-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMsu2Bm+jM/jtrSXEnn7B+vzD6HsuiN6k4FRMFqutIkUKALwGWwJaAGlfPWFFEuZ tmbkxCkxDLGN/C4g79m/WA== 0000897101-98-001075.txt : 19981109 0000897101-98-001075.hdr.sgml : 19981109 ACCESSION NUMBER: 0000897101-98-001075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNS INC /DE/ CENTRAL INDEX KEY: 0000814258 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411580270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16612 FILM NUMBER: 98739044 BUSINESS ADDRESS: STREET 1: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128206696 MAIL ADDRESS: STREET 1: PO BOX 39802 STREET 2: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-Q 1 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 September 30, 1998. [ ] 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 October 30, 1998, 17,522,014 shares of common stock were outstanding. PART I - FINANCIAL INFORMATION CNS, INC. CONDENSED BALANCE SHEETS
September 30, December 31, 1998 1997 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,806,769 $ 229,647 Marketable securities 61,723,505 59,458,236 Accounts receivable, net 8,070,742 11,392,001 Inventories 6,436,237 8,624,663 Prepaid expenses and other current assets 2,755,734 3,295,001 Deferred income taxes 1,736,000 1,770,000 ------------ ------------ Total current assets 84,528,987 84,769,548 Property and equipment, net 2,456,899 1,863,007 Product rights, net 1,419,400 1,502,520 Certificate of deposit, restricted 0 359,898 ------------ ------------ $ 88,405,286 $ 88,494,973 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses 8,826,962 6,691,939 Accrued income taxes 154,937 1,158,533 ------------ ------------ Total current liabilities 8,981,899 7,850,472 ------------ ------------ 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 63,495,718 63,495,718 Treasury shares - at cost; 1,528,456 at September 30, 1998 and 961,511 at December 31, 1997 (11,009,542) (8,219,993) Retained earnings 26,744,265 25,175,830 ------------ ------------ Total stockholders' equity 79,423,387 80,644,501 ------------ ------------ $ 88,405,286 $ 88,494,973 ============ ============
The accompanying notes are an integral part of the condensed financial statements. 2 CNS, INC. CONDENSED STATEMENTS OF INCOME (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ------------ ------------ ------------- Net sales $ 12,749,081 $ 12,642,798 $ 39,187,364 $ 45,631,043 Cost of goods sold 4,241,459 3,896,836 13,164,543 14,598,201 ------------ ------------ ------------ ------------ Gross profit 8,507,622 8,745,962 26,022,821 31,032,842 ------------ ------------ ------------ ------------ Operating expenses: Marketing and selling 7,032,080 4,581,778 22,306,603 20,605,798 General and administrative 810,191 933,104 3,024,687 2,507,220 Product development 539,878 246,229 1,524,275 737,018 ------------ ------------ ------------ ------------ Total operating expenses 8,382,149 5,761,111 26,855,565 23,850,036 ------------ ------------ ------------ ------------ Operating income (loss) 125,473 2,984,851 (832,744) 7,182,806 Interest income 711,788 773,621 2,131,179 2,260,632 ------------ ------------ ------------ ------------ Income before income taxes 837,261 3,758,472 1,298,435 9,443,438 Income tax (provision) benefit (100,000) (1,200,000) 270,000 (2,950,000) ------------ ------------ ------------ ------------ Net income $ 737,261 $ 2,558,472 $ 1,568,435 $ 6,493,438 ============ ============ ============ ============ Basic net income per share $ .04 $ .13 $ .09 $ .34 ============ ============ ============ ============ Diluted net income per share $ .04 $ .13 $ .08 $ .33 ============ ============ ============ ============ Weighted average number of common shares outstanding 18,202,000 19,274,000 18,346,000 19,244,000 ============ ============ ============ ============ Weighted average number of common and assumed conversion shares outstanding 18,323,000 19,907,000 18,528,000 19,976,000 ============ ============ ============ ============
The accompanying notes are an integral part of the condensed financial statements. 3 CNS, INC. CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30, ---------------------------- 1998 1997 ------------ ------------ Operating activities: Net income $ 1,568,435 $ 6,493,438 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 610,069 335,241 Deferred income taxes 34,000 (41,000) Changes in operating assets and liabilities: Accounts receivable 3,321,261 6,788,052 Inventories 2,188,426 (1,170,687) Prepaid expenses and other current assets 539,270 (1,628,308) Accounts payable and accrued expenses 1,131,420 (1,752,220) ------------ ------------ Net cash from operating activities 9,392,881 9,024,516 ------------ ------------ Investing activities: Change in marketable securities (2,265,268) (11,767,666) Payments for purchases of property and equipment (981,656) (1,010,325) Payments for product rights (139,185) (1,273,378) Change in certificate of deposit, restricted 359,898 (9,750) ------------ ------------ Net cash from investing activities (3,026,211) (14,061,119) ------------ ------------ Financing activities: Proceeds from issuance of common stock under Employee Stock Purchase Plan 6,946 7,190 Proceeds from the exercise of stock options 228,063 312,081 Purchase of treasury shares (3,024,557) (907,888) ------------ ------------ Net cash from financing activities (2,789,548) (588,617) ------------ ------------ Net change in cash and cash equivalents 3,577,122 (5,625,220) Cash and cash equivalents: Beginning of period 229,647 12,109,150 ------------ ------------ End of period $ 3,806,769 $ 6,483,930 ============ ============
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 September 30, 1998 and 1997 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, 1997, and reference is hereby made to that report for detailed information on accounting policies. Note 2 - Earnings Per Share A reconciliation of basic and diluted average common shares outstanding is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------- 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------- Average common shares outstanding 18,202,000 19,274,000 18,346,000 19,244,000 Assumed conversion of stock options 121,000 633,000 182,000 732,000 - ----------------------------------------------------------------------------------------------- Average common and assumed conversion shares 18,323,000 19,907,000 18,528,000 19,976,000 - -----------------------------------------------------------------------------------------------
5 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's revenues are derived primarily from the manufacture and sale of the Breathe Right(R) nasal strip, which is a nonprescription disposable device that can reduce or eliminate snoring by improving nasal breathing and temporarily relieve nasal congestion and breathing difficulties due to a deviated nasal septum. During the first quarter of 1998 the Company began the rollout of Banish(TM) personal smoke deodorizer, which removes smoke odor from clothing and hair. During the third quarter of 1998 the Company began the rollout of Breathe Right Allergen Barrier Pillow Covers and Saline Nasal Spray. The Company also has entered into several agreements to market or license certain other new consumer products that are in various stages of evaluation and testing. Results of Operations Net sales were $12.7 million for the third quarter of 1998 compared to $12.6 million for the same quarter of 1997 and were $39.2 million for the first nine months of 1998 compared to $45.6 million for the same period of 1997. Domestic sales increased to $12.6 million from $12.4 million in the third quarter of 1997 as retail sell-through of Breathe Right nasal strips held steady. Domestic sales for the first nine months of 1998 were $37.7 million compared to $41.9 million for the same period of 1997. This decline was primarily a result of the failure of marketing efforts in the first quarter of 1998 to generate sufficient growth of Breathe Right nasal strip purchasers. International sales were only $168,000 for the third quarter of 1998 compared to $290,000 for the same quarter of 1997 and were $1.5 million for the first nine months of 1998 compared to $3.7 million for the same period of 1997. The lower level of international sales for 1998 reflects continued high inventory levels at 3M, the Company's international distributor. Gross profit was $8.5 million or 66.7% of net sales for the third quarter of 1998 compared to $8.7 million or 69.2% for the same quarter of 1997 and was $26.0 million or 66.4% for the first nine months of 1998 compared to $31.0 million or 68.0% for the same period of 1997. The lower gross profit percentage was primarily due to the sale of Breathe Right nasal strips for a sampling program, where the nasal strips are distributed to new home buyers, and the introduction of new products with lower gross profit margins. Marketing and selling expenses were $7.0 million for the third quarter of 1998 compared to $4.6 million for the same quarter of 1997 and were $22.3 million for the first nine months of 1998 compared to $20.6 million for the same period in 1997. The increase for the third quarter resulted primarily from expenses associated with the rollout and market testing of Banish personal smoke deodorizer. General and administrative expenses were $810,000 for the third quarter of 1998 compared to $933,000 for the same quarter of 1997 and were $3.0 million for the first nine months of 1998 6 compared to $2.5 million for the same period in 1997. This increase for the nine months was primarily due to expenses associated with patent litigation that was settled in the second quarter of 1998 and personnel costs. Product development expenses were $540,000 for the third quarter of 1998 compared to $246,000 for the same quarter of 1997 and were $1.5 million for the first nine months of 1998 comparable to $737,000 for the same period in 1997. This increase resulted from costs related to evaluation and testing of potential new products. Interest income was $712,000 for the third quarter of 1998 compared to $774,000 for the same quarter of 1997 and was $2.1 million for the first nine months of 1998 comparable to $2.3 million for the same period in 1997. The decrease was primarily due to a lower level of funds available for investment following stock repurchases in the fourth quarter of 1997 and third quarter of 1998. Income tax (expense) benefit for the third quarter of 1998 was an expense of $100,000 compared to $1.2 million for the same quarter of 1997 and was a benefit of $270,000 for the first nine months of 1998 compared to an expense of $3.0 million for the same period of the prior year. The effective income tax rate is impacted by a high level of tax exempt interest income. Net income for the third quarter of 1998 was $737,000 or $.04 per share compared to $2.6 million or $.13 per share for the same quarter of 1997 and was $1.6 million or $.08 per share for the first nine months of 1998 compared to $6.5 million or $.33 per share for the same period of 1997. This decrease was due primarily to lower sales and higher operating expenses as noted above. Seasonality The Company believes that a significant portion of Breathe Right nasal strip users currently use the product 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 season. For this reason the Company's domestic net sales have been relatively higher in the first and fourth quarters. Liquidity and Capital Resources At September 30, 1998, the Company had cash and cash equivalents and marketable securities of $65.5 million and working capital of $75.5 million. The Company generated cash from operations of $9.4 million for the first nine months of 1998 compared with $9.0 million for the same period of 1997. The increased cash flow was due primarily to a decrease in net operating assets and liabilities offset by a decrease in net income. 7 The Company invested $2.3 million in marketable securities, $982,000 in property and equipment and $139,000 in product rights while a $360,000 certificate of deposit, restricted matured during the first nine months of 1998. The Company received $235,000 during the first nine months of 1998 from employee stock plan transactions. In October 1998 the Company completed the repurchase of 750,000 shares of its common stock authorized by the Board of Directors in April 1998. In October 1998 the Board authorized the Company to purchase from time-to-time up to an additional 1,500,000 shares of its common stock, 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 its 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 commence the following steps: (i) implementing 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) communicating with third parties that supply product to the Company to ensure they are addressing the Year 2000 issue; and (iii) 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 expects to complete testing and establish compliance with respect to all of its systems and products by March 31, 1999, 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 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 others' efforts to achieve compliance, and the effects of the Year 2000 issue on the Company's future financial condition and results of operations. These 8 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 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 This Form 10-Q contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that 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 comparable terminology. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: (i) the Company's revenue and profitability is currently reliant on sales of a single product; (ii) the Company's success will depend, to a large extent, on the enforceability and comprehensiveness of the patents on the Breathe Right nasal strip technology, which have been, and in the future may be, subject to litigation; (iii) the markets in which the Company competes are highly competitive; (iv) the Year 2000 factors noted above; and (v) the additional factors listed in the statement "Forward Looking Statements" included in the Company's Annual Report on Form 10-K. 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information The deadline for the submission of shareholder proposals pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in the Company's proxy statement for its 1999 Annual Meeting of Shareholders is November 19, 1998. Additionally, if the Company receives notice of a shareholder proposal after February 1, 1999, such proposal will be considered untimely pursuant to Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited by the Board of Directors of the Company may exercise discretionary voting power with respect to such proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. 27, Financial Data Schedule (b) Reports on Form 8-K None 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNS, Inc. -------------------------------------------------- Registrant Date: November 6, 1998 By: /s/ Marti Morfitt ----------------- --------------------------------------------- Marti Morfitt President & Chief Operating Officer Date: November 6, 1998 By: /s/ David J. Byrd ----------------- --------------------------------------------- David J. Byrd Vice President of Finance and Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 3,806,769 61,723,505 8,070,742 0 6,436,237 84,528,987 2,456,899 0 88,405,286 8,981,899 0 0 0 192,946 79,230,441 88,405,286 39,187,364 39,187,364 13,164,543 26,855,565 0 0 0 1,298,435 (270,000) 1,568,435 0 0 0 1,568,435 0.09 0.08
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