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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 June 30, 2002 . [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. 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) (952) 229-1500 (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, 2002, the Company had outstanding 13,514,934 shares of common stock, $.01 par value per share. 1 |
PART I – FINANCIAL INFORMATION Item 1. Financial Statements CNS, INC. |
| June 30, 2002 | March 31, 2002 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,249 | $ | 5,553 | ||||
| Marketable securities | 24,337 | 19,109 | ||||||
| Accounts receivable, net | 8,402 | 11,682 | ||||||
| Inventories | 4,197 | 4,465 | ||||||
| Deferred income taxes | 5,879 | 5,879 | ||||||
| Prepaid expenses and other current assets | 1,038 | 999 | ||||||
| Total current assets | 49,102 | 47,687 | ||||||
| Property and equipment, net | 2,206 | 2,400 | ||||||
| Product rights, net | 1,205 | 1,179 | ||||||
| Deferred income taxes | 2,183 | 3,220 | ||||||
| $ | 54,696 | $ | 54,486 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | 9,019 | 10,264 | ||||||
| Total current liabilities | 9,019 | 10,264 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock – authorized 8,484 shares; | ||||||||
| none issued or outstanding | 0 | 0 | ||||||
| Common stock – $.01 par value; authorized 50,000 shares; | ||||||||
| issued 19,295 shares | 193 | 193 | ||||||
| Additional paid-in capital | 60,418 | 60,796 | ||||||
| Treasury shares – at cost; 5,754 at June 30, 2002 and | ||||||||
| 5,756 at March 31, 2002 | (25,607 | ) | (25,821 | ) | ||||
| Retained earnings | 10,512 | 8,956 | ||||||
| Accumulated other comprehensive income | 161 | 98 | ||||||
| Total stockholders’ equity | 45,677 | 44,222 | ||||||
| $ | 54,696 | $ | 54,486 | |||||
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The accompanying notes are an integral part 2 |
CNS, INC. |
| Three Months Ended June 30, | ||||||||
| 2002 | 2001 | |||||||
| Net sales | 14,523 | 14,370 | ||||||
| Cost of goods sold | 5,319 | 5,557 | ||||||
| Gross profit | 9,204 | 8,813 | ||||||
| Operating expenses: | ||||||||
| Advertising and promotion | 4,115 | 7,529 | ||||||
| Selling, general and administrative | 2,763 | 3,519 | ||||||
| Special charges | 0 | 1,100 | ||||||
| Total operating expenses | 6,878 | 12,148 | ||||||
| Operating income (loss) | 2,326 | (3,335 | ) | |||||
| Interest income | 229 | 345 | ||||||
| Income (loss) before income taxes | 2,555 | (2,990 | ) | |||||
| Income tax expense | 1,000 | 0 | ||||||
| Net income (loss) | $ | 1,555 | $ | (2,990 | ) | |||
| Basic net income (loss) per share | $ | .11 | $ | (.21 | ) | |||
| Diluted net income (loss) per share | $ | .11 | $ | (.21 | ) | |||
| Weighted average number of common | ||||||||
| shares outstanding | 13,556 | 14,128 | ||||||
| Weighted average number of common and | ||||||||
| assumed conversion shares outstanding | 14,193 | 14,128 | ||||||
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The accompanying notes are an integral part 3 |
CNS, INC. |
| Three Months Ended June 30, | ||||||||
| 2002 | 2001 | |||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | 1,555 | $ | (2,990 | ) | |||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| from operating activities: | ||||||||
| Depreciation and amortization | 313 | 310 | ||||||
| Deferred income taxes | 1,000 | 0 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,279 | 3,844 | ||||||
| Inventories | 268 | (176 | ) | |||||
| Prepaid expenses and other current assets | (37 | ) | 1,151 | |||||
| Accounts payable and accrued expenses | (1,245 | ) | (2,523 | ) | ||||
| Net cash from operating activities | 5,133 | (384 | ) | |||||
| Investing activities: | ||||||||
| Net change in marketable securities | (5,129 | ) | 651 | |||||
| Payments for purchases of property and equipment | (25 | ) | (77 | ) | ||||
| Payments for product rights | (120 | ) | (8 | ) | ||||
| Net cash from investing activities | (5,274 | ) | 566 | |||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| under stock plans | 312 | 78 | ||||||
| Purchase of treasury shares | (475 | ) | 0 | |||||
| Net cash from financing activities | (163 | ) | 78 | |||||
| Net change in cash and cash equivalents | (304 | ) | 260 | |||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 5,553 | 701 | ||||||
| End of period | $ | 5,249 | $ | 961 | ||||
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The accompanying notes are an integral part 4 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements as of June 30, 2002 and 2001 and March 31, 2002 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 periods presented. In 2002 the Company changed its fiscal year-end from December 31 to March 31. The change in its fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cough/cold season within the same fiscal year. Note 1 – Accounting Principles |
| The Company implemented Emerging Issues Task Force bulletins Number 00-14 “Accounting for Certain Sales Incentives” and Number 00-25 “Vendor Income Statement Characterization of Consideration Paid to a Reseller”. These new accounting standards had no impact on the Company’s net income; however, they did require reclassification of certain promotional costs such as sales incentives, promotional funds, and consumer coupon redemption that were previously reported as a component of advertising and promotion expense as a reduction of net revenue. This resulted in revenue reductions of $800,000 in the quarter ended June 2002 and $1.1 million in the quarter ended June 2001, with corresponding reductions in advertising and promotion expense during those periods. |
| The Company implemented Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. There was no material impact on the Company’s consolidated financial position or results of operations as the result of implementing this standard. |
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Refer to the Annual Report on Form 10-K for detailed information on accounting policies. Note 2 – Comprehensive Income (Loss) 5 |
| Three Months Ended June 30, | ||||||||
| 2002 | 2001 | |||||||
| Net income (loss) | $ | 1,555 | $ | (2,990 | ) | |||
| Change in unrealized gain (loss) on marketable | ||||||||
| securities, net of income tax | 63 | (15 | ) | |||||
| Total comprehensive income (loss) | $ | 1,618 | $ | (3,005 | ) | |||
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Note 3 – Earnings Per Share |
| Three Months Ended June 30, | ||||||||
| 2002 | 2001 | |||||||
| Average common shares outstanding | 13,556 | 14,128 | ||||||
| Assumed conversion of stock options | 637 | 0 | ||||||
| Average common and assumed | ||||||||
| conversion shares | 14,193 | 14,128 | ||||||
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Note 4 – Income Taxes 6 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended December 31, 2001. In 2002 the Company changed its fiscal year-end from December 31 to March 31. The change in its fiscal year-end aligns the Company’s financial reporting period with its business and customer-planning cycle. The Company believes this change provides a clearer picture of the Company’s financial results by including an entire cough/cold season within the same fiscal year. The Company’s revenues are derived primarily from the manufacture and sale of the Breathe Right® 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 began marketing FiberChoice® chewable tablets, an innovative bulk fiber supplement in the June quarter of 2000. The Company has experienced in the past, and expects to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to advertising levels and seasonality of sales, as described below, as well as increases and decreases in purchases by distributors in anticipation of future demand by consumers. Results of Operations Net sales for the June 2002 quarter were $14.5 million versus $14.4 million in the June 2001 quarter. Net sales, before the effect of accounting reclassifications described in Note 1, for the June 2002 quarter were $15.3 million compared to $15.5 million in the 2001 period. Domestic sales for the June quarter of 2002 were $12.7 million compared to $11.4 million for the same quarter of 2001. Sales for the 2002 June quarter were higher due to increased retailer purchases of Breathe Right nasal strips in line with a return to growing consumer purchases. International sales were $1.8 million for the June quarter of 2002 compared to $2.9 million for the same quarter of 2001. Lower sales for the 2002 June quarter are primarily due to a Japanese distributor having excess inventory at the end of last year’s cold and allergy season, resulting in lower purchases during the current quarter. Gross profit was $9.2 million for the June quarter of 2002 compared to $8.8 million for the same quarter of 2001. Gross profit as a percentage of net sales increased to 63.4% for the June quarter of 2002 compared to 61.3% for the same quarter of 2001. The higher gross profit percentage in 2002 resulted primarily from reduced operating costs and lower deductions from sales for promotional expenditures. Advertising and promotion expenses were $4.1 million for the June quarter of 2002 compared to $7.5 million for the same quarter of 2001. Expenditures for the Breathe Right brand declined by $1.9 million, due to dropping the allergy-focused advertising that was tested during the 2001 June quarter. Advertising and 7 |
promotion expense for the FiberChoice brand was down by $1.7 million, as spending levels were reduced in the year following the product launch. Selling, general and administrative expenses were $2.8 million for the June quarter of 2002 compared to $3.5 million for the same quarter of 2001. This decrease was primarily the result of the June 2001 corporate restructuring that included a workforce reduction and that has enabled the Company to streamline its resources to focus on building the core businesses. Product development costs were less than expected due to a delay in some product development expenditures. The Company incurred a special charge of $1.1 million during the June 2001 quarter relating to the restructuring. Operating income for the June quarter of 2002 was $2.3 million compared to a loss of $3.3 million for the same quarter of 2001. Investment income was $200,000 for the June quarter of 2002 compared to $300,000 for the same quarter of 2001. The decrease was primarily the result of lower market interest rates. Net income for the June quarter of 2002 was $1.6 million compared to a net loss of $3.0 million for the same quarter of 2001. There was no income tax benefit recognized for the June quarter of 2001. 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, 2002, the Company had cash, cash equivalents and marketable securities of $29.6 million and working capital of $40.1 million. Company operations provided cash of $5.1 million for the June quarter of 2002 compared with a use of cash of $400,000 for the same quarter of 2001. Net income, that included non cash tax expense of $1.0 million, and a decrease in accounts receivable offset partially by payment of operating liabilities provided the positive impact on cash for the June 2002 quarter. The Company had net purchases of $5.1 million of marketable securities in the June quarter of 2002 compared to sales of $700,000 for the same quarter of 2001. The Company repurchased 89,600 shares of common stock for $500,000 in the June quarter of 2002. This leaves 900,100 shares that can be repurchased out of the board of directors’most recent authorization. The shares of common stock are available for use by the Company to meet its obligations under its employee stock ownership plan and\ stock option plans, and for possible future acquisitions. 8 |
The Company believes that its existing funds and funds generated from operations will be sufficient to support its planned operations for the foreseeable future. Accounting Policies and Recent Accounting Pronouncements In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States, management must make decisions which impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgement based on its understanding and analysis of the relevant circumstances. Note 1 to the condensed consolidated financial statements and the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 provide important information about the significant accounting policies followed in the preparation of the Company’s financial statements and accounting pronouncements applicable to the Company. Forward-Looking Statements Certain statements contained in this Report on Form 10-Q and other written and oral statements made from time to time by the Company 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 reliant on sales of Breathe Right nasal strips; (ii) the Company currently has a seasonal pattern of sales that is typically higher in the March and December quarters of each year due to increased nasal strip usage during the cough/cold season and its revenues and earnings may be impacted by the relative severity of such season; (iii) the Company’s success and future growth will depend significantly on its ability to effectively market Breathe Right nasal strips and upon its ability to develop and achieve markets for additional products; (iv) the Company’s competitive position will, to some extent, be dependent on the enforceability and comprehensiveness of the patents on its Breathe Right nasal strip technology which have been, and in the future may be, the subject of litigation and could be narrowed as a result of the outcome of the reexamination of one such patent by the United States Patent and Trademark Office; (v) the Company has faced and will continue to face challenges in successfully developing and introducing new products; (vi) the Company operates in competitive markets where recent and potential entrants into the nasal dilator segment pose competitive challenges; (vii) the Company is dependent upon contract manufacturers for the production of substantially all of its products; and (viii) the Company 9 |
currently purchases most of its major components for its nasal strip products from different contract manufacturers that obtain the raw materials from a single supplier. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company’s market risk exposure is primarily interest rate risk related to its cash, cash equivalents and investments in marketable securities. The Company’s risk to interest rate fluctuations has not materially changed since December 31, 2001. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. 10 |
PART II – OTHER INFORMATION |
| Item 1. | Legal Proceedings |
| Not Applicable |
| Item 2. | Changes in Securities |
| Not Applicable |
| Item 3. | Defaults Upon Senior Securities |
| Not Applicable |
| Item 4. | Submission of Matters to a Vote of Security Holders |
| On May 15, 2002, CNS, Inc. held its Annual Meeting of Stockholders. Of the 13,530,065 shares of Common Stock eligible to vote, 12,781,223 were represented in person or by proxy at the meeting and shares were voted on the following matters: |
| 1. The votes cast for the eight (8) directors to serve until the next annual meeting of shareholders were: |
| Name | Votes for | Votes Withheld | ||||||
| Daniel E. Cohen | 12,641,265 | 139,958 | ||||||
| Patrick Delaney | 11,840,770 | 940,453 | ||||||
| R. Hunt Greene | 11,887,600 | 893,623 | ||||||
| Andrew J. Greenshields | 11,891,870 | 889,353 | ||||||
| H. Robert Hawthorne | 12,669,210 | 112,013 | ||||||
| Marti Morfitt | 12,636,607 | 144,616 | ||||||
| Richard A. Peddie | 12,668,130 | 113,093 | ||||||
| Richard W. Perkins | 11,869,628 | 911,595 | ||||||
| 2. The votes cast to ratify and approve the appointment of KPMG LLP as independent auditors for the fiscal year ending March 31, 2003 were: |
| Votes for | Votes Against | Votes Abstained | |||||
| 12,636,168 | 136,897 | 8,158 | |||||
| Item 5. | Other Information |
| Because the Company’s fiscal year has recently changed to a fiscal year ending March 31, the Company plans to hold its 2003 Annual Meeting of Stockholders on or about August 27, 2003. The Company anticipates mailing its proxy materials in connection with the 2003 Annual Meeting of Stockholders on or about July 14, 2003. |
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| For a stockholder proposal to be considered for inclusion in the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders, the proposal must be in writing and received by the Secretary of the Company at its corporate offices no later than March 17, 2003. The Board of Directors of the Company will consider shareholder proposals and nominations submitted in connection with the 2003 Annual Meeting of Stockholders to be timely for purposes of the procedure established in the Company’s Bylaws if received between May 15, 2003 and May 30, 2003. |
| In addition to meeting the deadlines noted above and complying with applicable rules of the Securities Exchange Act of 1934, stockholder proposals must also meet the requirements described in the Company’s Bylaws and summarized in the section entitled “Stockholder Proposals” in the Company’s definitive proxy statement for the 2002 Annual Meeting of Stockholders held on May 15, 2002. |
| Item 6. | Exhibits and Reports on Form 8-K |
| (a) | The following exhibits are filed as part of this Report: |
| 99.1 | Certification pursuant to 18 U.S.C. Section 1350. |
| (b) | Reports on Form 8-K |
| None |
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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 9, 2002 By: /s/ Marti Morfitt Marti Morfitt President & Chief Executive Officer Date: August 9, 2002 By: /s/ David J. Byrd David J. Byrd Vice President of Finance, Chief Financial Officer and Treasurer 13 |