-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FVYAooQIMObsuEfsj7lagzs0uQDaqUGf21wiwKj26dKl/Y8vt9VWmBQHkMwWPX1Z juOANMLAuQMV1alcYZ7zRQ== /in/edgar/work/0000897101-00-001077/0000897101-00-001077.txt : 20001114 0000897101-00-001077.hdr.sgml : 20001114 ACCESSION NUMBER: 0000897101-00-001077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNS INC /DE/ CENTRAL INDEX KEY: 0000814258 STANDARD INDUSTRIAL CLASSIFICATION: [3845 ] IRS NUMBER: 411580270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16612 FILM NUMBER: 759963 BUSINESS ADDRESS: STREET 1: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128206696 MAIL ADDRESS: STREET 1: PO BOX 39802 STREET 2: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-Q 1 0001.txt 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 ---------------------------------------------------------------
5 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 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 SEP-30-2000 358,549 34,216,083 11,410,671 0 2,716,308 51,842,115 1,943,350 0 55,087,516 8,429,741 0 0 0 192,946 46,464,829 55,087,516 47,157,341 47,157,341 16,830,488 38,686,951 0 0 0 (6,788,939) 0 (6,788,939) 0 0 0 (6,788,939) (0.47) (0.47)
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