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, 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 July 31, 1996, 19,144,780 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 11.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $51,487,681 $ 8,551,919
Marketable securities 4,877,378 1,950,354
Accounts receivable, net 9,462,787 7,830,793
Inventories 8,927,998 11,100,909
Income taxes receivable 1,195,500 0
Prepaid expenses and other current assets 740,354 997,674
Deferred income taxes 563,000 879,000
----------- -----------
Total current assets 77,254,698 31,310,649
Property and equipment, net 733,802 558,999
Patents and trademarks, net 101,642 126,887
Certificate of deposit, restricted 320,000 320,000
Deferred income taxes 24,000 24,000
----------- -----------
$78,434,142 $32,340,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 8,091,436 4,947,193
Accrued income taxes 0 508,000
----------- -----------
Total current liabilities 8,091,436 5,455,193
----------- -----------
Stockholders' equity:
Common stock - $.01 par value; authorized
50,000,000 shares; issued and
outstanding, 19,144,780 shares at June 30, 1996
and 17,387,852 shares at December 31, 1995 191,448 173,878
Additional paid-in capital 63,119,820 25,828,434
Retained earnings 7,031,438 883,030
----------- -----------
Total stockholders' equity 70,342,706 26,885,342
----------- -----------
$78,434,142 $32,340,535
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
<TABLE>
<CAPTION>
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales $21,118,933 $ 18,818,445 $41,939,694 $ 26,277,683
Cost of goods sold 9,146,850 7,072,040 16,798,481 9,922,325
----------- ------------ ----------- ------------
Gross profit 11,972,083 11,746,405 25,141,213 16,355,358
----------- ------------ ----------- ------------
Operating expenses:
Marketing and selling 6,917,420 3,788,389 14,347,517 5,927,748
General and administrative 644,953 377,482 1,382,613 677,821
Product development 339,941 6,869 497,202 7,133
----------- ------------ ----------- ------------
Total operating expenses 7,902,314 4,172,740 16,227,332 6,612,702
----------- ------------ ----------- ------------
Operating income 4,069,769 7,573,665 8,913,881 9,742,656
Interest income 685,702 124,294 840,527 208,469
----------- ------------ ----------- ------------
Income from continuing operations
before income taxes 4,755,471 7,697,959 9,754,408 9,951,125
Income tax provision 1,708,000 910,000 3,606,000 910,000
----------- ------------ ----------- ------------
Income from continuing operations 3,047,471 6,787,959 6,148,408 9,041,125
Loss from operations of discontinued sleep division 0 (9,497) 0 (459,901)
Gain on disposal of discontinued sleep division 0 1,225,890 0 1,225,890
----------- ------------ ----------- ------------
Net income $ 3,047,471 $ 8,004,352 $ 6,148,408 $ 9,807,114
=========== ============ =========== ============
Net income per common and common equivalent share:
From continuing operations $ .15 $ .37 $ .32 $ .50
From discontinued operations 0 .06 0 .04
----------- ------------ ----------- ------------
Net income per share $ .15 $ .43 $ .32 $ .54
=========== ============ =========== ============
Weighted average number of common and
common equivalent shares outstanding 20,295,000 18,444,000 19,440,000 18,312,000
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
<TABLE>
<CAPTION>
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
Operating activities:
Net income $ 6,148,408 $ 9,807,114
Adjustments to reconcile net income to net cash
from operating activities:
Net gain on sale of assets of discontinued operations 0 (1,915,890)
Depreciation and amortization 118,046 123,241
Deferred income taxes 316,000 0
Changes in operating assets and liabilities:
Accounts receivable (1,631,994) (5,531,510)
Inventories 2,172,911 (3,123,227)
Prepaid expenses and other current assets 257,320 (178,136)
Accounts payable and accrued expenses 1,440,743 7,159,069
------------ -----------
Net cash from operating activities 8,821,434 6,340,661
------------ -----------
Investing activities:
Change in marketable securities (2,927,024) (4,837,035)
Payments for purchases of property and equipment (254,332) (249,415)
Payments for patents and trademarks (13,272) (24,822)
------------ -----------
Net cash from investing activities (3,194,628) (5,111,272)
------------ -----------
Financing activities:
Net proceeds from sale of discontinued operations 0 5,000,000
Net proceeds from public stock offering 35,415,176 0
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 2,931 0
Proceeds from the exercise of stock options 1,890,849 960,126
------------ -----------
Net cash from financing activities 37,308,956 5,960,126
------------ -----------
Net change in cash and cash equivalents 42,935,762 7,189,515
Cash and cash equivalents:
Beginning of period 8,551,919 2,051,957
------------ -----------
End of period $ 51,487,681 $ 9,241,472
============ ===========
</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, 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. 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 Company intends to use
the net proceeds 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.
2. The Company's $1.25 million bank line of credit expired on June 30,
1996 and was not renewed based on available cash, cash equivlaents and
marketable securities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's current revenues are derived primarily 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,
temporarily relieve nasal congestion and temporarily relieve breathing
difficulties due to a deviated nasal septum. The Company also has entered into
several agreements to market or license certain new medical consumer products
that are in various stages of evaluation, testing and marketing. 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 $21.1 million for the second quarter of 1996 from $18.8
million for the same period of 1995 and were $41.9 million for the first six
months of 1996 compared to $26.3 million for the same period of 1995. During the
first quarter of 1995, a rapid increase in demand for the product resulted in
the Company being unable to avoid large back orders and out of stock situations.
As a result, net sales for the second quarter of 1995 included approximately $7
million of back orders received in the prior quarter. International sales were
$8.5 million for the second quarter of 1996 and were $11.3 million for the first
six months 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.
Breathe Right sales increased in 1996 in part as a result of increased
advertising, particularly national television and radio, and the commencement of
international sales. Unlike sales for the first six months of 1995, which
reflected an increase in inventory levels at existing and new retail outlets,
domestic sales during the first six months of 1996 approximated off the shelf
movement at retail due to increased consumer demand. Based on independent
research data, the Company believes that domestic off-the-shelf movement of
product at retail for the second quarter of 1996 was more than twice that of the
same period of 1995.
Gross profit was $12.0 million for the second quarter of 1996 compared to $11.7
million for the same period of 1995 and was $25.1 million for the first six
months of 1996 compared to $16.4 million for the same period of 1995. Gross
profit as a percentage of net sales was 56.7% for the second quarter of 1996
compared to 62.4% for the same period of 1995 and was 60.0% for the first six
months of 1996 compared to 62.2% for the same period of 1995. The lower gross
profit in 1996 was due to the higher level of international sales in the second
quarter and first six months 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 $6.9 million for the second quarter of 1996
compared to $3.8 million for the same period of 1995 and were $14.3 million for
the first six months of 1996 compared to $5.9 million for the same period of
1995. This increase resulted primarily from marketing expenses associated with
national television and radio advertising. The Company had reduced advertising
expenses in the second quarter of 1995 due to the backorder and retail
out-of-stock situation.
General and administrative expenses were $645,000 for the second quarter of 1996
compared to $377,000 for the same period of 1995 and were $1.4 million for the
first six months of 1996 compared to $678,000 for the same period 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 $340,000 for the second quarter of 1996
compared to $7,000 for the same period of 1995 and were $497,000 for the first
six months of 1996 compared to $7,000 for the same period of 1995. This increase
resulted from costs related to evaluation and testing of potential new products.
Interest income was $686,000 for the second quarter of 1996 compared to $124,000
for the same period of 1995 and was $841,000 for the first six months of 1996
compared to $208,000 for the same period of 1995. The increase in interest
income reflected investment of net proceeds from the public offering of common
stock completed in the second quarter of 1996.
Income before income taxes for the second quarter of 1996 was $4.8 million
compared to $7.7 million for the same period of 1995 and was $9.8 million for
the first six months of 1996 compared to $10.0 for the same period of 1995.
Income before income taxes as a percentage of net sales was 22.5% for the second
quarter of 1996 compared to 40.9% for the same period of 1995 and was 23.3% for
the first six months of 1996 compared to 37.9% for the same period of 1995. The
decrease in income before income taxes primarily reflects increased marketing
expenses in 1996.
Income tax expense for the second quarter of 1996 was $1.7 million or 35.9% of
income before income taxes and was $3.6 million or 37.0% for the first six
months of 1996. Income tax expense as a percentage of income before income taxes
for the second quarter of 1996 was lower than the first quarter of 1996 due to
the tax benefit from the implementation of a foreign sales corporation during
the second quarter of 1996. The lower level of income tax expense in 1995 was
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 second quarter of 1996 was $.15 compared to $.37
per share from continuing operations for the same period of 1995 and was $.32
for the first six months of 1996 compared to $.50 for the same period of 1995.
Net income per share from continuing operations would have been $.26 for the
second quarter of 1995 and $.34 for the first six months 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, the
impact seasonality has had on sales of the Breathe Right nasal strip is only
beginning to be determined. The Company believes that approximately 50% of
Breathe Right nasal strip users, use the product for the temporary relief of
nasal congestion. Sales for this application are higher during the fall and
winter seasons because of increased use during the cold season. The Company
expects its net sales to be relatively higher in the first and fourth quarters
Liquidity and Capital Resources:
At June 30, 1996, the Company had cash and cash equivalents and marketable
securities of $56.4 million and working capital of $69.2 million.
The Company provided cash from operations of $8.8 million for the first six
months of 1996 compared with $6.3 million for the same period of 1995. Cash flow
for the first six months of 1996 was primarily from net income plus a decrease
in inventories and an increase in accounts payable and accrued expenses, offset
by an increase in accounts receivable.
The Company purchased $2.9 million of marketable securities in the first six
months of 1996 and property and equipment of $254,000.
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 $35.4
million. The Company intends to use the net proceeds 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 also received
$1.9 million from the exercise of stock options during the first six months of
1996.
The Company believes that its existing funds and funds generated from operations
will be sufficient to support its planned operations for the foreseeable future.
Information included in this Form 10-Q which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "plan," "intend,"
"anticipate," "estimate," or "continue" or the negative thereof or other
variations thereon or comparable terminology constitutes forward-looking
information. The factors set forth below and the other risk factors included in
the Company's Prospectus dated March 29, 1996 constitute cautionary statements
identifying important factors with respect to such forward looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements: (i) the
Company's revenue and profitability is currently reliant on sales of a single
product; (ii) the Company's success will depend, to a large extent, on the
enforceability and comprehensiveness of the patents on the Breathe Right nasal
strip technology; and (iii) the markets in which the Company competes are highly
competitive.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as otherwise noted below, during the second quarter there
were no material legal proceedings instituted against or by the
Company and there were no developments in any material legal
proceedings involving the Company. As described in Item 3, Legal
Proceedings to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, the Company is a defendant in a
lawsuit in which the plaintiff is seeking an undefined amount of
monetary damages from the Company and an order enjoining the
Company from infringing on his patents for a facial cleanser for a
person's nose. On May 17, 1996, the U.S. District Court for the
Northern District of Ohio granted the Company summary judgment on
this lawsuit. On June 12, 1996, the plaintiff appealed the
decision to the U.S. Court of Appeals for the Sixth Circuit. The
plaintiff subsequently requested that the appeal be transferred to
the U.S. Court of Appeals for the Federal Circuit. The Company
believes that the suit is completely without merit and has denied
all material allegations in the complaint and is vigorously
defending itself based upon what it considers meritorious
defenses.
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
On April 24, 1996, CNS, Inc. held its annual meeting of
shareholders. Of the 17,436,052 shares of Common Stock eligible to
vote, 16,205,452 were represented at the meeting and shares were
voted on the following matters:
1. The votes cast for the six (6) directors to serve until the
next annual meeting of shareholders were:
Name Votes For Votes Withheld
---- --------- --------------
Daniel E. Cohen, M.D. 16,161,350 44,102
Richard E. Jahnke 16,164,011 41,441
Patrick Delaney 15,565,950 639,502
R. Hunt Greene 15,560,150 645,302
Andrew J. Greenshields 15,539,825 665,627
Richard W. Perkins 16,161,725 43,727
2. The votes cast to approve the appointment of KPMG Peat Marwick
LLP as independent auditors for the fiscal year ending December
31, 1996 were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
16,120,772 23,713 60,967
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K Page
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income Per Share 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: August 9, 1996 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: August 9, 1996 By: /s/ David J. Byrd
David J. Byrd
Vice President of Finance and Chief
Financial Officer
Exhibit No. 11
<TABLE>
<CAPTION>
CNS, INC.
Computation of Net Income per Share of Common Stock
Three months ended June 30, Six months ended June 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME
Income from continuing operations $ 3,047,471 $ 6,787,959 $ 6,148,408 $ 9,041,125
Income from discontinued operations 0 1,216,393 0 765,989
----------- ----------- ----------- -----------
Net income $ 3,047,471 $ 8,004,352 $ 6,148,408 $ 9,807,114
=========== =========== =========== ===========
PRIMARY EARNINGS PER SHARE:
Average number of common and common equivalent
shares outstanding:
Average common shares outstanding 19,106,000 17,129,000 18,258,000 17,087,000
Incentive stock options 667,000 703,000 651,000 610,000
Non qualified stock options 426,000 467,000 407,000 425,000
Warrants 77,000 81,000 76,000 78,000
----------- ----------- ----------- -----------
20,276,000 18,380,000 19,392,000 18,200,000
=========== =========== =========== ===========
Earnings per share from continuing operations $ .15 $ .37 $ .32 $ .50
Earnings per share from discontinued operations .00 .07 .00 .04
----------- ----------- ----------- -----------
Primary earnings per share $ .15 $ .44 $ .32 $ .54
=========== =========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE
Average number of common and common equivalent
shares outstanding:
Average common shares outstanding 19,106,000 17,129,000 18,258,000 17,087,000
Incentive stock options 676,000 739,000 674,000 670,000
Non qualified stock options 435,000 493,000 430,000 471,000
Warrants 78,000 83,000 78,000 84,000
----------- ----------- ----------- -----------
20,295,000 18,444,000 19,440,000 18,312,000
=========== =========== =========== ===========
Earnings per share from continuing operations $ .15 $ .37 $ .32 $ .50
Earnings per share from discontinued operations .00 .06 .00 .04
----------- ----------- ----------- -----------
Fully diluted earnings per share $ .15 $ .43 $ .32 $ .54
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 51,487,681
<SECURITIES> 4,877,378
<RECEIVABLES> 9,462,787
<ALLOWANCES> 0
<INVENTORY> 8,927,998
<CURRENT-ASSETS> 77,254,698
<PP&E> 733,802
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,434,142
<CURRENT-LIABILITIES> 8,091,436
<BONDS> 0
0
0
<COMMON> 191,448
<OTHER-SE> 70,151,258
<TOTAL-LIABILITY-AND-EQUITY> 78,434,142
<SALES> 41,939,694
<TOTAL-REVENUES> 41,939,694
<CGS> 16,798,481
<TOTAL-COSTS> 16,227,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,754,408
<INCOME-TAX> 3,606,000
<INCOME-CONTINUING> 6,148,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,148,408
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
