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 For the Period Ended December 31, 2002. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES 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 Indicated by check mark whether the registration is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES
NO X At January 27, 2003, the Company had outstanding 13,434,992 shares of common stock, $.01 par value per share. |
FORM 10-Q For the Period Ended December 31, 2002 Index PART I. FINANCIAL INFORMATION Financial Statements Management’s Discussion and Analysis of Financial Condition Quantitative and Qualitative Disclosures about Market Risk Controls and Procedures PART II. OTHER INFORMATION Legal Proceedings Change in Securities and Use of Proceeds Defaults Upon Senior Securities Submission of Matters to a Vote of Securities Holders Other Information Exhibits and Reports on Form 8-K |
PART I — FINANCIAL INFORMATION CNS, INC. |
| December 31, 2002 | March 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,688 | $ | 5,553 | ||||
| Marketable securities | 24,842 | 19,109 | ||||||
| Accounts receivable, net | 17,456 | 11,682 | ||||||
| Inventories | 3,639 | 4,465 | ||||||
| Deferred income taxes | 5,189 | 5,879 | ||||||
| Prepaid expenses and other current assets | 1,345 | 999 | ||||||
| Total current assets | 64,159 | 47,687 | ||||||
| Property and equipment, net | 1,763 | 2,400 | ||||||
| Product rights, net | 1,264 | 1,179 | ||||||
| Deferred income taxes | 0 | 3,220 | ||||||
| $ | 67,186 | $ | 54,486 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | 17,878 | 10,264 | ||||||
| Total current liabilities | 17,878 | 10,264 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock - authorized 8,484 shares; | ||||||||
| none issued or outstanding | 0 | 0 | ||||||
| Common stock - $.01 par value; authorized 50,000 shares; | ||||||||
| issued, 19,295 shares | 193 | 193 | ||||||
| Additional paid-in capital | 59,865 | 60,796 | ||||||
| Treasury shares - at cost; 5,860 at Dec. 31, 2002 and | ||||||||
| 5,756 at March 31, 2002 | (25,855 | ) | (25,821 | ) | ||||
| Retained earnings | 14,904 | 8,956 | ||||||
| Accumulated other comprehensive income | 201 | 98 | ||||||
| Total stockholders' equity | 49,308 | 44,222 | ||||||
| $ | 67,186 | $ | 54,486 | |||||
The accompanying notes are an integral part |
CNS, INC.CONDENSED |
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
| Net sales | $ | 25,914 | $ | 21,357 | $ | 57,823 | $ | 52,775 | ||||||
| Cost of goods sold | 8,119 | 7,376 | 19,350 | 18,992 | ||||||||||
| Gross profit | 17,795 | 13,981 | 38,473 | 33,783 | ||||||||||
| Operating expenses: | ||||||||||||||
| Advertising and promotion | 13,407 | 9,618 | 20,402 | 20,322 | ||||||||||
| Selling, general and administrative | 3,204 | 3,052 | 8,983 | 9,817 | ||||||||||
| Special charges | 0 | (170 | ) | 0 | 930 | |||||||||
| Total operating expenses | 16,611 | 12,500 | 29,385 | 31,069 | ||||||||||
| Operating income | 1,184 | 1,481 | 9,088 | 2,714 | ||||||||||
| Investment income | 240 | 330 | 709 | 944 | ||||||||||
| Income before income taxes | 1,424 | 1,811 | 9,797 | 3,658 | ||||||||||
| Income tax expense | 550 | 0 | 3,850 | 0 | ||||||||||
| Net income | $ | 874 | $ | 1,811 | $ | 5,947 | $ | 3,658 | ||||||
| Basic net income per share | $ | .07 | $ | .13 | $ | .44 | $ | .26 | ||||||
| Diluted net income per share | $ | .06 | $ | .12 | $ | .42 | $ | .25 | ||||||
| Weighted average number of common | ||||||||||||||
| shares outstanding | 13,422 | 14,118 | 13,495 | 14,144 | ||||||||||
| Weighted average number of common and | ||||||||||||||
| assumed conversion shares outstanding | 13,966 | 14,534 | 14,034 | 14,461 | ||||||||||
The accompanying notes are an integral part |
CNS, INC. |
| Nine Months Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 5,947 | $ | 3,658 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| from operating activities: | ||||||||
| Depreciation and amortization | 953 | 934 | ||||||
| Deferred income taxes | 3,850 | 0 | ||||||
| Other | 1 | 101 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (5,774 | ) | 1,457 | |||||
| Inventories | 826 | 697 | ||||||
| Prepaid expenses and other current assets | (345 | ) | 1,602 | |||||
| Accounts payable and accrued expenses | 7,614 | 142 | ||||||
| Net cash from operating activities | 13,072 | 8,591 | ||||||
| Investing activities: | ||||||||
| Net change in marketable securities | (5,569 | ) | 98 | |||||
| Payments for purchases of property and equipment | (27 | ) | (111 | ) | ||||
| Payments for product rights | (376 | ) | (209 | ) | ||||
| Net cash from investing activities | (5,972 | ) | (222 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| under stock plans | 951 | 199 | ||||||
| Purchase of treasury shares | (1,916 | ) | (958 | ) | ||||
| Net cash from financing activities | (965 | ) | (759 | ) | ||||
| Net change in cash and cash equivalents | 6,135 | 7,610 | ||||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 5,553 | 701 | ||||||
| End of period | $ | 11,688 | $ | 8,311 | ||||
The accompanying notes are an integral part |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements as of December 31, 2002 and 2001 and March 31, 2002 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. In 2002, the Company changed its fiscal year-end from December 31 to March 31. The change in its fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cough/cold season within the same fiscal year. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2001 with the exception of the following new pronouncements: |
| Effective for the quarter ended March 31, 2002, the Company implemented Emerging Issues Task Force bulletins Number 00-14 “Accounting for Certain Sales Incentives”, Number 00-25 “Vendor Income Statement Characterization of Consideration Paid to a Reseller” and Number 01-9 “Accounting for Consideration Given by a Vendor to a Customer”. These new accounting standards had no impact on the Company’s net income; however, they did require reclassification of certain promotional costs such as sales incentives, promotional funds, and consumer coupon redemptions that were previously reported as a component of advertising and promotion expense as a reduction of net sales. This resulted in a sales reduction of $3.1 million and $5.0 million in the quarter and the nine months ended December 2002 and $1.7 million and $4.0 million in the quarter and nine months ended December 2001, with a corresponding reduction in advertising and promotion expense during those periods. |
| The Company implemented Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. The Company adopted SFAS No. 144 effective for the quarter ended March 2002. There was no material impact on the Company’s consolidated financial position or results of operations as the result of implementing this standard. |
| In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which requires that costs associated with an exit or disposal activity be recognized when the liability is |
| incurred, rather than at the date of a commitment to an exit or disposal plan. The Company adopted SFAS No. 146 effective for the quarter ended September 2002. There was no material impact on the Company’s consolidated financial position or results of operations as the result of implementing this standard. |
Refer to the Annual Report on Form 10-K for the year ended December 31, 2001 for detailed information on accounting policies. Note 2 – Comprehensive Income A reconciliation of total comprehensive income is as follows (in thousands): |
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
| Net income | $ | 874 | $ | 1,811 | $ | 5,947 | $ | 3,658 | ||||||
| Unrealized gain (loss) on marketable | ||||||||||||||
| securities, net of income tax | (37 | ) | (27 | ) | 103 | 62 | ||||||||
| Total comprehensive income | $ | 837 | $ | 1,784 | $ | 6,050 | $ | 3,720 | ||||||
Note 3 — Earnings Per Share A reconciliation of weighted average common and assumed conversion shares outstanding is as follows (in thousands): |
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
| Average common shares outstanding | 13,422 | 14,118 | 13,495 | 14,144 | ||||||||||
| Assumed conversion of stock options | 544 | 416 | 539 | 317 | ||||||||||
| Average common and assumed | �� | |||||||||||||
| conversion shares | 13,966 | 14,534 | 14,034 | 14,461 | ||||||||||
Note 4 – Income Taxes As part of the process of preparing financial statements, the Company is required to estimate income taxes, both state and federal. This process involves management estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be utilized to offset future taxable income during the periods in which these temporary differences are deductible. Management believes that as of December 31, 2002, based on the level of historical taxable income and projections of |
future taxable income for the periods in which the deferred tax assets are deductible, that it is more likely than not the Company will realize the benefits of these deductible differences. Item 2. Management's Discussion and Analysis of Financial Condition and Results of This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended December 31, 2001. In 2002, the Company changed its fiscal year-end from December 31 to March 31. The change in its fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cough/cold season within the same fiscal year. The Company’s revenues are derived primarily from the manufacture and sale of the Breathe Right® 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® chewable tablets, an innovative bulk fiber supplement in the June quarter of 2000. Breathe Right Snore Relief™ throat spray was introduced during 2002 with initial shipments to retailers during the September quarter. The Company has experienced in the past, and expects to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to seasonality of sales and advertising levels, as described below, as well as increases and decreases in purchases by retailers and distributors in anticipation of future demand by consumers. Results of Operations Net sales for the December 2002 quarter increased 21.3% to $25.9 million compared to $21.4 million for the same quarter of 2001 and increased 9.6% to $57.8 million for the nine months ended December 2002 compared to $52.8 million for the same period of 2001. Domestic net sales were $19.1 million for the December quarter of 2002 compared to $16.4 million for the same quarter of 2001, an increase of 16.5%. The growth in quarterly sales was primarily driven by shipments of Snore Relief spray. Sales of nasal strips were flat for the quarter as a result of a slower start to the cough cold season and cough cold advertising not beginning until December. For the nine months ended December 2002, domestic net sales increased 13.5% to $47.1 million compared to $41.5 million for the same period of 2001. The increase is primarily the result of Snore Relief throat spray sales. International sales for the December 2002 quarter were $6.8 million compared to $5.0 million for the same quarter of 2001, an increase of 36.0%. The higher international sales for the quarter were the result of the Japanese distributor returning to normal ordering in October and then purchasing most of the product that will be sold by them during the current cold and allergy |
season. International sales for the nine months ended December 2002 were $10.7 million compared to Gross profit for the December 2002 quarter was $17.8 million compared to $14.0 million for the same quarter of 2001, and was $38.5 million for the nine months ended December 2002 compared to $33.8 million for the same period of 2001. Gross profit as a percentage of net sales increased to 68.7% for the December quarter of 2002 compared to 65.4% for the same quarter of 2001, and was 66.5% for the nine months ended December 2002 compared to 64.0% for the same period of 2001. The higher gross profit percentage resulted from the mix of products sold, primarily greater domestic Breathe Right sales including Snore Relief throat spray. Advertising and promotion expense for the December quarter of 2002 was $13.4 million compared to Selling, general and administrative expenses were $3.2 million for the December quarter of 2002 compared to $3.1 million for the same quarter of 2001, and were $8.9 million for the nine months ended December 2002 compared to $9.8 million for the same period of 2001. In June 2001, the Company restructured, including a workforce reduction, in order to focus its resources on building the core businesses. The Company incurred a special charge of $930,000 during the nine months ended December 2001 relating to the restructuring. Operating income for the December quarter of 2002 was $1.2 million compared to $1.5 million for the same quarter of 2001, and was $9.1 million for the nine months ended December 2002 compared to $2.7 million for the same period of 2001. Investment income for the December quarter of 2002 was $240,000 compared to $330,000 for the same quarter of 2001, and was $709,000 for the nine months ended December 2002 compared to $944,000 for the same period of 2001. The decrease was due to significantly lower interest rates offset by an increase in the amount of funds invested. Net income for the December quarter of 2002 was $874,000 or 6 cents per diluted share compared to $1.8 million or 12 cents per diluted share in the same quarter of 2001, with no |
income tax expense. Pro-forma net income for the prior year quarter, adjusted for a 38% income tax rate, would have been $1.1 million or 8 cents per diluted share. Net income for the nine months ended December 2002 rose to $5.9 million or 42 cents per diluted share compared to net income of $3.7 million or 25 cents per diluted share for the nine months ended December 2001, with no income tax expense. Pro-forma net income for the nine months ended December 2001 would have been $2.3 million or 16 cents per diluted share, adjusted for a 38% income tax rate. An effective income tax rate of 38% was used for the quarter and nine months ended December 2002 and for the pro-forma information in order to show comparative after-tax results. The Company provided a valuation allowance against the net deferred tax assets as of December 31, 2001 as the result of the uncertainty relating to the future realization of these assets. No income tax expense was recognized for the quarter and nine months ended December 31, 2001 as the result of this valuation allowance. Seasonality Liquidity and Capital Resources The Company believes that its existing funds and funds generated from operations will be sufficient to support its planned operations for the foreseeable future. The Company intends on utilizing the cash and marketable securities for normal operating needs, repurchases of the Company’s common stock and potential future acquisitions. The Company generated cash from operations of $13.1 million for the nine months ended December 2002 compared with $8.6 million for the same period of 2001. Net income, that included non-cash tax expense of $3.9 million, and an increase in accounts payable partially offset by an increase in accounts receivable provided the positive impact on cash for the nine months ended December 2002. The Company had net purchases of $5.6 million of marketable securities, consisting of primarily cash equivalents, corporate bonds, and U.S. Government obligations, and $403,000 of purchases for property and equipment and product rights in the nine months ended December 2002. The Company issued 225,667 shares of common stock for $951,000 during the nine months ended December 31, 2002 under its employee stock ownership plans. The Company repurchased 328,900 shares of common stock for $1.9 million during the nine months ended December 31, 2002. There remain 660,800 shares of common stock that can be repurchased by the Company in connection with the repurchase program that was authorized by the board of directors. The shares of common stock repurchased by the Company are available for use by the Company to |
meet obligations under its employee stock ownership plan and stock option plans, and for possible future acquisitions. Accounting Policies and Recent Accounting Pronouncements Forward-Looking Statements |
nasal strip products from different contract manufacturers that obtain the raw materials from a single supplier. 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, 2001. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Changes in Internal Controls |
PART II — OTHER INFORMATION |
| Not Applicable |
| Not Applicable |
Item 3. Defaults Upon Senior Securities |
| Not Applicable |
| Not Applicable |
| Not Applicable |
Item 6. Exhibits and Reports on Form 8-K |
| (a) | The following exhibits are filed as part of this Report: |
| 99.1 Certification pursuant to 18 U.S.C. Section 1350. |
| (b) | Reports on Form 8-K |
| None |
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: February 4, 2003 By: /s/ Marti Morfitt Marti Morfitt President & Chief Executive Officer Date: February 4, 2003 By: /s/ David J. Byrd David J. Byrd Vice President of Finance, Chief Financial Officer and Treasurer |
I, Marti Morfitt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNS, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date:February 4, 2003 | By:s/ Marti Morfitt Marti Morfitt President & Chief Executive Officer |
I, David Byrd, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNS, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date:February 4, 2003 | By:s/ David J. Byrd David J. Byrd President of Finance, Chief Financial Officer and Treasurer |