10-Q 1 cns012986_10q.txt CNS, INC. FORM 10-Q 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