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, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to _________
COMMISSION FILE NUMBER: 0-16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 39802
MINNEAPOLIS, MN 55439
(Address of principal executive offices including zip code)
(612) 820-6696
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
At July 30, 1999, 15,271,122 shares of common stock were outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 918,497 $ 584,718
Marketable securities 53,455,358 59,796,952
Accounts receivable, net 3,638,167 7,790,952
Inventories 7,318,753 8,823,193
Prepaid expenses and other current assets 3,560,917 2,794,558
Deferred income taxes 1,571,000 1,332,000
------------ ------------
Total current assets 70,462,692 81,122,373
Property and equipment, net 2,248,173 2,406,488
Product rights, net 1,284,914 1,434,566
------------ ------------
$ 73,995,779 $ 84,963,427
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 6,434,568 8,412,649
Accrued income taxes 0 684,937
------------ ------------
Total current liabilities 6,434,568 9,097,586
------------ ------------
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 61,965,701 61,932,529
Treasury shares - at cost; 3,984,948 at June 30, 1999 and
2,692,144 at December 31, 1998 (19,123,796) (14,670,128)
Retained earnings 24,666,360 28,157,494
Accumulated other comprehensive income (loss) (140,000) 253,000
------------ ------------
Total stockholders' equity 67,561,211 75,865,841
------------ ------------
$ 73,995,779 $ 84,963,427
============ ============
The accompanying notes are an integral part
of the condensed financial statements.
2
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales $ 8,184,611 $ 11,957,301 $ 20,119,048 $ 26,438,282
Cost of goods sold 3,629,295 4,453,618 8,317,636 8,923,084
------------ ------------ ------------ ------------
Gross profit 4,555,316 7,503,683 11,801,412 17,515,198
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling 4,360,526 5,580,732 15,766,465 15,274,522
General and administrative 779,387 1,167,053 1,604,292 2,214,495
Product development 888,059 589,501 1,868,867 984,397
------------ ------------ ------------ ------------
Total operating expenses 6,027,972 7,337,286 19,239,624 18,473,414
------------ ------------ ------------ ------------
Operating income (loss) (1,472,656) 166,397 (7,438,212) (958,216)
Investment income 698,431 729,491 1,597,078 1,419,390
------------ ------------ ------------ ------------
Income (loss) before income taxes (774,225) 895,888 (5,841,134) 461,174
Income tax (provision) benefit 250,000 (80,000) 2,350,000 370,000
------------ ------------ ------------ ------------
Net income (loss) $ (524,225) $ 815,888 $ (3,491,134) $ 831,174
============ ============ ============ ============
Basic net income (loss) per share $ (.03) $ .04 $ (.22) $ .05
============ ============ ============ ============
Diluted net income (loss) per share $ (.03) $ .04 $ (.22) $ .04
============ ============ ============ ============
Weighted average number of common
shares outstanding 15,570,000 18,445,000 15,991,000 18,419,000
============ ============ ============ ============
Weighted average number of common and
assumed conversion shares outstanding 15,570,000 18,608,000 15,991,000 18,632,000
============ ============ ============ ============
The accompanying notes are an integral part
of the condensed financial statements.
3
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-----------------------------
1999 1998
----------- -----------
Operating activities:
Net income (loss) $(3,491,134) $ 831,174
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 516,196 374,159
Changes in operating assets and liabilities:
Accounts receivable 4,152,785 4,848,987
Inventories 1,504,440 2,076,449
Prepaid expenses and other current assets 990,186 240,921
Accounts payable and accrued expenses (4,309,564) (1,333,787)
----------- -----------
Net cash from operating activities (637,091) 7,037,903
----------- -----------
Investing activities:
Change in marketable securities 5,709,595 (995,776)
Payments for purchases of property and equipment (208,113) (792,231)
Payments for product rights (115) (118,744)
Change in certificate of deposit, restricted 0 359,898
----------- -----------
Net cash from investing activities 5,501,367 (1,546,853)
----------- -----------
Financing activities:
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 16,332 6,946
Proceeds from the exercise of stock options 0 198,188
Purchase of treasury shares (4,546,829) 0
----------- -----------
Net cash from financing activities (4,530,497) 205,134
----------- -----------
Net change in cash and cash equivalents 333,779 5,696,184
Cash and cash equivalents:
Beginning of period 584,718 229,647
----------- -----------
End of period $ 918,497 $ 5,925,831
=========== ===========
The accompanying notes are an integral part
of the condensed financial statements.
4
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of June 30, 1999 and 1998 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, 1998, and reference is hereby made to
that report for detailed information on accounting policies.
Note 2 - Comprehensive Income (Loss)
A reconcilitaion of total comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------
Net income (loss) ($ 524,225) $ 815,888 ($3,491,134) $ 831,174
Unrealized loss on marketable
Securities net of income tax (140,000) 0 (140,000) 0
---------- ---------- ----------- ----------
Total comprehensive income (loss) ($ 664,225) $ 815,888 ($3,631,134) $ 831,174
---------- ---------- ----------- ----------
Note 3 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------
Average common shares outstanding 15,570,000 18,445,000 15,991,000 18,419,000
Assumed conversion of stock options 0 163,000 0 213,000
----------------------------------------------------------
Average common and assumed
Conversion shares 15,570,000 18,608,000 15,991,000 18,632,000
----------------------------------------------------------
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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 also has new consumer products in various stages of
evaluation, testing and development.
Results of Operations
Net sales were $8.2 million for the second quarter of 1999 compared to $12.0
million for the same quarter of 1998 and were $20.1 million for the first six
months of 1999 compared to $26.4 million for the same period of 1998.
Domestic sales declined to $8.0 million from $11.8 million in the second quarter
of 1998 and for the first six months of 1999 were $19.8 million compared to
$25.1 million for the same period of 1998. Slower sales this year reflect both a
lower level of advertising during the previous cough/cold season and the
presence of competition. Retail sell-through for the entire nasal strip category
declined, but the Breathe Right brand continued to increase its market share. We
believe retailers also managed down their inventory levels to handle the
introduction of our new packaging. This, along with reserves for anticipated
returns of product in the old packaging, significantly reduced our reported
sales for the second quarter of 1999.
International sales were $191,000 for the second quarter of 1999 compared to
$168,000 for the same quarter of 1998 and were $314,000 for the first six months
of 1999 compared to $1.3 million for the same period of 1998. The lower level of
international sales for 1999 is attributable in large part to continued high
inventory levels at and disappointing marketing results by the Company's
international distributor.
Gross profit was $4.6 million or 55.7% of net sales for the second quarter of
1999 compared to $7.5 million or 62.8% for the same quarter of 1998 and was
$11.8 million or 58.7% for the first six months of 1999 compared to $17.5
million or 66.2% for the same period of 1998. The lower gross profit percentage
was primarily due to costs for the transition to new product packaging. Without
the impact of the packaging change, gross profit would have been approximately
65% for the second quarter and 64% for the first six months.
Marketing and selling expenses were $4.4 million for the second quarter of 1999
compared to $5.6 million for the same quarter of 1998 and were $15.8 million for
the first six months of 1999 compared to $15.3 million for the same period in
1998. The decrease for the second quarter resulted primarily from limited
spending during the quarter and expenses associated with the market testing of a
new product in 1998.
General and administrative expenses were $779,000 for the second quarter of 1999
compared to $1.2 million for the same quarter of 1998 and were $1.6 million for
the first six months of 1999
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compared to $2.2 million for the same period in 1998. This decrease was
primarily due to 1998 expenses associated with patent litigation that has been
settled and to personnel costs.
Product development expenses were $888,000 for the second quarter of 1999
compared to $590,000 for the same quarter of 1998 and were $1.9 million for the
first six months of 1999 comparable to $984,000 for the same period in 1998.
This increase resulted from costs related to evaluation and testing of potential
new products.
Investment income was $698,000 for the second quarter of 1999 comparable to
$729,000 for the same quarter of 1998 and was $1.6 million for the first six
months of 1999 comparable to $1.4 million for the same period in 1998.
Income tax (provision) benefit for the second quarter of 1999 was a benefit of
$250,000 compared to a provision of $80,000 for the same quarter of 1998 and was
a benefit of $2.3 million for the first six months of 1999 compared to $370,000
for the same period of the prior year. A high level of tax-exempt interest
income impacts the effective income tax rate in the first quarter of 1999 and
1998.
Net income (loss) for the second quarter of 1999 was a loss of $524,000 or $.03
per share compared to income of $816,000 or $.04 per share for the same quarter
of 1998 and was a loss of $3.5 million or $.22 per share for the first six
months of 1999 compared to income of $831,000 or $.04 per share for the same
period of 1998. This decrease was due primarily to lower sales as noted above.
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, 1999, the Company had cash and cash equivalents and marketable
securities of $54.4 million and working capital of $64.0 million.
The Company used cash for operations of $637,000 for the first six months of
1999 compared to generating cash of $7.0 million for the same period of 1998.
The reduced operating cash flow was due primarily to a decrease in net income
and net operating assets and liabilities.
The Company had net sales of $5.7 million of marketable securities and purchased
$208,000 of property and equipment in the first six months of 1999.
The Company repurchased 1.3 million shares of common stock for $4.55 million in
the first six months of 1999. The Board of Directors has authorized the purchase
of an additional 1 million
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shares of common stock. The shares of common stock are available to be used to
meet the Company's 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.
Year 2000
The Company is evaluating the potential impact of what is commonly referred to
as the Year 2000 issue, concerning the inability of certain information systems
to properly recognize and process dates containing the year 2000 and beyond. The
Company has established a Year 2000 team, and this team has worked with
management to take the following steps: (i) implement a Year 2000 assessment and
testing plan for all internal information systems and other systems that contain
microcontrollers that may be affected by the Year 2000 date change; (ii)
communicate with third parties that supply product to the Company to ensure they
are addressing the Year 2000 issue; and (iii) perform contingency and disaster
recovery planning to ensure Year 2000 problem resolution.
The Company has identified and tested the systems it believes are critical, and
the test results indicate that these systems are Year 2000 compliant. The
Company has completed testing and established compliance with respect to all of
its systems and products, subject to possible equipment upgrades during 1999 and
ongoing communications with third parties. Regardless of the Year 2000
compliance of the Company's systems and products, there can be no assurance that
the Company will not be adversely affected by the failure of others to become
Year 2000 compliant.
The Company estimates that its direct costs for Year 2000 compliance will
consist primarily of costs related to the staff time devoted to Year 2000
compliance. The Company does not expect that material capital expenditures will
be necessary related to Year 2000 compliance. Costs and capital expenditures in
these areas have not been material for historical periods.
As noted below under "Forward-Looking Statements," statements in this section
that are not historical or current facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and efforts of others to achieve compliance, and the effects
of the Year 2000 issue on the Company's future financial condition and results
of operations. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company; (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000; and
(iii) the uncertainty of the ultimate costs and
8
consequences of any unanticipated disruption in the Company's business resulting
from the failure of one of the Company's applications or of a third party's
systems. The foregoing list is not exhaustive, and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Forward Looking Statements
Certain statements in this Form 10-Q and other statements made by the Company
from time to time 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 a single product, Breathe Right nasal strips; (ii) the
Company's success will depend on its ability to effectively market Breathe Right
nasal strips and on the fact that it was the first entrant into the nasal
dilation market; (iii) the Company's competitive position will, to some extent,
be dependent on the enforceability and comprehensiveness of the patents on the
Breathe Right nasal strip technology which have been, and in the future may be,
the subject of litigation; (iv) the Company operates in a highly competitive
market where recent and potential market entrants 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 introducing new
products; (vi) the Company is currently dependent upon 3M for the international
distribution of its products under a contractual relationship which has produced
less than anticipated results and which the Company expects to modify or
replace; and (vii) the risk factors included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
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, 1998. See Item 7A of the Company's Annual Report on Form 10K for
the year ended December 31, 1998.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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 On April 21, 1999,
CNS, Inc. held its annual meeting of stockholders. Of the 16,432,926
shares of Common Stock eligible to vote, 15,238,018 were represented in
person or by proxy at the meeting and shares were voted on the following
matters:
1. The votes cast for the six (6) directors to serve until the next
annual meeting of shareholders were:
Name Votes For Votes Withheld
---- --------- --------------
Daniel E. Cohen, M.D. 14,775,533 462,485
Patrick Delaney 14,780,891 457,127
R. Hunt Greene 14,812,354 425,664
Andrew J. Greenshields 14,779,021 458,997
Marti Morfitt 14,713,869 524,149
Richard W. Perkins 14,768,793 469,225
2. The votes cast to ratify and approve the appointment of KPMG LLP as
independent auditors for the fiscal year ending December 31, 1999 were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
14,978,014 162,093 97,911
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 27, Financial Data Schedule
10
(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: July 30, 1999 By: /s/ Marti Morfitt
------------------- ----------------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: July 30, 1999 By: /s/ David J. Byrd
------------------- ----------------------------------------
David J. Byrd
Vice President of Finance,
Chief Financial Officer and
Treasurer
12