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, 1995.
[ ] 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.)
1250 PARK ROAD
CHANHASSEN, MN 55317
(Address of principal executive offices including zip code)
(612) 474-7600
(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 August 14, 1995, 17,342,772 shares of common stock were outstanding.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $18,050,916 $ 6,024,366
Accounts receivable 6,467,789 936,279
Note receivable 595,611 0
Inventories:
Finished goods 2,143,606 932,407
Work in process 1,515,566 171
Components 589,064 192,431
Total inventories 4,248,236 1,125,009
Prepaid expenses 423,755 245,619
Net assets of discontinued operations 0 2,990,990
TOTAL CURRENT ASSETS 29,786,307 11,322,263
PROPERTY AND EQUIPMENT
less accumulated depreciation of
$111,610 and $15,453, respectively 331,362 178,104
OTHER ASSETS
Intangible assets
less accumulated amortization of
$65,622 and $38,538, respectively 110,242 112,504
$30,227,911 $11,612,871
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
LIABILITIES AND 1995 1994
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,996,700 $ 272,039
Accrued expenses 1,916,436 134,297
Accrued income tax 1,341,000 0
TOTAL CURRENT LIABILITIES 8,254,136 406,336
SHAREHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized 50,000,000 shares;
issued and outstanding,
17,328,511 shares at June 30, 1995 and
17,041,656 shares at December 31, 1994. 173,285 170,417
Additional paid-in capital 25,186,840 24,229,582
Accumulated deficit (3,386,350) (13,193,464)
TOTAL SHAREHOLDERS' EQUITY 21,973,775 11,206,535
$ 30,227,911 $ 11,612,871
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Sales $ 18,818,445 $ 529,271 $ 26,277,683 $ 873,150
Cost of goods sold 7,072,040 364,320 9,922,325 612,695
Gross profit 11,746,405 164,951 16,355,358 260,455
Operating expenses:
Marketing and selling 3,788,389 517,243 5,927,748 903,728
General and administrative 377,482 150,804 677,821 259,391
Research and development 6,869 31,200 7,133 63,100
Total operating expenses 4,172,740 699,247 6,612,702 1,226,219
Operating profit (loss) 7,573,665 (534,296) 9,742,656 (965,764)
Interest income 136,794 62,063 220,969 62,389
Interest expense (12,500) (1,812) (12,500) (4,612)
Income (loss) from continuing
operations before income taxes $ 7,697,959 $ (474,045) $ 9,951,125 $ (907,987)
Income tax provision 910,000 0 910,000 0
Income (loss) from continuing
operations 6,787,959 (474,045) 9,041,125 (907,987)
Income (loss) from operations of
discontinued sleep division (less
applicable income tax benefit of
$259,000 and $0 at June 30, 1995
and 1994, respectively) (9,497) 41,168 (459,901) 7,068
Gain on disposal of sleep division
(less applicable income taxes of
$690,000 and $0 at June 30, 1995
and 1994, respectively) 1,225,890 0 1,225,890 0
Net income (loss) $ 8,004,352 $ (432,877) $ 9,807,114 $ (900,919)
Income (loss) per share of
common and common equivalent
share:
From continuing operations $ .37 $ (.03) $ .50 $ (.06)
From discontinued operations .06 0 .04 0
Net income (loss) per share $ .43 $ (.03) $ .54 $ (.06)
Weighted average number of
common and common equivalent
shares outstanding 18,443,734 16,099,258 18,312,233 14,651,180
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 9,807,114 $ (900,919)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Gain on sale of discontinued operations (1,915,890) 0
Depreciation and amortization 123,241 16,170
Changes in operating assets and liabilities:
Accounts receivable (5,531,510) (648,714)
Inventories (3,123,227) (114,886)
Prepaid expenses (178,136) (227,764)
Net assets of discontinued operations 0 (270,836)
Accounts payable and accrued expenses 7,159,069 269,523
Net cash provided by (used in) operating activities 6,340,661 (1,877,426)
INVESTING ACTIVITIES:
Payments for purchases of property and equipment (249,415) (43,907)
Payments for intangible assets (24,822) (66,634)
Net cash used in investing activities (274,237) (110,541)
FINANCING ACTIVITIES:
Proceeds from sale of discontinued operations 5,000,000 0
Proceeds from exercise of employee 193,564 73,524
stock options
Proceeds from exercise of warrants,
nonqualified options and other 766,562 0
Net proceeds from public offering 0 9,661,932
Net cash provided by financing activities 5,960,126 9,735,456
Net increase
in cash and cash equivalents 12,026,550 7,747,489
Beginning cash and cash equivalents 6,024,366 347,224
Ending cash and cash equivalents $ 18,050,916 $ 8,094,713
Supplemental schedule of non-cash operating
and financing activities:
A note receivable for $595,611 was received on
June 1, 1995 when the Company sold the assets
of its discontinued sleep division.
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of June 30, 1995 and 1994 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, 1994, and reference is hereby made to
that report for detailed information on accounting policies.
1. The Company's balance sheet reflects Common Stock outstanding on a
historical bases. Net income per common share for the three and six
month periods ended June 30, 1995 was based upon the weighted average
of common and common equivalent shares outstanding during the period.
Net loss per share of Common Stock for the three and six month periods
ended June 30, 1994 was based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares
were not included because they were anti-dilutive.
2. The Company has a $1.25 million bank line of credit. Borrowings are due
on demand, bear interest at 1% over a defined base rate (9% at June 30,
1995), are secured by substantially all assets of the Company and are
subject to certain restrictive covenants. Borrowings are limited to 80%
of eligible Breathe Right accounts receivable. There were no borrowings
against this line of credit as of June 30, 1995. The line of credit
expires on March 31, 1996.
3. The Company declared a two-for-one stock split, which was accomplished
in the form of a 100 percent stock dividend distributed on June 22,
1995 to shareholders of record on June 1, 1995. The accompanying
condensed financial statements presented for all periods herein have
been adjusted to reflect the increased shares.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On June 1, 1995, the Company completed the sale of all the assets of its Sleep
Disorder Diagnostic Products Division (Sleep) to Aequitron Medical Inc. Net sale
proceeds of $5,000,000 cash and a note receivable of $595,611 resulted in a gain
on the sale of discontinued operations of $1,915,890 which is recognized in the
second quarter of 1995. Sleep generated revenues were $853,209 and $2,405,546
with a net loss of $268,497 and $718,901 for the second quarter and six month
period of 1995, respectively, compared to revenues of $1,914,539 and $3,672,354
with net income of $41,168 and $7,068 for the second quarter and six month
period of 1994, respectively. The net income or loss of this operation is shown
on the Condensed Statement of Operations as the income (loss) from discontinued
operations. The net assets of Sleep were $2,990,990 at December 31, 1994.
Continuing operations of the Company is soley related to the manufacture and
marketing of the Breathe Right nasal strip, which is a non medicinal disposable
device that improves nasal breathing by reducing nasal airflow resistance.
Unless otherwise noted, the following discussion of financial condition and
results of operations relates only to the continuing operations of the Company.
Results of Operations:
Net sales of continuing operations increased to $18.8 million in the quarter
ended June 30, 1995 from $.5 million in the quarter ended June 30, 1994. For the
six month period of 1995 net sales were $26.3 million, up from $.9 million in
the comparable six month period of 1994. These significant increases of Breathe
Right sales were due to increased consumer awareness as a result of the use of
the Breathe Right nasal strips by professional athletes in several sports, as
well as the commencement of national consumer advertising in newspapers,
magazines and radio. The Company believes that the Breathe Right nasal strip
sales to wholesalers and retailers represent an expansion of their inventories
as well as a replenishment of product sold to consumers. Although second quarter
sales of 1995 continued to be strong for the Breathe Right, sales during the
period included the shipment of more than $7.5 million in back orders that
existed at the beginning of the quarter. The Company expects that the third
quarter sales of the Breathe Right nasal strip may ease somewhat from the second
quarter. Foreign sales of the Breathe Right nasal strip were $.6 million for the
six months ended June 30, 1995.
Gross profit was $11.7 million and $16.4 million compared to $.2 million and $.3
million in the second quarter and six month periods of 1995 and 1994,
respectively. As a percentage of sales, gross profit from sales was 62.4% and
62.2% for the two periods of 1995, respectively, compared to 31.2% and 29.8% for
the same two periods of 1994 as a result of the efficiencies realized from the
higher level of Breathe Right nasal strip sales.
Marketing and selling expenses were $3.8 million and $5.9 million in the second
quarter and six month periods of 1995, respectively, compared to $.5 million and
$.9 million in the same two periods of 1994, respectively. This significant
increase results primarily from the marketing expenses associated with
establishing distribution channels, trade advertisements, consumer
advertisements, and other product roll-out items for the Breathe Right nasal
strip. Marketing and selling expenses are expected to increase significantly in
1995 as a result of the increased marketing and advertising of the Breathe Right
nasal strip.
General and administrative expenses were $.4 million and $.7 million for the
second quarter and six month period ended June 30, 1995, respectively, compared
to $.2 million and $.3 million in the same two periods of 1994, respectively.
These increases result from the additional personnel and systems required to
support the Breathe Right nasal strip.
Research and Development expenses for the Breathe Right nasal strips are
minimal.
The Company received interest income of $221,000 during the first six months
ending June 30, 1995 compared to approximately $62,000 during the same six month
period of 1994. Interest expense during the reporting periods represents the
cost of minimal borrowings and maintaining the bank line of credit.
The tax expense of $910,000 on continuing operations represent the estimated tax
rate from all of 1995 applied to earnings for the six month period ended June
30, 1995.
Liquidity and Capital Resources:
At June 30, 1995, the Company had cash and cash equivalents of $18.0 million,
working capital of $21.5 and $1.25 million line of credit with a bank, subject
to certain borrowing base restrictions. The Company had total assets at June 30,
1995 of $30.2 million, an increase of $18.6 from $11.6 million at December 31,
1994. The increase primarily reflects the Company's net income, the receipt of
proceeds from the sale of the sleep disorders product line and the increases in
current liabilities during the first six months of 1995.
The Company's operations provided approximately $6.3 million in cash flow during
the six months ended June 30, 1995 compared to a use of cash of $1.9 million for
the comparable six month period of 1994. Cash provided in operations was
primarily from net earnings, less an increase in accounts receivable of $5.5
million, an increase in inventories of $3.1 million, the gain on discontinued
operations of $1.9 million offset by an increase in accounts payable and accrued
expenses of $7.1 million.
With respect to investing activities, the Company made purchases of property and
equipment totaling $249,000 during the first six months of 1995 compared to
$44,000 during the comparable six months of 1994. Capitalized patent and
trademark costs were approximately $25,000 in the first six months of 1995
compared to $67,000 during the first six months of 1994. The Company presently
does not have any significant commitments for capital equipment.
At June 30, 1995, the Company had a $1.25 million bank line of credit.
Borrowings are due on demand, bear interest at 1% over a defined base rate, (9%
at June 30, 1995) are secured by substantially all assets of the Company and are
subject to certain restrictive covenants. Borrowings are limited to 80% of
eligible Breathe Right accounts receivable. There were no borrowings against
this line of credit as of June 30, 1995. The credit line expires on March 31,
1996.
During the six month period ended June 30, 1995, the Company utilized net
operating loss carryforwards totaling approximately $9,965,000. The remaining
net operating loss and credit carryforwards at June 30, 1995 which are available
to reduce income taxes payable in future periods total $1,751,000 and $312,000
respectively, and expire at various times through 2009.
The Company believes that its existing funds and funds generated from
operations, along with its bank line of credit, will be sufficient to support
its planned operations for the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Byron G. Ellingson v. Bruce C. Johnson, Creative Integration and
Design, Inc. and CNS, Inc.
In July 1994, Byron G. Ellingson commenced a lawsuit in Minnesota
State District Court against the Company, Bruce Johnson (the
inventor of the Breathe Right(R) device), and Creative Integration
and Design, Inc., (the "Licensor"), which is wholly owned by
Johnson and which licenses the Breathe Right(R) device to the
Company. Ellingson claimed that he entered into an oral
partnership agreement with Johnson concerning the Breathe Right(R)
device and that the Company tortiously interfered with this
agreement. Ellingson sought an undefined amount of monetary
damages from the Company and an order declaring the License
Agreement between the Company and the Licensor null and void.
In June 1995, the Company entered into a Settlement Agreement with
Ellingson under which Ellingson agreed to dismiss all claims
against the Company with prejudice in return for a nominal cash
payment. In connection with the Settlement Agreement, Ellingson
released all claims to overturn the License Agreement. All of the
Company's costs in defending the suit, including the settlement
payment, were reimbursed to the Company by the Licensor. In July
1995, Ellingson entered into a Settlement Agreement with Johnson
and the Licensor which dismissed with prejudice all claims against
Johnson and the Licensor.
CNS, Inc. v. Bollinger Industries, Inc.
In March 1995, the Company commenced litigation in Federal
District Court for the District of Minnesota seeking an injunction
and money damages against Bollinger Industries, Inc.
("Bollinger"), the manufacturer of a nasal strip, for deceptive
trade practices and unfair competition. In April 1995, the Court
issued a temporary restraining order prohibiting Bollinger from
using certain misleading advertising. Bollinger brought a
counterclaim against the Company seeking money damages and
alleging that the Company had engaged in unfair competition by
making statements to Bollinger's existing and prospective
customers to the effect that Bollinger's product is required to
have FDA approval to market.
In June 1995, the Company entered into a Settlement Agreement with
Bollinger that provides for the dismissal of the company's and
Bollinger's claims. Bollinger also agreed to refrain from using
certain misleading advertising, which it had been earlier enjoined
from using by the temporary restraining order issued by the Court.
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 11, 1995, CNS, Inc. held its annual meeting of
shareholders. Of the 17,065,856 shares of Common Stock eligible to
vote, 15,913,264 were represented at the meeting and shares were
voted on the following matters:
1. The votes cast for the seven (7) directors to serve until the
next annual meeting of shareholders were:
Name Votes For Votes Withheld
Daniel E. Cohen, M.D. 15,877,144 36,120
Richard E. Jahnke 15,750,794 162,470
Frederick T. Strobl, M.D. 15,827,678 85,586
Patrick Delaney 15,877,132 36,132
R. Hunt Greene 15,876,812 36,532
Andrew J. Greenshields 15,878,132 35,132
Richard W. Perkins 15,877,098 36,166
2. The votes cast to approve an amendment to the Company's
Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 10,000,000 to
50,000,000 shares.
Votes For Votes Against Votes Abstained
15,211,320 640,036 56,908
3. The votes cast to approve the Company's 1994 Stock Plan:
Votes For Votes Against Votes Abstained
8,634,726 506,698 127,494
4. The votes cast to approve the appointment of KPMG Peat Marwick
LLP as independent auditors for the fiscal year ending
December 31, 1995 were:
Votes For Votes Against Votes Abstained
15,824,150 27,024 58,090
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income (Loss) Per Share
(b) Reports on Form 8-K
The Company filed a current report on Form 8-k dated June 1,
1995 reporting the sale of the Company's sleep disorders
diagnostic products business to Aequitron Medical, Inc. No
financial statements were filed.
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 14, 1995 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: August 14, 1995 By: /s/ Ronald D. Cox
Ronald D. Cox
Vice President of Finance and Chief
Financial Officer
EXHIBIT 11
CNS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE OF COMMON STOCK
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations before income taxes $ 7,697,959 $ (474,045) $ 9,951,125 $ (907,987)
Income tax provision 910,000 0 910,000 0
Income (loss) from continuing operations 6,787,959 (474,045) 9,041,125 (907,987)
Income (loss) from operations of
discontinued sleep division (less
applicable income tax benefit of
$259,000 and $0 at June 30, 1995 and
1994, respectively). (9,497) 41,168 (459,901) 7,068
Gain on disposal of sleep division (less
applicable income taxes of $690,000 and $0
at June 30, 1995 and 1994 respectively). 1,225,890 0 1,225,890 0
Income from discontinued operations 1,216,393 41,168 765,989 7,068
Net income (loss) $ 8,004,352 $ (432,877) $ 9,807,114 $ (900,919)
Income (loss) per common and
common equivalent share
From continuing operations before
income tax .42 (.03) .54 (.06)
From income tax on continuing operations (.05) 0 (.04) 0
From continuing operations .37 (.03) .50 (.06)
From discontinued operations (sleep div.) 0 0 (.03) 0
From gain on disposal of sleep division .06 0 .07 0
From discontinued operations, net .06 0 .04 0
Net income (loss) per common and
common equivalent share $ .43 $ (.03) $ .54 $ (.06)
Weighted average number of
common and common equivalent
shares outstanding 18,443,734 16,099,258 18,312,233 14,651,180
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 18,050,916
<SECURITIES> 0
<RECEIVABLES> 7,063,400
<ALLOWANCES> 0
<INVENTORY> 4,248,236
<CURRENT-ASSETS> 29,786,307
<PP&E> 618,836
<DEPRECIATION> 177,232
<TOTAL-ASSETS> 30,227,911
<CURRENT-LIABILITIES> 8,254,136
<BONDS> 0
<COMMON> 21,973,775
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,227,911
<SALES> 18,818,445
<TOTAL-REVENUES> 18,818,445
<CGS> 7,072,040
<TOTAL-COSTS> 7,072,040
<OTHER-EXPENSES> 6,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,500
<INCOME-PRETAX> 7,697,959
<INCOME-TAX> 910,000
<INCOME-CONTINUING> 6,787,959
<DISCONTINUED> 1,216,393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,004,352
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
