,752,761
------------ ------------
Total current liabilities 5,083,484 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 61,447,405 61,530,522
Treasury shares - at cost; 4,886,009 shares at March 31, 2000
and 4,838,098 shares at December 31, 1999 (22,386,107) (22,220,537)
Retained earnings 8,713,971 14,401,143
Accumulated other comprehensive loss (320,000) (320,000)
------------ ------------
Total stockholders' equity 47,648,215 53,584,074
------------ ------------
$ 52,731,699 $ 65,336,835
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE>
CNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 14,633,046 $ 11,934,437
Cost of goods sold 4,845,501 4,688,341
------------ ------------
Gross profit 9,787,545 7,246,096
------------ ------------
Operating expenses:
Marketing and selling 14,312,046 11,407,965
General and administrative 1,173,948 802,904
Product development 487,136 1,000,782
------------ ------------
Total operating expenses 15,973,130 13,211,651
------------ ------------
Operating loss (6,185,585) (5,965,555)
Investment income 498,413 898,646
------------ ------------
Loss before income taxes (5,687,172) (5,066,909)
Income tax benefit 0 2,100,000
------------ ------------
Net loss $ (5,687,172) $ (2,966,909)
============ ============
Basic and diluted net loss per share $ (0.39) $ (0.18)
============ ============
Weighted average number of common shares outstanding 14,400,000 16,400,000
============ ============
Weighted average number of common and
assumed conversion shares outstanding 14,400,000 16,400,000
============ ============
</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>
Three Months Ended
-------------------------------
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(5,687,172) $(2,966,909)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 251,129 261,870
Changes in operating assets and liabilities:
Accounts receivable 4,579,348 1,372,312
Inventories 917,611 1,490,869
Prepaid expenses and other current assets 1,769,913 (460,910)
Accounts payable and accrued expenses (6,671,512) (1,457,015)
----------- -----------
Net cash from operating activities (4,840,683) (1,759,783)
----------- -----------
Investing activities:
Net change in marketable securities 4,330,447 5,368,979
Payments for purchases of property and equipment (47,362) (45,903)
Payments for product rights (17,624) (115)
----------- -----------
Net cash from investing activities 4,265,461 5,322,961
----------- -----------
Financing activities:
Purchase of treasury shares (248,688) (2,937,741)
----------- -----------
Net cash from financing activities (248,688) (2,937,741)
----------- -----------
Net change in cash and cash equivalents (823,910) 625,437
Cash and cash equivalents:
Beginning of period 859,852 584,718
----------- -----------
End of period $ 35,942 $ 1,210,155
=========== ===========
</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 March 31, 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 Income (Loss)
A reconciliation of total comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Net loss ($5,687,172) ($2,966,909)
Change in unrealized loss on marketable
securities, net of income tax 0 (253,000)
------------------ ------------------
Total comprehensive loss ($5,687,172) ($3,219,909)
------------------ ------------------
</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
March 31,
-------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Average common shares outstanding 14,400,000 16,400,000
Assumed conversion of stock options 0 0
------------------ ------------------
Average common and assumed
conversion shares 14,400,000 16,400,000
------------------ ------------------
</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 will begin marketing FiberChoice(TM) chewable tablets,
an innovative bulk fiber supplement in the second quarter of 2000.
Results of Operations
Net sales increased 22.6% to $14.6 million for the first quarter of 2000
compared to $11.9 million for the same quarter of 1999. The increase was a
result of advertising Breathe Right nasal strips over the entire 1999/2000
cough-cold season versus only a portion of the season last year and retailers
working off excess inventory last year.
Gross profit was $9.8 million for the first quarter of 2000 compared to $7.2
million for the same quarter of 1999. Gross profit as a percentage of net sales
increased to 66.9% for the first quarter of 2000 compared to 60.7% for the same
quarter of 1999. The lower gross profit last year resulted primarily from the
inclusion of free Breathe Right nasal strips in packages and costs to rework
product into new packaging.
Marketing and selling expenses were $14.3 million for the first quarter of 2000
compared to $11.4 million for the same quarter of 1999. This increase resulted
primarily from planned spending on advertising and promotion during this
cough-cold season to restart growth of the Breathe Right brand.
General and administrative expenses were $1.2 million for the first quarter of
2000 compared to $803,000 for the same quarter of 1999. This increase resulted
primarily from business development expenses.
Product development expenses were $487,000 for the first quarter of 2000
compared to $1.0 million for the same quarter of 1999. This decrease represents
the substantial completion of development expenses for new products that the
Company expects to introduce later this year.
Operating loss for the first quarter of 2000 was $6.2 million comparable to $6.0
million for the same quarter of 1999.
Investment income was $498,000 for the first quarter of 2000 compared to
$899,000 for the same quarter of 1999. The decrease was primarily from 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 for the first quarter of 2000 due to tax loss
carryforwards.
6
<PAGE>
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, 2000, the Company had cash, cash equivalents and marketable
securities of $33.7 million and working capital of $44.4 million.
The Company used cash from operations of $4.8 million for the first quarter of
2000 compared with $1.8 million for the same quarter 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 $4.3 million of marketable securities in the first
quarter of 2000.
The Company repurchased 58,000 shares of common stock for $249,000 in the first
quarter of 2000. Since 1997, the Company has repurchased 5.2 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 its 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
7
<PAGE>
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; (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 FiberChoiceTM 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
See Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
Item 2. Changes in Securities
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
9
<PAGE>
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 10, 2000 By: /s/ Marti Morfitt
---------------------------------- ------------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: May 10, 2000 By: /s/ David J. Byrd
---------------------------------- ------------------------------------
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CNS, INC.
EXHIBIT 27
03-31-2000
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 35,942
<SECURITIES> 33,666,962
<RECEIVABLES> 6,790,467
<ALLOWANCES> 0
<INVENTORY> 3,987,838
<CURRENT-ASSETS> 49,516,676
<PP&E> 1,879,395
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,731,699
<CURRENT-LIABILITIES> 5,083,484
<BONDS> 0
0
0
<COMMON> 192,946
<OTHER-SE> 47,455,269
<TOTAL-LIABILITY-AND-EQUITY> 52,731,699
<SALES> 14,633,046
<TOTAL-REVENUES> 14,633,046
<CGS> 4,845,501
<TOTAL-COSTS> 15,973,130
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,687,172)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,687,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,687,172)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
