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 March 31, 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 April 30, 1998, 18,484,059 shares of common stock were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ -------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,301,649 $ 229,647
Marketable securities 60,364,265 59,458,236
Accounts receivable, net 6,924,197 11,392,001
Inventories 7,594,106 8,624,663
Prepaid expenses and other current assets 2,703,937 3,295,001
Deferred income taxes 1,770,000 1,770,000
------------ ------------
Total current assets 82,658,154 84,769,548
Property and equipment, net 2,293,702 1,863,007
Product rights, net 1,426,402 1,502,520
Certificate of deposit, restricted 359,898 359,898
------------ ------------
$ 86,738,156 $ 88,494,973
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 5,990,680 6,691,939
Accrued income taxes 8,937 1,158,533
------------ ------------
Total current liabilities 5,999,617 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; 901,511at March 31, 1998 and
961,511 at December 31, 1997 (8,141,243) (8,219,993)
Retained earnings 25,191,118 25,175,830
------------ ------------
Total stockholders' equity 80,738,539 80,644,501
------------ ------------
$ 86,738,156 $ 88,494,973
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financialstatements.
<PAGE>
CNS, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 14,480,981 $ 19,394,936
Cost of goods sold 4,469,465 6,245,203
------------ ------------
Gross profit 10,011,516 13,149,733
------------ ------------
Operating expenses:
Marketing and selling 9,677,227 11,124,415
General and administrative 1,064,005 762,352
Product development 394,896 201,860
------------ ------------
Total operating expenses 11,136,128 12,088,627
------------ ------------
Operating income (loss) (1,124,612) 1,061,106
Interest income 689,900 710,387
------------ ------------
Income (loss) before income taxes (434,712) 1,771,493
Income tax (provision) benefit 450,000 (450,000)
------------ ------------
Net income $ 15,288 $ 1,321,493
============ ============
Basic and diluted net income per share $ .00 $ .07
============ ============
Weighted average number of common shares outstanding 18,374,000 19,205,000
============ ============
Weighted average number of common and
assumed conversion shares outstanding 18,752,000 20,044,000
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
<PAGE>
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
Operating activities:
<S> <C> <C>
Net income $ 15,288 $ 1,321,493
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 158,482 76,200
Changes in operating assets and liabilities:
Accounts receivable 5,592,804 3,869,088
Inventories 1,092,986 (1,784,707)
Prepaid expenses and other current assets 2,291,064 (40,341)
Accounts payable and accrued expenses (4,738,284) (2,170,631)
------------ ------------
Net cash from operating activities 4,412,340 1,271,102
------------ ------------
Investing activities:
Net change in marketable securities (906,029) (551,714)
Payments for purchases of property and equipment (512,927) (350,452)
Payments for product rights (132) (1,200,000)
------------ ------------
Net cash from investing activities (1,419,088) (2,102,166)
------------ ------------
Financing activities:
Proceeds from the exercise of stock options 78,750 211,955
------------ ------------
Net cash from financing activities 78,750 211,955
------------ ------------
Net change in cash and cash equivalents 3,072,002 (619,109)
Cash and cash equivalents:
Beginning of period 229,647 12,109,150
------------ ------------
End of period $ 3,301,649 $ 11,490,041
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of March 31, 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.
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.
<PAGE>
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
national rollout of Banish(TM) personal smoke deodorizer, which removes smoke
odor from clothing and hair. 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 $14.5 million for the first quarter of 1998 compared to $19.4
million for the same quarter of 1997. Domestic sales decreased to $13.4 million
for the first quarter of 1998 compared to $16.9 million for the same quarter of
1997 primarily as a result of the failure of marketing efforts to generate a
sufficient volume of Breathe Right nasal strip new trial users. The Company's
data indicates approximately 700,000 new trial users were attracted during the
first quarter of 1998, about half the level achieved in the same quarter of
1997. Sales of larger 24-count and 30-count packages were up slightly over last
year. These are the sizes preferred by regular users of the product.
International sales were $1.1 million for the first quarter of 1998 compared to
$2.5 million for the same quarter 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 $10.0 million for the first quarter of 1998 compared to $13.1
million for the same quarter of 1997. Gross profit as a percentage of net sales
was 69.1% for the first quarter of 1998 comparable to 67.8% for the same quarter
of 1997.
Marketing and selling expenses were $9.7 million for the first quarter of 1998
compared to $11.1 million for the same quarter of 1997. This decrease resulted
primarily from a lower level of national television and radio advertising. The
Company's strategy for 1998 is to spend at relatively higher levels for
advertising during the first and fourth quarter cold seasons and keep
advertising levels lighter during the second and third quarters.
General and administrative expenses were $1.1 million for the first quarter of
1998 compared to $762,000 for the same quarter of 1997. This increase resulted
primarily from one time costs associated with the change of the Company's
president.
Product development expenses were $395,000 for the first quarter of 1998
compared to $202,000 for the same quarter of 1997. This increase resulted from
costs related to evaluation and testing of potential new products.
<PAGE>
Operating income (loss) for the first quarter of 1998 was a loss of $1.1 million
compared to income of $1.1 million for the same quarter of 1997. This decrease
was due primarily to lower sales in the first quarter of 1998.
Interest income was $690,000 for the first quarter of 1998 comparable to
$710,000 for the same quarter of 1997.
Income tax (expense) benefit for the first quarter of 1998 was a benefit of
$450,000 compared to expense of $450,000 for the same quarter of 1997. The
effective income tax rate is impacted by a high level of tax exempt interest
income.
Seasonality
The Company believes that approximately 50 percent 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 March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $63.7 million and working capital of $76.7 million.
The Company generated cash from operations of $4.4 million for the first quarter
of 1998 compared with $1.3 million for the same quarter of 1997. The increased
cash flow was primarily from a net decrease in operating assets and liabilities,
offset by a decrease in net income.
The Company expended $906,000 for marketable securities and $513,000 for
property and equipment in the first quarter of 1998.
The Company received $79,000 during the first quarter of 1998 from the exercise
of stock options. In April 1998 the Board of Directors authorized the Company to
purchase from time-to-time up to 750,000 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.
<PAGE>
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 (see Item 3, Legal Proceedings in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and Item 1, Legal Proceedings in this
Form 10-Q); (iii) the markets in which the Company competes are highly
competitive; and (iv) the additional factors listed in the statement "Forward
Looking Statements" included in the Company's Annual Report on Form 10-K.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1997, the Company was sued for patent infringement in
United States District Court for the Central District of
California by Acutek Adhesive Specialties, Inc. ("Acutek"). Acutek
claims to be an exclusive licensee in the United States Reissue
Patent RE. 35,408. The plaintiff seeks compensatory damages,
interest, costs and fees. The Company has counterclaimed for a
declaration of invalidity of the patent asserted by Acutek and for
a declaration that the Company does not infringe the Reissue
Patent. Cross-motions for summary judgment with respect to the
lawsuit are pending. In February 1998, Acutek was issued a patent
entitled "Transparent Nasal Dilator" and commenced an additional
patent infringement lawsuit against the Company in U.S. District
Court for the Central District of California. The Company believes
that it does not infringe any valid patent claims and has
vigorously defended the lawsuits brought against it by Acutek. The
Company is engaged in settlement negotiations, however, that may
resolve all pending matters between the parties. The Company is
currently unable to determine if these discussions will ultimately
result in a settlement.
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income Per Share
Exhibit No. 27, Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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: May 12, 1998 By: /s/ Marti Morfitt
---------------------------- --------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: May 12, 1998 By: /s/ David J. Byrd
---------------------------- --------------------------------
David J. Byrd
Vice President of Finance and Chief
Financial Officer
Exhibit No. 11
CNS, INC.
Computation of Net Income per Share of Common Stock
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
-------------- -------------
NET INCOME
<S> <C> <C>
Net income $ 15,288 $ 1,321,493
=========== ===========
BASIC NET INCOME PER SHARE
Weighted average number of common
shares outstanding 18,374,000 19,205,000
=========== ===========
Basic net income per share $ .00 $ .07
=========== ===========
DILUTED NET INCOME PER SHARE
Weighted average number of common
shares outstanding 18,374,000 19,205,000
Incentive stock options 205,000 520,000
Non qualified stock options 173,000 319,000
----------- -----------
Weighted average number of common and
assumed conversion shares 18,752,000 20,044,000
=========== ===========
Diluted net income per share $ .00 $ .07
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,301,649
<SECURITIES> 60,364,265
<RECEIVABLES> 6,924,197
<ALLOWANCES> 0
<INVENTORY> 7,594,106
<CURRENT-ASSETS> 82,658,154
<PP&E> 2,293,702
<DEPRECIATION> 0
<TOTAL-ASSETS> 86,738,156
<CURRENT-LIABILITIES> 5,999,617
<BONDS> 0
0
0
<COMMON> 192,946
<OTHER-SE> 80,545,593
<TOTAL-LIABILITY-AND-EQUITY> 86,738,156
<SALES> 14,480,981
<TOTAL-REVENUES> 14,480,981
<CGS> 4,469,465
<TOTAL-COSTS> 11,136,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (434,712)
<INCOME-TAX> (450,000)
<INCOME-CONTINUING> 15,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,288
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
