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, 2004
| [ ] | 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 o | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
7615 Smetana Lane
Eden Prairie, MN 55344
(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 _______
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES _______ NO ___X___
At July 30, 2004, the Company had outstanding 13,954,224 shares of common stock, $.01 par value per share.
CNS, Inc.
FORM 10-Q
For the Period Ended June 30, 2004
Index
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATIONItem 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Item 1. Legal Proceedings
Item 2. Change in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Net sales | $ | 16,531 | $ | 17,497 | ||||
| Cost of goods sold | 5,394 | 5,470 | ||||||
| Gross profit | 11,137 | 12,027 | ||||||
| Operating expenses: | ||||||||
| Advertising and promotion | 5,148 | 4,465 | ||||||
| Selling, general and administrative | 3,578 | 3,341 | ||||||
| Total operating expenses | 8,726 | 7,806 | ||||||
| Operating income | 2,411 | 4,221 | ||||||
| Interest income | 214 | 194 | ||||||
| Income before income taxes | 2,625 | 4,415 | ||||||
| Income tax expense | 952 | 1,634 | ||||||
| Net income | $ | 1,673 | $ | 2,781 | ||||
Basic net income per share | $ | 0.12 | $ | 0.21 | ||||
| Diluted net income per share | $ | 0.11 | $ | 0.20 | ||||
Weighted average number of common | ||||||||
| shares outstanding | 13,831 | 13,357 | ||||||
| Weighted average number of common and | ||||||||
| potential common shares outstanding | 14,570 | 14,238 | ||||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
CNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
| June 30, 2004 | March 31, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 9,868 | $ | 8,871 | ||||
| Marketable securities | 40,324 | 40,550 | ||||||
| Accounts receivable, net | 8,353 | 11,394 | ||||||
| Inventories | 3,994 | 4,132 | ||||||
| Deferred income taxes | 2,140 | 2,008 | ||||||
| Prepaid expenses and other current assets | 2,036 | 2,835 | ||||||
| Total current assets | 66,715 | 69,790 | ||||||
| Property and equipment, net | 1,439 | 1,562 | ||||||
| Product rights, net | 1,099 | 1,107 | ||||||
| Deferred income taxes | 1,075 | 1,075 | ||||||
| $ | 70,328 | $ | 73,534 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 10,557 | $ | 14,890 | ||||
| Total current liabilities | 10,557 | 14,890 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock – authorized 8,484 shares; | ||||||||
| none issued or outstanding | — | — | ||||||
| Common stock – $.01 par value; authorized 50,000 shares; | ||||||||
| issued 19,295 shares; outstanding 13,954 shares at | ||||||||
| June 30, 2004 and 13,783 shares at March 31, 2004 | 193 | 193 | ||||||
| Additional paid-in capital | 59,764 | 59,835 | ||||||
| Treasury shares – at cost; 5,341 at June 30, 2004 and | ||||||||
| 5,512 at March 31, 2004 | (23,439 | ) | (23,878 | ) | ||||
| Retained earnings | 23,363 | 22,379 | ||||||
| Accumulated other comprehensive income | (110 | ) | 115 | |||||
| Total stockholders' equity | 59,771 | 58,644 | ||||||
| $ | 70,328 | $ | 73,534 | |||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
CNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 1,673 | $ | 2,781 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| from operating activities: | ||||||||
| Depreciation and amortization | 200 | 240 | ||||||
| Deferred income taxes | (132 | ) | 1,634 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,042 | 1,373 | ||||||
| Inventories | 138 | (1,606 | ) | |||||
| Prepaid expenses and other current assets | 799 | 312 | ||||||
| Accounts payable and accrued expenses | (4,332 | ) | (5,636 | ) | ||||
| Net cash from operating activities | 1,388 | (902 | ) | |||||
| Investing activities: | ||||||||
| Purchases of marketable securities | (8,857 | ) | (14,204 | ) | ||||
| Sales of marketable securities | 8,859 | 13,958 | ||||||
| Payments for purchases of property and equipment | (6 | ) | (4 | ) | ||||
| Payments for product rights | (65 | ) | (15 | ) | ||||
| Net cash from investing activities | (69 | ) | (265 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| under stock plans | 840 | 451 | ||||||
| Purchase of treasury shares | (473 | ) | — | |||||
| Payment of cash dividends | (689 | ) | — | |||||
| Net cash from financing activities | (322 | ) | 451 | |||||
| Net change in cash and cash equivalents | 997 | (716 | ) | |||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 8,871 | 16,554 | ||||||
| End of period | $ | 9,868 | $ | 15,838 | ||||
The accompanying notes are an integral part
of the condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal, recurring accruals, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.
The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.
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 Company’s Annual Report on Form 10-K for the year ended March 31, 2004. Refer to the Annual
Report on Form 10-K for detailed information on accounting policies.
Note 2 – Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and complies
with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS
No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is determined based on
the difference, if any, on the grant date between the fair value of the Company’s stock and the amount an employee
must pay to acquire the stock. Accordingly, no compensation expense associated with the intrinsic value of stock option
grants or shares sold to employees under the Employee Stock Purchase Plan has been recognized in the Company’s
financial statements.
Had compensation cost for the Company’s stock option plan been determined based on the fair value of options at the grant date, net earnings and earnings per share would have been as follows (in thousands, except per share information):
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Net income, as reported | $ | 1,673 | $ | 2,781 | ||||
| Deduct: Total stock-based compensation expense | ||||||||
| determined under the fair value based method for all awards, | ||||||||
| net of tax | 165 | 98 | ||||||
Proforma net income | $ | 1,508 | $ | 2,683 | ||||
Earnings per share: | ||||||||
| Basic – as reported | $ | 0.12 | $ | 0.21 | ||||
Basic – proforma | $ | 0.11 | $ | 0.20 | ||||
Diluted – as reported | $ | 0.11 | $ | 0.20 | ||||
Diluted – proforma | $ | 0.10 | $ | 0.19 | ||||
Note 3 – Marketable Securities
The Company classifies its marketable debt securities as available-for-sale and records these securities at fair
market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Any
unrealized gains and losses, net of deferred income taxes, are included in stockholders’ equity as a separate
component of other comprehensive income. A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary, results in a charge to operations resulting in the establishment of a new cost
basis for the security. Realized securities gains or losses are included in investment income in the consolidated
statements of operations.
Note 4 – Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory
reserves have been established for potential product obsolescence. The components of inventories are as follows (in
thousands):
| June 30, 2004 | March 31, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Finished goods | $ | 2,873 | $ | 3,014 | ||||
| Raw materials and component parts | 1,121 | 1,118 | ||||||
| Total inventories | $ | 3,994 | $ | 4,132 | ||||
Note 5 – Net sales
Net sales by brand and geographic area are as follows (in thousands):
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Domestic – Breathe Right | $ | 12,033 | $ | 12,469 | ||||
| Domestic – FiberChoice | 2,494 | 2,015 | ||||||
| Domestic – Other | 58 | 70 | ||||||
| Total Domestic | 14,585 | 14,554 | ||||||
| International | 1,946 | 2,943 | ||||||
| Total net sales | $ | 16,531 | $ | 17,497 | ||||
Note 6 – Comprehensive Income
A reconciliation of total comprehensive income is as follows (in thousands):
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Net income | $ | 1,673 | $ | 2,781 | ||||
| Unrealized gain(loss) on marketable | ||||||||
| securities, net of income tax | (225 | ) | 0 | |||||
| Total comprehensive income | $ | 1,448 | $ | 2,781 | ||||
Note 7 — Earnings Per Share
A reconciliation of weighted average common and potential common shares outstanding is as follows (in thousands):
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Average common shares outstanding | 13,831 | 13,357 | ||||||
| Potential common shares | 739 | 881 | ||||||
| Average common and potential common shares | 14,570 | 14,238 | ||||||
For the three months ended June 30, 2004 and 2003 there were 336,320 options with a weighted average exercise price of $11.33 and 0 options, respectively, that were not included in the calculation of potential common shares due to the exercise price of the option being higher than the average market price for the three month period.
Note 8 – Dividends
The Company declared a $.05 per share cash dividend on April 26, 2004 for shareholders of record as of May 21, 2004.
The amount of dividend, paid on June 4, 2004, was $689,000. There were no dividends paid during the three months ended
June 30, 2003.
Note 9 – Income Taxes
As part of the process of preparing financial statements, the Company is required to estimate income taxes, both
state and federal. This process involves management estimating the actual current tax exposure together with assessing
temporary differences resulting from different treatment for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then
assess the likelihood that deferred tax assets will be utilized to offset future taxable income during the periods in
which these temporary differences are deductible. Management believes that as of June 30, 2004, based on the level of
historical taxable income and projections of future taxable income for the periods in which the deferred tax assets are
deductible, that it is more likely than not the Company will realize the benefits of these deductible differences.
Note 10 – Contingent Gain
The Company has received notice of a favorable court decision relating to an import duty appeal that may result in
the refund of previously paid European Community import duties on Breathe Right nasal strips. The estimated amount of
the potential refund, payable in Euros, is approximately $1.0 million. Assuming satisfactory completion of audit
procedures performed by Dutch customs, the Company expects to receive the refund during the current fiscal year and will
recognize the refund at the time of receipt.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed under “Forward-Looking Statements” and elsewhere in this report.
This Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.
The Company’s revenues are derived primarily from the 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 nasal congestion resulting from colds, allergies, sinusitis, and deviated nasal septum. Breathe Right nasal strips are sold in the United States and 25 markets internationally.
The Company expanded the Breathe Right brand in March of 2002 by marketing Breathe Right Snore Relief™ throat spray. Snore Relief spray lubricates and soothes dry throats, while a natural astringent firms loose tissue to reduce the vibrations that cause snoring.
The Company introduced Breathe Right Vapor Shot! personal vaporizer in March of 2003 further expanding the Breathe Right product line. Vapor Shot! is packaged with a reusable cup, vapor concentrating lid and 8 effervescent tablets and provides instant drug free relief from nasal congestion due to colds and allergies.
In March of 2000, the Company entered into the bulk fiber category by launching FiberChoice® chewable fiber tablets. FiberChoice is an orange flavored chewable tablet that offers consumers an effective, convenient, good-tasting way to supplement their daily intake of dietary fiber. FiberChoice tablets can be taken without water and have been clinically proven to be as effective as powder alternatives.
Results of Operations
Net sales for the quarter ended June 30, 2004 were $16.5 million, a decrease of 5.5% versus net sales of $17.5 million for the quarter ended June 30, 2003. Net sales for the quarters ending June 30, 2004 and 2003 were favorably impacted by $103,000 and $485,000, respectively, primarily relating to a reduction of estimated promotional spending liabilities.
Domestic net sales for the quarter ended June 30, 2004 of $14.6 million were flat compared to the same quarter of 2003. Net sales of FiberChoice brand products of $2.5 million increased by $479,000 compared to the quarter ended June 30, 2003, as the result of continuing adverting support and an on-shelf bonus pack promotion. Net sales for the Breathe Right brand decreased by $436,000 to $12.0 million as customers worked through higher retail inventory levels caused by an abrupt end to last year’s cold/flu season.
International net sales for the quarter ended June 30, 2004 were $1.9 million compared to $2.9 million for the quarter ended June 30, 2003. The decrease in international net sales for the three months ended June 30, 2004 is primarily the result of no product shipments to Japan in the first quarter. The Company’s distributor in Japan is working through high inventory levels associated with an unusually mild allergy season in February and March 2004.
Gross profit was $11.1 million for the June quarter of 2004 compared to $12.0 million for the same quarter of 2003. Gross profit as a percentage of net sales of 67.4% decreased from 68.7% for the three months ended June 30, 2003. The reduction in gross profit percentage in the first quarter of 2004 was the result of higher trade promotion activity and increased product cost relating to the FiberChoice on shelf bonus pack promotion.
The Company has received notice of a favorable court decision relating to an import duty appeal that may result in the refund of previously paid European Community import duties on Breathe Right nasal strips. The estimated amount of the potential refund, payable in Euros is approximately $1.0 million. Assuming satisfactory completion of audit procedures performed by Dutch customs, the Company expects to receive the refund during the current fiscal year and will recognize the refund at the time of receipt.
Advertising and promotion expense for the June quarter of 2004 was $5.1 million compared to $4.5 million for the same period of 2003, an increase of 15.3%. The Company increased advertising and promotion expense for allergy and snoring advertising in the United Kingdom and Japan during the first quarter. Domestic advertising and promotion expense was flat versus the prior year.
Selling, general and administrative expenses were $3.6 million for the June quarter of 2004 compared to $3.3 million for the same quarter of 2003. The increase is primarily from a slight increase in staff cost as well as incremental legal costs for trademarks and intellectual property work.
Operating income for the June quarter of 2004 was $2.4 million compared to $4.2 million for the same quarter of 2003. Operating income as a percentage of net sales decreased to 14.6% for the quarter ended June 30, 2004 from 24.1% for the quarter ended June 30, 2003. The decline in operating profit as a percentage of sales was caused by the reduction in gross profit margin explained above, as well as the increases in advertising and promotion expense and selling, general and administration expense.
Investment income was $214,000 for the June quarter of 2004 compared to $194,000 for the same quarter of 2003. The slight decrease in market interest rates compared to the prior year quarter was offset by an increase of $9.0 million in cash and marketable securities. The Company continues to increase the percentage of the portfolio invested in tax-exempt investments that provide higher after-tax returns.
Net income for the quarter ended June 30, 2004 was $1.7 million compared to $2.8 million for the same quarter of 2003. Income tax expense was $952,000 or 36.3% of income before taxes for the June quarter of 2004 compared to $1.6 million or 37.0% of income before taxes for the same quarter of 2003. The reduction in the effective income tax rate reflects a shift from taxable investments to tax-exempt securities and utilization of foreign export incentives.
Seasonality
The Company has experienced in the past, and expects that it will continue 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 well as increases and decreases in purchases by distributors and retailers in anticipation of future demand by consumers. The Company believes that significant portions of Breathe Right® product line are used for the temporary relief of nasal congestion and congestion-related snoring. Sales of nasal congestion remedies are higher during the fall and winter seasons, corresponding with the Company’s third and fourth quarters.
Liquidity and Capital Resources
At June 30, 2004, the Company had cash, cash equivalents and marketable securities of $50.2 million, an increase of $800,000 during the current quarter. The Company’s working capital increased by $1.3 million during the quarter ended June 30, 2004 to $56.2 million.
| Three Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 1,673 | $ | 2,781 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| from operating activities: | ||||||||
| Depreciation and amortization | 200 | 240 | ||||||
| Deferred income taxes | (132 | ) | 1,634 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,042 | 1,373 | ||||||
| Inventories | 138 | (1,606 | ) | |||||
| Prepaid expenses and other current assets | 799 | 312 | ||||||
| Accounts payable and accrued expenses | (4,332 | ) | (5,636 | ) | ||||
| Net cash from operating activities | $ | 1,388 | $ | (902 | ) | |||
The Company generated cash from operating activities of $1.4 million during the first quarter of fiscal 2005, compared to a use of cash from operating activities of $900,000 during the first quarter of fiscal 2004. Net income for the quarter declined by $1.1 million as explained above.
Deferred income taxes generated $1.6 million of cash flow in the fiscal 2004 first quarter due to the utilization of net operating loss carryforwards. A reduction in accounts receivable generated $3.0 million of cash flow in the fiscal 2005 first quarter and $1.4 million in the fiscal 2004 first quarter. The reduction in accounts receivable during the first quarter reflects the seasonal nature of the Company’s business, where sales are higher during the cold/flu season and lower during the first half of the fiscal year. The reduction in accounts receivable was larger during the first quarter of fiscal 2005 due to the timing of sales in the fourth quarter of fiscal 2004, as well as the lower sales recorded in the first quarter of fiscal 2005. Inventory used $1.6 million of cash during the first quarter of fiscal 2004 as the Company prepared for the introduction of Vapor Shot! during fiscal 2004. Accounts payable used $4.3 million of cash in the first quarter of fiscal 2005 and $5.6 million in the first quarter of fiscal 2004 also reflecting the seasonal nature of the Company’s business and the heavier levels of advertising and promotion expense during the cold/flu season. The larger usage of cash in the first quarter of 2004 reflects the exact timing of payments related to promotions and product purchases.
There was no material net change in the value of marketable securities during the current period. Purchases of marketable securities exceeded sales and maturities by $246,000 for the first quarter of fiscal 2004.
The Company issued 171,721 shares of common stock for $668,000 during the three months ended June 2004 under its Employee Stock Purchase Plan and shareholder approved equity compensation plans. The Company also issued 50,000 shares of common stock for $172,000 pursuant to the exercise of outstanding warrants.
The Company repurchased 50,000 shares of common stock for $473,000 during the three months ended June 2004. The Company has authority to repurchase up to 481,600 additional shares of its common stock in connection with the repurchase program that has been authorized by the board of directors.
The Company declared a $.05 per share regular cash dividend on April 26, 2004 for shareholders of record as of May 21, 2004. The amount of this dividend payment, paid on June 4, 2004, was $689,000. No dividends were paid during the three months ended June 30, 2003.
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 judgment based on its understanding and analysis of the relevant circumstances.
The accounting principles followed in the preparation of the financial information contained on Form 10-Q are the same as those described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.
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 fiscal third and fourth quarters of each year due to increased nasal strip usage during the cold/flu 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 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 March 31, 2004. See Item 7A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.
Item 4. Controls and Procedures
The Company’s Chief Executive Officer, Marti Morfitt, and Chief Financial Officer, Samuel E. Reinkensmeyer, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.
There have been no significant changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table provides certain information regarding purchases made by CNS, Inc. of its common stock in the quarter covered by this report:
Issuer Purchases Of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||
|---|---|---|---|---|---|---|---|---|---|
| April 1 – April 30, 2004 | — | — | — | 531,600 | |||||
| May 1 – May 31, 2004 | — | — | — | 531,600 | |||||
| June 1 – June 30, 2004 | 50,000 | $ 9.46 | 50,000 | 481,600 | |||||
| Total | 50,000 | $ 9.46 | 50,000 | 481,600 | |||||
| (1) | On February 11, 2002, the Company announced that its
board of directors had approved a stock repurchase program authorizing the Company to repurchase up to 1,000,000 shares of the Company’s common stock from time to time in open market transactions or in privately negotiated transactions. |
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this Report:
| 10.31 | Executive Employment Agreement between the Company and Marti Morfitt effective as of July 20, 2004.* |
| 31.1 | Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |
| 31.2 | Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350). |
*Indicates Compensatory Agreement
(b) Reports on Form 8-K
| During the quarter covered by this report, the Company furnished a Current Report on Form 8-K dated April 28, 2004 reporting, under Item 5, a quarterly dividend and reporting under Item 12, the disclosure of information regarding its results of operations for its quarter ended March 31, 2004, and attaching as exhibits, under Item 7, a press release relating to the dividend and a press release relating to the results of operations. |
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. | |||||
Dated: August 5, 2004 | By: |
/s/ Marti Morfitt | |||
| President & Chief Executive Officer | |||||
Dated: August 5, 2004 | By: |
/s/ Samuel E. Reinkensmeyer | |||
| Samuel E. Reinkensmeyer Vice President of Finance, Chief Financial Officer and Treasurer | |||||