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, 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 July 31, 1998, 18,360,914 shares of common stock were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,925,831 $ 229,647
Marketable securities 60,454,012 59,458,236
Accounts receivable, net 6,543,015 11,392,001
Inventories 6,548,214 8,624,663
Prepaid expenses and other current assets 3,054,083 3,295,001
Deferred income taxes 1,770,000 1,770,000
------------ ------------
Total current assets 84,295,155 84,769,548
Property and equipment, net 2,428,805 1,863,007
Product rights, net 1,473,539 1,502,520
Certificate of deposit, restricted 0 359,898
------------ ------------
$ 88,197,499 $ 88,494,973
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 6,427,754 6,691,939
Accrued income taxes 88,937 1,158,533
------------ ------------
Total current liabilities 6,516,691 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; 808,756 at June 30, 1998 and
961,511 at December 31, 1997 (8,014,860) (8,219,993)
Retained earnings 26,007,004 25,175,830
------------ ------------
Total stockholders' equity 81,680,808 80,644,501
------------ ------------
$ 88,197,499 $ 88,494,973
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
2
<PAGE>
CNS, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 11,957,301 $ 13,593,309 $ 26,438,282 $ 32,988,245
Cost of goods sold 4,453,618 4,456,161 8,923,084 10,701,364
------------ ------------ ------------ ------------
Gross profit 7,503,683 9,137,148 17,515,198 22,286,881
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling 5,580,732 4,899,604 15,274,522 16,024,019
General and administrative 1,167,053 811,766 2,214,495 1,574,118
Product development 589,501 288,930 984,397 490,790
------------ ------------ ------------ ------------
Total operating expenses 7,337,286 6,000,300 18,473,414 18,088,927
------------ ------------ ------------ ------------
Operating income (loss) 166,397 3,136,848 (958,216) 4,197,954
Interest income 729,491 776,625 1,419,390 1,487,012
------------ ------------ ------------ ------------
Income before income taxes 895,888 3,913,473 461,174 5,684,966
Income tax (provision) benefit (80,000) (1,300,000) 370,000 (1,750,000)
------------ ------------ ------------ ------------
Net income $ 815,888 $ 2,613,473 $ 831,174 $ 3,934,966
============ ============ ============ ============
Basic net income per share $ .04 $ .14 $ .05 $ .20
============ ============ ============ ============
Diluted net income per share $ .04 $ .13 $ .04 $ .20
============ ============ ============ ============
Weighted average number of common
shares outstanding 18,445,000 19,277,000 18,419,000 19,241,000
============ ============ ============ ============
Weighted average number of common and
assumed conversion shares outstanding 18,608,000 19,979,000 18,632,000 20,022,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
3
<PAGE>
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 831,174 $ 3,934,966
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 374,159 216,632
Changes in operating assets and liabilities:
Accounts receivable 4,848,987 7,699,408
Inventories 2,076,449 (1,668,947)
Prepaid expenses and other current assets 240,921 (1,281,278)
Accounts payable and accrued expenses (1,333,787) (1,017,435)
------------ ------------
Net cash from operating activities 7,037,903 7,883,346
------------ ------------
Investing activities:
Change in marketable securities (995,776) (10,936,840)
Payments for purchases of property and equipment (792,231) (643,088)
Payments for product rights (118,744) (1,273,377)
Change in certificate of deposit, restricted 359,898 (9,750)
------------ ------------
Net cash from investing activities (1,546,853) (12,863,055)
------------ ------------
Financing activities:
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 6,946 7,191
Proceeds from the exercise of stock options 198,188 211,955
------------ ------------
Net cash from financing activities 205,134 219,146
------------ ------------
Net change in cash and cash equivalents 5,696,184 (4,760,563)
Cash and cash equivalents:
Beginning of period 229,647 12,109,150
------------ ------------
End of period $ 5,925,831 $ 7,348,587
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
4
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of June 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.
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.
5
<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 $12.0 million for the second quarter of 1998 compared to $13.6
million for the same quarter of 1997 and were $26.4 million for the first six
months of 1998 compared to $33.0 million for the same period of 1997.
Domestic sales declined to $11.8 million from $12.6 million in the second
quarter of 1997 while retail sell-through held steady. Domestic sales for the
first six months of 1998 were $25.1 million compared to $29.5 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 second quarter of 1998 compared
to $971,000 for the same quarter of 1997 and were $1.3 million for the first six
months of 1998 compared to $3.5 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 $7.5 million or 62.8% of net sales for the second quarter of
1998 compared to $9.1 million or 67.2% for the same quarter of 1997 and was
$17.5 million or 66.3% for the first six months of 1998 compared to $22.3
million or 67.6% 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.
Marketing and selling expenses were $5.6 million for the second quarter of 1998
compared to $4.9 million for the same quarter of 1997 and were $15.3 million for
the first six months of 1998 compared to $16.0 million for the same period in
1997. The increase for the second quarter resulted primarily from expenses
associated with the launch of Banish personal smoke deodorizer.
General and administrative expenses were $1.2 million for the second quarter of
1998 compared to $812,000 for the same quarter of 1997 and were $2.2 million for
the first six months of 1998 compared to $1.6 million for the same period in
1996. This increase was primarily due to expenses associated with patent
litigation which has been settled and personnel costs.
6
<PAGE>
Product development expenses were $590,000 for the second quarter of 1998
compared to $289,000 for the same quarter of 1997 and were $984,000 for the
first six months of 1998 comparable to $491,000 for the same period in 1997.
This increase resulted from costs related to evaluation and testing of potential
new products.
Interest income was $729,000 for the second quarter of 1998 comparable to
$777,000 for the same quarter of 1997 and was $1.4 million for the first six
months of 1998 comparable to $1.5 million for the same period in 1997.
Income tax (expense) benefit for the second quarter of 1998 was an expense of
$80,000 compared to $1.3 million for the same quarter of 1997 and was a benefit
of $370,000 for the first six months of 1998 compared to an expense of $1.8
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 second quarter of 1998 was $816,000 or $.04 per share
compared to $2.6 million or $.13 per share for the same quarter of 1997 and was
$831,000 or $.04 per share for the first six months of 1998 compared to $3.9
million or $.20 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 June 30, 1998, the Company had cash and cash equivalents and marketable
securities of $66.4 million and working capital of $77.8 million.
The Company generated cash from operations of $7.0 million for the first six
months of 1998 compared with $7.8 million for the same period of 1997. The
reduced cash flow was due primarily to a decrease in net income offset by a
decrease in net operating assets and liabilities.
The Company invested $1.0 million in marketable securities, $792,000 in property
and equipment and $119,000 in product rights while a $360,000 certificate of
deposit, restricted matured during the first six months of 1998.
The Company has reviewed the ability of its computer systems to process
transactions relating to the year 2000 and beyond and believes that all
significant systems are compliant. The Company is in the process of working with
its vendors and customers to ensure they will be year 2000 compliant. The
Company currently does not anticipate any significant financial impact on its
operations as a result of the year 2000 issue.
7
<PAGE>
The Company received $205,000 during the first six months of 1998 from employee
stock plan transactions. 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. No shares
have been purchased under this authorization as of June 30, 1998.
The Company believes that its existing funds and funds generated from operations
will be sufficient to support its planned operations for the foreseeable future.
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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, the Company had been sued for patent
infringement by Acutek Adhesive Specialties, Inc. ("Acutek") in two
separate lawsuits in U.S. District Court for the Central District of
California. On July 13, 1998, the Company announced that it had settled
the lawsuits and that both suits were dismissed by the court. Terms of
the settlement were not disclosed under terms of a confidentiality
agreement between the parties.
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
On April 22, 1998, CNS, Inc. held its annual meeting of shareholders.
Of the 18,393,059 shares of Common Stock eligible to vote, 15,228,319
were represented 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. 14,580,782 647,537
Marti Morfitt 14,598,167 630,152
Patrick Delaney 14,582,167 646,152
R. Hunt Greene 14,584,542 643,777
Andrew J. Greenshields 14,585,375 642,944
Richard W. Perkins 14,565,283 663,036
2. The votes cast to approve the appointment of KPMG Peat Marwick LLP
as independent auditors for the fiscal year ending December 31, 1998
were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
15,125,834 48,084 54,401
9
<PAGE>
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
10
<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: August 10, 1998 By: /s/ Marti Morfitt
---------------------------- --------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: August 10, 1998 By: /s/ David J. Byrd
---------------------------- --------------------------------
David J. Byrd
Vice President of Finance and Chief
Financial Officer
11
Exhibit No. 11
CNS, INC.
Computation of Net Income per Share of Common Stock
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME
Net income $ 815,888 $ 2,613,473 $ 831,174 $ 3,934,966
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Weighted average number of common
shares outstanding
18,445,000 19,277,000 18,419,000 19,241,000
=========== =========== =========== ===========
Basic earnings per share $ .04 $ .14 $ .05 $ .20
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 18,445,000 19,277,000 18,419,000 19,241,000
Incentive stock options 66,000 436,000 81,000 485,000
Nonqualified stock options 97,000 266,000 132,000 296,000
----------- ----------- ----------- -----------
18,608,000 19,979,000 18,632,000 20,022,000
=========== =========== =========== ===========
Diluted earnings per share $ .04 $ .13 $ .04 $ .20
=========== =========== =========== ===========
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,925,831
<SECURITIES> 60,454,012
<RECEIVABLES> 6,543,015
<ALLOWANCES> 0
<INVENTORY> 6,548,214
<CURRENT-ASSETS> 84,295,155
<PP&E> 2,428,805
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,197,499
<CURRENT-LIABILITIES> 6,516,691
<BONDS> 0
0
0
<COMMON> 192,946
<OTHER-SE> 81,487,862
<TOTAL-LIABILITY-AND-EQUITY> 88,197,499
<SALES> 26,438,282
<TOTAL-REVENUES> 26,438,282
<CGS> 8,923,084
<TOTAL-COSTS> 18,473,414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 461,174
<INCOME-TAX> (370,000)
<INCOME-CONTINUING> 831,174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831,174
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
