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, 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 April 30, 1999, 15,595,481 shares of common stock were outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,210,155 $ 584,718
Marketable securities 54,020,973 59,796,952
Accounts receivable, net 6,418,640 7,790,952
Inventories 7,332,325 8,823,193
Prepaid expenses and other current assets 3,255,468 2,794,558
Deferred income taxes 1,486,000 1,332,000
------------ ------------
Total current assets 73,723,561 81,122,373
Property and equipment, net 2,265,956 2,406,488
Product rights, net 1,359,246 1,434,566
------------ ------------
$ 77,348,763 $ 84,963,427
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 7,640,571 8,412,649
Accrued income taxes 0 684,937
------------ ------------
Total current liabilities 7,640,571 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 61,886,730 61,932,529
Treasury shares - at cost; 3,512,089 at March 31, 1999 and
2,692,144 at December 31, 1998 (17,562,069) (14,670,128)
Retained earnings 25,190,585 28,157,494
Accumulated other comprehensive income 0 253,000
------------ ------------
Total stockholders' equity 69,708,192 75,865,841
------------ ------------
$ 77,348,763 $ 84,963,427
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
2
<PAGE>
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 11,934,437 $ 14,480,981
Cost of goods sold 4,688,341 4,469,465
------------ ------------
Gross profit 7,246,096 10,011,516
------------ ------------
Operating expenses:
Marketing and selling 11,407,965 9,677,227
General and administrative 802,904 1,064,005
Product development 1,000,782 394,896
------------ ------------
Total operating expenses 13,211,651 11,136,128
------------ ------------
Operating loss (5,965,555) (1,124,612)
Investment income 898,646 689,900
------------ ------------
Loss before income taxes (5,066,909) (434,712)
Income tax benefit 2,100,000 450,000
------------ ------------
Net income (loss) $ (2,966,909) $ 15,288
============ ============
Basic and diluted net income (loss) per share $ (.18) $ .00
============ ============
Weighted average number of common shares outstanding 16,417,000 18,374,000
============ ============
Weighted average number of common and
assumed conversion shares outstanding 16,417,000 18,752,000
============ ============
</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>
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (2,966,909) $ 15,288
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 261,870 158,482
Changes in operating assets and liabilities:
Accounts receivable 1,372,312 5,592,804
Inventories 1,490,869 1,092,986
Prepaid expenses and other current assets (460,910) 2,291,064
Accounts payable and accrued expenses (1,457,015) (4,738,284)
------------ ------------
Net cash from operating activities (1,759,783) 4,412,340
------------ ------------
Investing activities:
Net change in marketable securities 5,368,979 (906,029)
Payments for purchases of property and equipment (45,903) (512,927)
Payments for product rights (115) (132)
------------ ------------
Net cash from investing activities 5,322,961 (1,419,088)
------------ ------------
Financing activities:
Proceeds from the exercise of stock options 0 78,750
Purchase of treasury shares (2,937,741) 0
------------ ------------
Net cash from financing activities (2,937,741) 78,750
------------ ------------
Net change in cash and cash equivalents 625,437 3,072,002
Cash and cash equivalents:
Beginning of period 584,718 229,647
------------ ------------
End of period $ 1,210,155 $ 3,301,649
============ ============
</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 March 31, 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 - Earnings Per Share
A reconciliation of weighted average common and assumed conversion shares
outstanding is as follows:
Three Months Ended
March 31,
--------------------------------
1999 1998
--------------------------------
Average common shares outstanding 16,417,000 18,374,000
Assumed conversion of stock options 0 378,000
--------------------------------
Average common and assumed
conversion shares 16,417,000 18,752,000
--------------------------------
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. The Company also has new consumer products in evaluation,
testing and development.
Results of Operations
Net sales were $11.9 million for the first quarter of 1999 compared to $14.5
million for the same quarter of 1998. Domestic sales decreased to $11.8 million
for the first quarter of 1999 compared to $13.4 million for the same quarter of
1998. The decrease was primarily a result of a decision to refrain from
advertising during the fourth quarter of 1998 and delay advertising until the
middle of January 1999, and the entry of a competitor into the nasal strip
market in the fourth quarter of 1998. We were successful in holding a market
share of approximately 85% and limiting our domestic sales decline to only 12%.
As expected, international sales for the first quarter of 1999 were below last
year. International sales were $123,000 compared to $1.1 million for the same
quarter of 1998. The lower level of international sales for 1999 reflects
continued high inventory levels at and inadequate performance by the Company's
international distributor.
Gross profit was $7.2 million for the first quarter of 1999 compared to $10.0
million for the same quarter of 1998. Gross profit as a percentage of net sales
was 60.7% for the first quarter of 1999 compared to 69.1% for the same quarter
of 1998 and 63.1% in the prior quarter. The lower gross profit resulted
primarily from the inclusion of free Breathe Right nasal strips in packages
during the quarter and costs to rework product into new packaging. Margins
should continue at the lower level next quarter as we complete rework of product
packaging. Margins should improve during the second half of this year.
Marketing and selling expenses were $11.4 million for the first quarter of 1999
compared to $9.7 million for the same quarter of 1998. This increase resulted
primarily from spending on a strong competitive defense for nasal strips and
testing of advertising and promotion support for saline nasal spray and allergen
barrier pillow covers.
General and administrative expenses were $803,000 for the first quarter of 1999
compared to $1.1 million for the same quarter of 1998. This decrease resulted
primarily from prior year costs associated with the change of the Company's
president.
Product development expenses were $1.0 million for the first quarter of 1999
compared to $395,000 for the same quarter of 1998. This increase resulted from
costs related to evaluation and testing of potential new products, including a
chewable dietary fiber product.
6
<PAGE>
Operating loss for the first quarter of 1999 was $6.0 million compared to $1.1
million for the same quarter of 1998. This increase was due primarily to lower
sales in the first quarter of 1999 and increased marketing and selling expenses.
Investment income was $898,000 for the first quarter of 1999 compared to
$690,000 for the same quarter of 1998. The increase was primarily from net gains
on the sale of marketable securities resulting from the repositioning of the
investment portfolio to taxable investments
Income tax benefit for the first quarter of 1999 was $2.1 million compared to
$450,000 for the same quarter of 1998. A high level of tax-exempt interest
income reduced the effective income tax rate.
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.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash, cash equivalents and marketable
securities of $55.2 million and working capital of $66.1 million.
The Company used cash from operations of $1.8 million for the first quarter of
1999 compared with cash provided of $4.4 million for the same quarter of 1998.
The use of cash in 1999 was primarily a result of the net loss offset by a
decrease in operating assets and liabilities.
The Company had net sales of $5.4 million of marketable securities and purchased
$46,000 of property and equipment in the first quarter of 1999.
The Company repurchased 825,400 shares of common stock for $2.9 million in the
first quarter of 1999. A total of 517,000 shares of common stock remain to be
purchased under the most recent Board of Directors authorization. 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 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 take the following steps: (i) implement a
7
<PAGE>
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 expects to complete testing and establish compliance with respect to all
of its systems and products by June 30, 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 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 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 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,"
8
<PAGE>
"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.
Market Risk Management
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
<PAGE>
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
None
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
<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, 1999 By: /s/ Marti Morfitt
------------------------ ----------------------------------
Marti Morfitt
President & Chief Operating Officer
Date: May 12, 1999 By: /s/ David J. Byrd
------------------------ ----------------------------------
David J. Byrd
Vice President of Finance, Chief
Financial Officer and Treasurer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,210,155
<SECURITIES> 54,020,973
<RECEIVABLES> 6,418,640
<ALLOWANCES> 0
<INVENTORY> 7,332,325
<CURRENT-ASSETS> 73,723,561
<PP&E> 2,265,956
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,348,763
<CURRENT-LIABILITIES> 7,640,571
<BONDS> 0
0
0
<COMMON> 192,946
<OTHER-SE> 69,515,246
<TOTAL-LIABILITY-AND-EQUITY> 77,348,763
<SALES> 11,934,437
<TOTAL-REVENUES> 11,934,437
<CGS> 4,688,341
<TOTAL-COSTS> 13,211,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,066,909)
<INCOME-TAX> (2,100,000)
<INCOME-CONTINUING> (2,966,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,966,909)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
