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, 1996.
[ ] 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, 1996, 19,144,552 shares of common stock were outstanding.
This Form 10-Q consists of 13 pages (including Exhibits). The Index to Exhibits
is set forth on page 9.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,631,100 $ 8,551,919
Marketable securities 6,827,732 1,950,354
Accounts receivable, net 9,845,241 7,830,793
Inventories 7,634,652 11,100,909
Prepaid expenses and other current assets 1,150,397 997,674
Deferred income taxes 563,000 879,000
----------- -----------
Total current assets 36,652,122 31,310,649
Property and equipment, net 664,297 558,999
Patents and trademarks, net 121,454 126,887
Certificate of deposit, restricted 320,000 320,000
Deferred income taxes 24,000 24,000
----------- -----------
$37,781,873 $32,340,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 5,641,445 4,947,193
Accrued income taxes 1,385,000 508,000
----------- -----------
Total current liabilities 7,026,445 5,455,193
----------- -----------
Stockholders' equity:
Common stock - $.01 par value:
Authorized 50,000,000 shares; issued and outstanding,
17,515,552 shares at March 31, 1996 and 17,387,852
shares at December 31, 1995 175,156 173,878
Additional paid-in capital 26,596,305 25,828,434
Retained earnings 3,983,967 883,030
----------- -----------
Total stockholders' equity 30,755,428 26,885,342
----------- -----------
$37,781,873 $32,340,535
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 20,820,761 $ 7,459,238
Cost of goods sold 7,651,631 2,850,285
------------ ------------
Gross profit 13,169,130 4,608,953
------------ ------------
Operating expenses:
Marketing and selling 7,430,097 2,139,359
General and administrative 737,660 254,032
Product development 157,261 46,571
------------ ------------
Total operating expenses 8,325,018 2,439,962
------------ ------------
Operating income 4,844,112 2,168,991
Interest income 154,825 84,175
------------ ------------
Income from continuing operations before income taxes 4,998,937 2,253,166
Income tax provision 1,898,000 --
------------ ------------
Income from continuing operations 3,100,937 2,253,166
Loss from operations of discontinued sleep division -- 450,404
------------ ------------
Net income $ 3,100,937 $ 1,802,762
============ ============
Net income per common and common equivalent share:
From continuing operations $ .17 $ .12
From discontinued operations -- (.02)
------------ ------------
Net income per share $ .17 $ .10
============ ============
Weighted average number of common and
common equivalent shares outstanding 18,706,000 18,174,000
============ ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 3,100,937 $ 1,802,762
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 54,617 54,797
Deferred income taxes 316,000 --
Changes in operating assets and liabilities:
Accounts receivable (2,014,448) (3,028,570)
Inventories 3,466,257 415,086
Prepaid expenses and other current assets (152,723) 122,893
Net assets of discontinued operations -- 49,653
Accounts payable and accrued expenses 1,571,252 2,241,245
------------ ------------
Net cash from operating activities 6,341,892 1,657,866
------------ ------------
Investing activities:
Change in marketable securities (4,877,378) 1,040,533
Payments for purchases of property and equipment (141,210) (58,757)
Payments for patents and trademarks (13,272) (19,671)
------------ ------------
Net cash from investing activities (5,031,860) 962,105
------------ ------------
Financing activities:
Proceeds from the exercise of stock options 769,149 41,824
------------ ------------
Net cash from financing activities 769,149 41,824
------------ ------------
Net change in cash and cash equivalents 2,079,181 2,661,795
Cash and cash equivalents:
Beginning of period 8,551,919 2,051,957
------------ ------------
End of period $ 10,631,100 $ 4,713,752
============ ============
</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 March 31, 1996 and 1995
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, 1995, and reference is hereby made to
that report for detailed information on accounting policies.
1. The Company has a $1.25 million bank line of credit. Borrowings are due
on demand, bear interest at 1% over a defined base, are secured by
substantially all assets of the Company and are subject to certain
restrictive covenants. Borrowings are limited to 80% of eligible
accounts receivable. There were no borrowings against this line of
credit as of March 31, 1996. The line of credit expires on June 30,
1996.
2. During April 1996, the Company completed a public offering of 1,725,000
shares of common stock. Of these shares, 1,525,000 shares were sold by
the Company and 200,000 shares by selling shareholders. Net proceeds to
the Company were approximately $35 million. The primary use of the net
proceeds will be to provide working capital for marketing , advertising
and promotion expenses; to finance the purchase and construction of
equipment, plant and machinery to develop certain supplementary
in-house manufacturing capability; to expand and upgrade management
information systems; and for other general corporate purposes.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's current revenues are derived from the manufacture and sale of the
Breathe Right nasal strip, which is a nonprescription disposable device that can
reduce or eliminate snoring by improving nasal breathing and temporarily relieve
nasal congestion. The Company also has entered into several agreements to market
or license certain new medical consumer products that are in various stages of
evaluation and testing. In 1995, the Company divested itself of all the assets
of its sleep disorder diagnostic products division. Unless otherwise noted, the
following discussion of financial condition and results of operations relates
only to continuing operations of the Company.
Results of Operations:
Net sales increased to $20.8 million for the first quarter of 1996 from $7.5
million for the same quarter of 1995. Breathe Right sales increased in part as a
result of increased advertising, particularly national television and radio.
Unlike sales for the first quarter of 1995, which reflected an increase in
inventory levels at existing and new retail outlets, sales during the first
quarter of 1996 paralleled off the shelf movement at retail due to increased
consumer demand. International sales were $2.8 million for the first quarter of
1996, which represented primarily initial inventory purchases by 3M, the
Company's international distributor and initial stocking of inventory at
international retail outlets in certain countries.
Gross profit was $13.2 million for the first quarter of 1996 compared to $4.6
million for the same quarter of 1995. Gross profit as a percentage of net sales,
improved to 63.2% for the first quarter of 1996 compared to 61.8% for the same
quarter of 1995 as a result of the efficiencies realized from the higher level
of Breathe Right nasal strip sales. Gross profit as a percentage of net sales
was lower than the fourth quarter of 1995 level of 65.9% due to the higher level
of international sales in the first quarter of 1996. International sales to 3M
are at a lower gross profit margin than domestic sales, because 3M is
responsible for substantially all of the operating expenses and a portion of the
packaging costs of the product.
Marketing and selling expenses were $7.4 million for the first quarter of 1996
compared to $2.1 million for the same quarter of 1995. This increase resulted
primarily from marketing expenses associated with national television and radio
advertising.
General and administrative expenses were $738,000 for the first quarter of 1996
compared to $254,000 for the same quarter of 1995. This increase resulted from
additional personnel and systems required to support growth of the Breathe Right
nasal strip business.
Product development expenses were $157,000 for the first quarter of 1996
compared to $47,000 for the same quarter of 1995. This increase resulted from
costs related to evaluation and testing of potential new products.
Interest income was $155,000 for the first quarter of 1996 compared to $84,000
for the same quarter of 1995, reflecting increased funds available for
investment.
Income before income taxes for the first quarter of 1996 increased to $5.0
million compared to $2.3 million for the same quarter of 1995. Income before
income taxes as a percentage of net sales was 24.0% for the first quarter of
1996 compared to 30.2% for the same quarter of 1995, due to increased marketing
expenses in the first quarter of 1996.
Income tax expense for the first quarter of 1996 was $1.9 million or 38.0% of
income before income taxes. There was no income tax expense in the first quarter
of 1995 due to the utilization of net operating loss carry forwards. There are
no net operating loss carry forwards available for 1996 or future years.
Net income per share for the first quarter of 1996 was $.17 compared to $.12 per
share from continuing operations for the same period of 1995. Net income per
share from continuing operations would have been $.08 for the same quarter of
1995 on a fully taxed basis.
Seasonality
The Company began marketing the Breathe Right nasal strip on a broad scale in
September 1994. Given the short time frame since introduction of the Breathe
Right nasal strip and the rapid revenue growth experienced by the Company, it is
difficult to ascertain what, if any, impact seasonality has had on sales of the
Breathe Right nasal strip. The Company believes that sales of the product for
the temporary relief of nasal congestion may be higher during the fall and
winter seasons because of increased use during the cold season. If such
seasonality occurs, the Company expects its net sales and operating income to be
relatively higher in the first and fourth quarters. Accordingly, the Company is
unable to predict the extent to which its business will be affected by
seasonality.
Liquidity and Capital Resources:
At March 31, 1996, the Company had cash and cash equivalents and marketable
securities of $17.5 million, working capital of $29.6 million and a $1.25
million line of credit with a bank, subject to certain borrowing base
restrictions
The Company provided cash from operations of $6.3 million for the first quarter
of 1996 compared with $1.7 million for the same quarter of 1995. The improved
cash flow was primarily from an increase in net income, a decrease in
inventories and an increase in accounts payable and accrued expenses, offset by
an increase in accounts receivable.
The Company purchased $4.9 million of marketable securities in the first quarter
of 1996 and property and equipment of $141,000.
The Company received $769,000 during the first quarter of 1996 from the exercise
of stock options.
At March 31, 1996, the Company had a $1.25 million bank line of credit. There
were no borrowings against this line of credit as of March 31, 1996. The line of
credit expires on June 30, 1996.
During April 1996, the Company completed a public offering of 1,725,000 shares
of common stock. Of these shares, 1,525,000 shares were sold by the Company and
200,000 shares by selling shareholders. Net proceeds to the Company were
approximately $35 million. The primary use of the net proceeds will be to
provide working capital for marketing, advertising and promotion expenses; to
finance the purchase and construction of equipment, plant and machinery to
develop certain supplementary in-house manufacturing capability; to expand and
upgrade management information systems; and for other general corporate
purposes.
The Company believes that its existing funds and funds generated from operations
will be sufficient to support its planned operations for the foreseeable future.
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
On January 11, 1996, the Company issued a press release (attached
hereto as Exhibit 99.1) reporting that the Company had entered into an
agreement with LecTec Corporation under which the Company will
private-label and market LecTec's analgesic pain patch in the U.S. and
Canada
On March 5, 1996, the Company issued a press release (attached hereto
as Exhibit 99.2) reporting that the U.S. Food and Drug Administration
has cleared the Company's Breathe Right nasal strip for marketing with
a new indication for use of the strip for the temporary relief of nasal
congestion and stuffy nose.
Item 6. Exhibits and Reports on Form 8-K Page
-------------------------------- ----
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income Per Share 11
Exhibit No. 99.1, Press Release - LecTec Agreement 12
Exhibit No. 99.2, Press Release - FDA 13
Exhibit No. 27, Financial Data Schedule
(b) Reports on Form 8-K
None
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 10, 1996 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: May 10, 1996 By: /s/ David J. Byrd
David J. Byrd
Vice President of Finance and Chief
Financial Officer
Exhibit No. 11
CNS, INC.
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
Three months ended March 31,
---------------------------
1996 1995
------------ ------------
NET INCOME
Income from continuing operations $ 3,100,937 $ 2,253,166
Loss from discontinued operations 0 (450,404)
------------ ------------
Net income $ 3,100,937 $ 1,802,762
============ ============
PRIMARY EARNINGS PER SHARE:
Average number of common and common equivalent
shares outstanding:
Average common shares outstanding 17,446,000 17,057,000
Incentive stock options 709,000 461,000
Non qualified stock options 399,000 257,000
Warrants 75,000 147,000
------------ ------------
18,629,000 17,922,000
============ ============
Earnings per share from continuing operations $ .17 $ .13
Loss per share from discontinued operations .00 (.03)
------------ ------------
Primary earnings per share $ .17 $ .10
============ ============
FULLY DILUTED EARNINGS PER SHARE
Average number of common and common
equivalent shares outstanding:
Average common shares outstanding 17,446,000 17,057,000
Incentive stock options 756,000 595,000
Non qualified stock options 426,000 328,000
Warrants 78,000 194,000
------------ ------------
18,706,000 18,174,000
============ ============
Earnings per share from continuing operations $ .17 $ .12
Loss per share from discontinued operations .00 (.02)
------------ ------------
Fully diluted earnings per share $ .17 $ .10
============ ============
EXHIBIT - NO. - 99.1
FROM: FOR:
Swenson/Falker Associates Inc. CNS, Inc.
1111 TCF Tower, 121 S. 8th Street 4400 W. 78th Street
Minneapolis, Minn. 55402 Bloomington, Minn. 55435
Contact-Curt Swenson 612/371-0000 Contact-Richard E. Jahnke or
Daniel E. Cohen 612/820-6696
And:
LecTech Corporation
FOR IMMEDIATE RELEASE 10701 Red Circle Dr.
Minnetonka, MN 55343
Contact-Erwin Templin 612/933-2291
CNS AND LECTEC ANNOUNCE DEFINITIVE AGREEMENT
ON MARKETING ALLIANCE FOR ANALGESIC PAIN PATCH
- ----------------------------------------------
MINNEAPOLIS, Jan. 11 -- CNS, Inc., (NASDAQ/NM:CNXS) and LecTec
Corporation (NASDAQ/NM:LECT) have executed a definitive agreement under which
CNS will private-label and market LecTec's analgesic pain patch as a
non-prescription product to consumers in the U.S. and Canada, the companies
announced today.
The patch, which delivers analgesics to the skin, will be marketed for
external application for temporary relief of pain from arthritis, simple
backache and muscular aches and strains. It is an alternative to topical
analgesic rubs and various pain-relief pills and has been cleared for
marketing by the U.S. Food and Drug Administration.
Test marketing is planned to begin during the first half of this year, to
be followed by a national product roll-out.
CNS, based in Minneapolis, designs, manufacturers and markets consumer
products, including the Breathe Right} nasal strip which improves breathing by
reducing nasal airflow resistance.
LecTec, also based in Minneapolis, develops, manufactures and markets
medical products, including diagnostic and monitoring electrodes, conductive
hydrogels, medical tape and a growing range of therapeutic products.
# # # #
01/11/96
EXHIBIT - NO. - 99.2
FROM: FOR:
Swenson/Falker Associates Inc. CNS, Inc.
1111 TCF Tower, 121 S. 8th Street 4400 W. 78th St.
Minneapolis, Minn. 55402 Bloomington, Minn. 55435
Contact-Curt Swenson 612/371-0000 Contact- Richard E. Jahnke or
Daniel E. Cohen
612/820-6696
FOR IMMEDIATE RELEASE
CNS, INC., GETS FDA CLEARANCE TO MARKET BREATHE RIGHT(R) STRIPS
FOR TEMPORARY RELIEF OF NASAL CONGESTION AND STUFFY NOSE
- ------------------------------------------------------------
MINNEAPOLIS, March 5 -- CNS, Inc., (NASDAQ/NM:CNXS) today announced that
the U.S. Food and Drug Administration (FDA) has given it clearance to market
Breathe Right(R) nasal strips for the temporary relief of nasal congestion and
stuffy nose. The company had previously received clearance (in November 1995) to
market the product for the reduction or elimination of snoring by improving
nasal breathing.
"This claim should be very helpful to our marketing efforts," said Daniel
E. Cohen, M.D., chairman and chief executive officer. "We can now promote the
product's use in another very large market during the cold and allergy seasons.
We believe that the drug-free nature of the Breathe Right strip will become a
strong motivating factor for many consumers to purchase the product instead of
using medications."
Richard E. Jahnke, president and chief operating officer, said the company
plans to continue to advertise the product primarily as a treatment for snoring
during the next six months. "Advertising that emphasizes use of Breathe Right
strips for the relief of nasal congestion is currently planned to begin early in
the fall of 1996," Jahnke said. "That will coincide with the onset of the fall
allergy season, back-to-school colds and the beginning of the NFL season, which
further illustrates and reinforces the breathing application of the product."
CNS, based in Minneapolis, designs, manufactures and markets consumer
products, including the Breathe Right nasal strip. The Breathe Right strip
improves breathing by reducing nasal airflow resistance. It can be effective in
eliminating or reducing snoring, and for the temporary relief of nasal
congestion and stuffy nose.
# # # #
03/05/96
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,631,100
<SECURITIES> 6,827,732
<RECEIVABLES> 9,845,241
<ALLOWANCES> 0
<INVENTORY> 7,634,652
<CURRENT-ASSETS> 36,652,122
<PP&E> 664,297
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,781,873
<CURRENT-LIABILITIES> 7,026,445
<BONDS> 0
0
0
<COMMON> 175,156
<OTHER-SE> 30,580,272
<TOTAL-LIABILITY-AND-EQUITY> 37,781,873
<SALES> 20,820,761
<TOTAL-REVENUES> 20,820,761
<CGS> 7,651,631
<TOTAL-COSTS> 8,325,018
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,998,937
<INCOME-TAX> 1,898,000
<INCOME-CONTINUING> 3,100,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,100,937
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
