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 December 31, 2005.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0 – 16612
CNS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 41-1580270 |
---|---|
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7615 Smetana Lane
Eden Prairie, MN 55344
(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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES x NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
At January 30, 2006, the Company had outstanding 14,164,998 shares of common stock, $.01 par value per share.
CNS, Inc.
FORM 10-Q
For the Period Ended December 31, 2005
Index
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Item 4. | Controls and Procedures |
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Submission of Matters to a Vote of Securities Holders |
Item 5. | Other Information |
Item 6. | Exhibits |
PART I –FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Net sales | $ | 30,929 | $ | 28,737 | $ | 80,525 | $ | 65,310 | ||||||
Cost of goods sold | 9,401 | 7,099 | 23,991 | 18,208 | ||||||||||
Gross profit | 21,528 | 21,638 | 56,534 | 47,102 | ||||||||||
Operating expenses: | ||||||||||||||
Advertising and promotion | 11,403 | 10,721 | 25,070 | 21,520 | ||||||||||
Selling, general and administrative | 4,203 | 4,506 | 12,969 | 11,605 | ||||||||||
Total operating expenses | 15,606 | 15,227 | 38,039 | 33,125 | ||||||||||
Operating income | 5,922 | 6,411 | 18,495 | 13,977 | ||||||||||
Investment income | 330 | 256 | 964 | 670 | ||||||||||
Income before income taxes | 6,252 | 6,667 | 19,459 | 14,647 | ||||||||||
Income tax expense | 2,284 | 2,262 | 6,916 | 5,084 | ||||||||||
Net income | $ | 3,968 | $ | 4,405 | $ | 12,543 | $ | 9,563 | ||||||
Basic net income per share | $ | .28 | $ | .32 | $ | .88 | $ | .69 | ||||||
Diluted net income per share | $ | .26 | $ | .30 | $ | .83 | $ | .65 | ||||||
Weighted average number of common | ||||||||||||||
shares outstanding | 14,200 | 13,943 | 14,175 | 13,913 | ||||||||||
Weighted average number of common and | ||||||||||||||
potential common shares outstanding | 15,023 | 14,740 | 15,057 | 14,648 | ||||||||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
December 31, 2005 | March 31, 2005 | |||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 6,684 | $ | 4,814 | ||||
Marketable securities | 53,018 | 55,936 | ||||||
Accounts receivable, net | 17,181 | 15,030 | ||||||
Inventories | 7,211 | 4,531 | ||||||
Deferred income taxes | 1,977 | 1,968 | ||||||
Prepaid expenses and other current assets | 2,692 | 1,435 | ||||||
Total current assets | 88,763 | 83,714 | ||||||
Property and equipment, net | 1,193 | 1,118 | ||||||
Product rights, net | 1,304 | 1,360 | ||||||
Deferred income taxes | 762 | 1,023 | ||||||
$ | 92,022 | $ | 87,215 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 18,332 | $ | 16,064 | ||||
Total current liabilities | 18,332 | 16,064 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock – authorized 8,484 shares; | ||||||||
none issued or outstanding | — | — | ||||||
Common stock – $.01 par value; authorized 50,000 shares; | ||||||||
issued 19,295 shares; outstanding 14,169 shares at | ||||||||
December 31, 2005 and 14,246 shares at March 31, 2005 | 193 | 193 | ||||||
Additional paid-in capital | 61,851 | 61,693 | ||||||
Treasury shares – at cost; 5,126 at December 31, 2005 and | ||||||||
5,049 at March 31, 2005 | (31,428 | ) | (23,779 | ) | ||||
Retained earnings | 43,269 | 33,284 | ||||||
Accumulated other comprehensive income | (195 | ) | (240 | ) | ||||
Total stockholders’ equity | 73,690 | 71,151 | ||||||
$ | 92,022 | $ | 87,215 | |||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||||
Operating activities: | ||||||||||
Net income | $ | 12,543 | $ | 9,563 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||
Depreciation and amortization | 607 | 596 | ||||||||
Deferred income taxes | 253 | (130 | ) | |||||||
Other | 1 | 1 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | (2,150 | ) | (2,792 | ) | ||||||
Inventories | (2,680 | ) | (234 | ) | ||||||
Prepaid expenses and other current assets | (1,260 | ) | 1,119 | |||||||
Accounts payable and accrued expenses | 2,269 | 3,084 | ||||||||
Net cash from operating activities | 9,583 | 11,207 | ||||||||
Investing activities: | ||||||||||
Purchases of marketable securities | (49,394 | ) | (54,433 | ) | ||||||
Sales of marketable securities | 52,356 | 44,249 | ||||||||
Payments for purchases of property and equipment | (438 | ) | (19 | ) | ||||||
Payments for product rights | (188 | ) | (441 | ) | ||||||
Net cash from investing activities | 2,336 | (10,644 | ) | |||||||
Financing activities: | ||||||||||
Proceeds from issuance of common stock under stock plans | 1,750 | 986 | ||||||||
Purchase of treasury shares | (9,241 | ) | (584 | ) | ||||||
Payment of cash dividends | (2,558 | ) | (2,086 | ) | ||||||
Net cash from financing activities | (10,049 | ) | (1,684 | ) | ||||||
Net change in cash and cash equivalents | 1,870 | (1,121 | ) | |||||||
Cash and cash equivalents: | ||||||||||
Beginning of period | 4,814 | 8,871 | ||||||||
End of period | $ | 6,684 | $ | 7,750 | ||||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal, recurring accruals, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.
The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005.
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 March 31, 2005. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.
Note 2 – Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is determined based on the difference, if any, on the grant date between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Accordingly, no compensation expense associated with the intrinsic value of stock option grants or shares sold to employees under the Employee Stock Purchase Plan has been recognized in the Company’s financial statements.
Had compensation cost for the Company’s stock option plan been determined based on the fair value of options at the grant date, net earnings and earnings per share would have been as follows (in thousands, except per share information):
For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income, as reported | $ | 3,968 | $ | 4,405 | $ | 12,543 | $ | 9,563 | ||||||
Deduct: Total stock-based compensation | ||||||||||||||
expense determined under the fair value | ||||||||||||||
based method for all awards, net of tax effects | 335 | 212 | 784 | 646 | ||||||||||
Proforma net income | $ | 3,633 | $ | 4,193 | $ | 11,759 | $ | 8,917 | ||||||
Earnings per share: | ||||||||||||||
Basic – as reported | $ | .28 | $ | .32 | $ | .88 | $ | .69 | ||||||
Basic – proforma | $ | .26 | $ | .30 | $ | .83 | $ | .64 | ||||||
Diluted – as reported | $ | .26 | $ | .30 | $ | .83 | $ | .65 | ||||||
Diluted – proforma | $ | .24 | $ | .29 | $ | .79 | $ | .60 |
Note 3 – Marketable Securities
The Company classifies its marketable debt securities as available-for-sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Any unrealized gains and losses, net of deferred income taxes, are included in stockholders’ equity as a separate component of other comprehensive income. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary, results in a charge to operations and the establishment of a new cost basis for the security. Realized securities gains or losses are included in investment income in the consolidated statements of operations.
Note 4 – Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory reserves have been established for probable product obsolescence. The components of inventories are as follows (in thousands):
December 31, 2005 | March 31, 2005 | |||||||
---|---|---|---|---|---|---|---|---|
Finished goods | $ | 5,695 | $ | 3,547 | ||||
Raw materials and component parts | 1,516 | 984 | ||||||
Total inventories | $ | 7,211 | $ | 4,531 | ||||
Note 5 – Net sales
Net sales by brand and geographic area are as follows (in thousands):
For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Domestic – Breathe Right | $ | 21,506 | $ | 21,821 | $ | 54,682 | $ | 48,934 | ||||||
Domestic – FiberChoice | 4,094 | 2,959 | 13,782 | 8,167 | ||||||||||
Domestic – Other | 14 | 13 | 145 | 173 | ||||||||||
Domestic Total | 25,614 | 24,793 | 68,609 | 57,274 | ||||||||||
International – Breathe Right | 5,315 | 3,944 | 11,916 | 8,036 | ||||||||||
Total net sales | $ | 30,929 | $ | 28,737 | $ | 80,525 | $ | 65,310 | ||||||
Note 6 – Comprehensive Income
A reconciliation of total comprehensive income is as follows (in thousands):
For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income | $ | 3,968 | $ | 4,405 | $ | 12,543 | $ | 9,563 | ||||||
Unrealized gain(loss) on marketable | ||||||||||||||
securities, net of income tax | (20 | ) | (92 | ) | 45 | (251 | ) | |||||||
Total comprehensive income | $ | 3,948 | $ | 4,313 | $ | 12,588 | $ | 9,312 | ||||||
Note 7 – Earnings Per Share
A reconciliation of weighted average common and potential common shares outstanding is as follows (in thousands):
For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Average common shares outstanding | 14,200 | 13,943 | 14,175 | 13,913 | ||||||||||
Potential common shares | 823 | 797 | 882 | 735 | ||||||||||
Average common and potential common shares | 15,023 | 14,740 | 15,057 | 14,648 | ||||||||||
For the three months ended December 31, 2005 and 2004 there were 7,000 and 1,000 options, respectively, that were excluded in the calculation of potential common shares because the exercise price of the options were higher than the average market price for the three month period. For the nine months ended December 31, 2005 and 2004 there were 7,000 and 322,320 options, respectively, that were excluded in the calculation of potential common shares because the exercise price of the options were higher than the average market price for the nine month period.
Note 8 – Dividends
The Company declared a $.06 per share cash dividend on October 25, 2005 for shareholders of record as of November 18, 2005 and paid on December 2, 2005. Total amount of dividends paid on December 2, 2005 was $853,000. Total dividends paid for the nine months ended December 31, 2005 were $2,558,000. The Company paid dividends of $2,086,000 during the nine months ended December 31, 2004.
Note 9 – 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, 2005, 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, it is more likely than not that the Company will realize the benefits of these deductible differences.
Note 10 – Subsequent Event
On January 4, 2006, the Company purchased a portfolio of domestic and international patents and patents pending related to the FiberChoice brand for approximately $8.0 million in cash from Onesta Nutrition, Inc.
Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed under “Forward-Looking Statements” and elsewhere in this report.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended March 31, 2005.
Overview
We are in the business of developing and marketing consumer health care products, including Breathe Right® branded products focused on better breathing, and FiberChoice® branded products focused on digestive health. We operate in niche categories of the large over-the-counter health care market with unique product offerings that are supported by strong advertising and promotion programs. Our competitive strengths include our brands and patented technologies, well-established distribution networks domestically and internationally, a flexible and low-cost operating model and an experienced management team.
Our principal product, the Breathe Right nasal strip, improves breathing by dilating the nasal passages. Nasal strips provide temporary relief from nasal congestion and stuffiness resulting from a variety of health conditions, and also reduce or eliminate snoring. Breathe Right nasal strips, and the entire Breathe Right product line, provide consumers “drug free” better breathing solutions. Breathe Right nasal strips are sold in the United States and 26 markets internationally.
The Breathe Right brand has been further extended by the launch of new products such as Breathe Right Snore Relief throat spray in fiscal 2003 and the launch of Breathe Right Vapor Shot!™ personal vaporizer in fiscal 2004.
We entered the bulk fiber category in March 2000 with the launch of the FiberChoice brand. The original FiberChoice product is an orange flavored chewable fiber tablet that offers consumers an effective, convenient and good-tasting way to supplement their daily intake of dietary fiber. In March 2005, CNS extended the FiberChoice line to include sugar-free chewable fiber tablets in assorted fruit flavors and a low-sugar, hard candy fiber drop. We recently announced the introduction of two additional product offerings under the FiberChoice brand, FiberChoice plus Calcium™ and FiberChoice Weight Management™. These two new products will begin shipping to retailers in February 2006.
In addition to further organic development and expansion of the Breathe Right and FiberChoice brands, we are exploring opportunities to acquire established consumer health care brands, product lines and new technologies that complement our better breathing and digestive health platforms.
Results of Operations
Net sales by brand and geographic area are as follows (in thousands):
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Domestic – Breathe Right | $ | 21,506 | $ | 21,821 | $ | 54,682 | $ | 48,934 | ||||||
Domestic – FiberChoice | 4,094 | 2,959 | 13,782 | 8,167 | ||||||||||
Domestic – Other | 14 | 13 | 145 | 173 | ||||||||||
Domestic Total | 25,614 | 24,793 | 68,609 | 57,274 | ||||||||||
International – Breathe Right | 5,315 | 3,944 | 11,916 | 8,036 | ||||||||||
Total net sales | $ | 30,929 | $ | 28,737 | $ | 80,525 | $ | 65,310 | ||||||
For the quarter ended December 31, 2005, net sales were $30.9 million, an increase of 7.6% versus net sales of $28.7 million for the quarter ended December 31, 2004. For the nine month period ended December 31, 2005, net sales increased by 23.3% to $80.5 million compared to net sales of $65.3 million for the nine month period ended December 31, 2004.
Domestic net sales for the quarter ended December 31, 2005 of $25.6 million increased by 3.3% compared to the quarter ended December 31, 2004. For the quarter ended December 31, 2005, net sales of domestic Breathe Right brand products decreased by 1.4% compared to the strong results for the quarter ended December 31, 2004 relating to increased consumer demand associated with the re-launch of the clear nasal strip and less effective advertising and promotions during the third quarter of fiscal 2006. Net sales of FiberChoice brand products were $4.1 million for the quarter ended December 31, 2005, an increase of 38.4% compared to the quarter ended December 31, 2004. FiberChoice sales growth resulted from continued improvement in consumer demand for the expanded offerings of FiberChoice products. For the two FiberChoice products launched in the March 2005 quarter, the assorted fruit flavored tablet has exceeded internal expectations and is currently the fastest-selling product in the FiberChoice product line, while the hard candy fiber drop has fallen short of internal expectations. FiberChoice also benefited from the expansion of advertising coverage to 100% of the United States compared to 85% of the United States in the prior year period.
For the nine months ended December 31, 2005, net sales of domestic Breathe Right branded products increased by 11.8%, to $54.7 million and FiberChoice branded products grew by 68.8%, to $13.8 million compared to the nine months ended December 31, 2004.
Breathe Right international net sales for the quarter ended December 31, 2005 increased by 34.8% to $5.3 million compared to $3.9 million for the quarter ended December 31, 2004. The increase in international net sales for the three months ended December 31, 2005 is the result of continued strong sales to Canada as well as normal shipments to Japan. During the first eight months of fiscal 2005, no revenues were recorded to Japan due to high inventory levels in that market. For the nine months ended December 31, 2005, Breathe Right international net sales increased by 48.3% over the prior year period to $11.9 million.
We believe the percentage relationship between net sales and major expense lines in the statement of operations and the percentage change in the dollar amounts of each of the items presented below is important in evaluating the performance of our business operations.
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross profit | 69.6 | % | 75.3 | % | 70.2 | % | 72.1 | % | ||||||
Operating expenses: | ||||||||||||||
Advertising and promotion | 36.9 | % | 37.3 | % | 31.1 | % | 33.0 | % | ||||||
Selling, general and administrative | 13.6 | % | 15.7 | % | 16.1 | % | 17.8 | % | ||||||
Total operating expenses | 50.5 | % | 53.0 | % | 47.2 | % | 50.7 | % | ||||||
Operating income | 19.1 | % | 22.3 | % | 23.0 | % | 21.4 | % | ||||||
Gross profit as a percentage of sales decreased from 75.3% in the quarter ending December 31, 2004 to 69.6% in the current quarter ending December 31, 2005. The decrease in gross profit rate was the result of a $1.1 million benefit relating to a European import duty refund recognized during the quarter ended December 31, 2004, as well as current quarter changes in product mix and an additional provision for obsolete inventory. Gross profit as a percentage of sales for the nine months ended December 31, 2005 decreased to 70.2% compared to the prior year gross margin percentage of 72.1% due primarily to the prior year benefit of the European import duty refund.
Advertising and promotion expense for the quarter ended December 31, 2005 was $11.4 million compared to $10.7 million for the same period of 2004, an increase of 6.4%. The increase in advertising and promotion expense is the result of increased levels of Breathe Right International and FiberChoice advertising. Overall, advertising and promotion expense as a percent of sales decreased slightly to 36.9% for the quarter ended December 31, 2005 compared to 37.3 % for the same quarter of the prior year. For the nine months ended December 31, 2005, advertising and promotion expense as a percent of sales decreased by 1.9 percentage points compared to the same period of the prior year, reflecting economies of scale related to the Breathe Right domestic advertising and promotional programs.
Selling, general and administrative expenses decreased to $4.2 million for the quarter ended December 31, 2005 compared to $4.5 million for the same quarter of 2004. The expense decrease reflects lower legal fees relating to regulatory compliance and defense of the Company’s intellectual property, as well as lower compensation expense. Selling, general and administrative expense as a percent of net sales decreased from 15.7% for the quarter ended December 31, 2004 to 13.6% for the quarter ended December 31, 2005 and from 17.8% for the nine months ended December 31, 2004 to 16.1% for the nine months ended December 31, 2005. The improvements in selling, general and administrative expense as a percentage of net sales result from lower levels of legal expense and leveraging of fixed corporate overhead expense.
Operating income for the quarter ended December 31, 2005 declined from 22.3% of net sales for the three months ended December 31, 2004 to 19.1% of sales for the three months ended December 31, 2005. The decline in operating profit margin for the three months ended December 31, 2005 resulted from the lower gross margin rate, as described above, partially offset by lower operating expenses as a percentage of sales. For the nine months ended December 31, 2005, operating profit margin improved to 23.0% of net sales compared to 21.4% for the nine months ended December 31, 2004, with the lower gross profit rates being more than offset by lower operating expenses as a percentage of sales.
Investment income was $330,000 for the quarter ended December 31, 2005 compared to $256,000 for the same quarter of 2004. The increase in market interest rates compared to the prior year quarter produced the increase in investment income. The Company has invested substantially all of its marketable securities in tax-exempt investments that provide higher after-tax returns.
Net income for the three months ended December 31, 2005 declined by 9.9% to $4.0 million, compared to $4.4 million in the three months ended December 31, 2004. The decline results from the prior year after tax benefit of the European import duty refund of $662,000 and the impact of a slightly higher effective tax rate partially offset by an 8.0% revenue growth for the quarter and leveraging of operating expenses. Net income for the nine months ended December 31, 2005 increased 31.2% to $12.5 million compared to $9.6 million for the nine months ended December 31, 2004 driven by 23.3% growth in revenue and leveraging of operating expense, partially offset by the prior year benefit of the European import duty refund and a slightly higher effective tax rate.
Our financial position continues to be strong, with cash and marketable securities of $59.7 million and no debt as of December 31, 2005.
Seasonality
The Company has experienced in the past, and expects that it will continue to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to advertising levels and seasonality of sales, as well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. The Company believes that significant portions of the Breathe Right® product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons, corresponding with the Company’s third and fourth quarters.
Liquidity and Capital Resources
As of December 31, 2005, we had cash and marketable securities of $59.7 million and no debt on our balance sheet. The existing cash and marketable securities may be used to acquire complementary consumer healthcare businesses or technologies, fund internal development of new products and expansion of existing product lines, pay dividends to our shareholders and/or buy back additional shares of CNS common stock.
Cash generated from operating activities for the nine months ended December 31, 2005 was $9.6 million, compared to $11.2 million in the prior year period. The decrease in cash generated from operations was driven by increases in accounts receivable, inventories and prepaid expenses reflecting seasonality of the business and increased new product launches and marketing activity compared to the prior year. These uses of cash from operating activities were partially offset by growth in net income and an increase in accounts payable.
Sales and maturities of marketable securities exceeded purchases by $3.0 million for the nine months ended December 31, 2005.
There were 358,535 shares of common stock issued for $1.7 million during the nine months ended December 31, 2005 under our Employee Stock Purchase Plan and shareholder approved equity compensation plans.
The Company repurchased 435,105 shares of common stock for $9.2 million during the nine months ended December 31, 2005 at an average price of $21.24 per share. On August 2, 2005, the board of directors authorized the repurchase of up to 1,000,000 additional shares of the Company’s common stock under the CNS stock repurchase program. At December 31, 2005, there remains authority to repurchase up to 990,400 additional shares of our common stock in connection with the stock repurchase program.
The board of directors declared a $.06 per share cash dividend on October 25, 2005 for shareholders of record as of November 18, 2005. The amount of this dividend payment, paid on December 2, 2005, was $852,000. Dividends of $697,000 were paid during the three months ended December 31, 2004. The Company paid dividends of $2.6 million and $2.1 million for the nine months ended December 31, 2005 and 2004, respectively.
On January 4, 2006, the Company purchased a portfolio of domestic and international patents and patents pending related to the FiberChoice brand for approximately $8.0 million in cash from Onesta Nutrition, Inc.
We believe that our existing funds and funds generated from operations will be sufficient to support our planned operations for the foreseeable future.
Accounting Policies and Recent Accounting Pronouncements
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States, we must make decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances.
The accounting principles followed in the preparation of the financial information contained on Form 10-Q are the same as those described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.
Forward-Looking Statements
Certain statements contained in this 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 depends on sales of Breathe Right nasal strips for the majority of its revenue; (ii) the Company’s business is subject to seasonality, with sales typically higher in the fiscal third and fourth quarters of each year due to the cold/flu season and its revenues and earnings may be impacted by the relative severity of such season; (iii) the Company’s success and future growth will depend significantly on its ability to develop and achieve markets for additional products; (iv) 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 may be, the subject of litigation and could be narrowed as a result of the outcome of the reexamination of one such patent by the United States Patent and Trademark Office; (v) the Company has faced and will continue to face competition in its market; (vi) the Company relies on third-party manufacturers for the production of all of its products; and (vii) the Company relies on a single third-party manufacturer for the production of its Breathe Right nasal strip products, with the raw materials being supplied by a sole source and other factors and risks, including those set forth in the Company’s reports filed with the Securities and Exchange Commission, including those risks identified in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
Item 3. Quantitative and QualitativeDisclosures about Market Risk
The Company’s market risk exposure is primarily interest rate risk related to its cash, cash equivalents and investments in marketable securities. The Company’s risk to interest rate fluctuations has not materially changed since March 31, 2005. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2005.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel E. Reinkensmeyer, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that as of that date, the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Control Over Financial Reporting.
There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II –OTHER INFORMATION
Item 1. | Legal Proceedings |
Not Applicable |
Item 1A. | Risk Factors |
Not Applicable |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides certain information regarding purchases made by CNS, Inc. of its common stock in the quarter covered by this report: |
Issuer Purchases Of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) (2) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 1 – October 31, 2005 | — | — | — | 1,070,400 | ||||||||||
November 1 – November 30, 2005 | 50,000 | 24.97 | 50,000 | 1,020,400 | ||||||||||
December 1 – December 31, 2005 | 30,000 | 22.89 | 30,000 | 990,400 | ||||||||||
Total | 80,000 | 24.19 | 80,000 | 990,400 | ||||||||||
(1) | On February 11, 2002, the Company announced that its board of directors had approved a stock repurchase program authorizing the Company to repurchase up to 1,000,000 shares of the Company’s common stock from time to time in open market transactions or in privately negotiated transactions. |
(2) | On August 2, 2005, the board of directors authorized the Company to repurchase an additional 1,000,000 shares of the Company’s common stock under the previous program that was authorized in February 2002. |
Item 3. | Defaults Upon Senior Securities |
Not Applicable |
Item 4. | Submission of Matters to a Vote of Security Holders |
Not Applicable |
Item 5. | Other Information |
Not Applicable |
Item 6. | Exhibits |
The following exhibits are filed as part of this Report: |
31.1 | Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |
31.2 | Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
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. | ||||||
Date: | February 1, 2006 | By: | /s/ Marti Morfit | |||
Marti Morfitt President & Chief Executive Officer | ||||||
Date: | February 1, 2006 | By: | /s/ Samuel E. Reinkensmeyer | |||
Samuel E. Reinkensmeyer Vice President of Finance, Chief Financial Officer and Treasurer |