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, 1997.
[ ] 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, 1997, 19,276,643 shares of common stock were outstanding.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,490,041 $12,109,150
Marketable securities 50,890,907 50,339,193
Accounts receivable, net 10,796,643 14,665,731
Inventories 10,099,533 8,314,826
Prepaid expenses and other current assets 1,687,396 1,647,055
Deferred income taxes 961,000 961,000
----------- -----------
Total current assets 85,925,520 88,036,955
Property and equipment, net 1,139,137 839,415
Patents and trademarks, net 1,367,163 192,633
Certificate of deposit, restricted 340,064 340,064
=========== ===========
$88,771,884 $89,409,067
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 7,033,996 8,314,627
Accrued income taxes 429,533 1,319,533
----------- -----------
Total current liabilities 7,463,529 9,634,160
----------- -----------
Stockholders' equity:
Preferred stock - authorized 8,483,589 shares;
none issued or outstanding 0 0
Common stock - $.01 par value; authorized 50,000,000 shares;
issued and outstanding, 19,276,643 shares at March 31, 1997
and 19,145,445 shares at December 31, 1996 192,766 191,454
Additional paid-in capital 63,388,582 63,177,939
Retained earnings 17,727,007 16,405,514
----------- -----------
Total stockholders' equity 81,308,355 79,774,907
----------- -----------
$88,771,884 $89,409,067
=========== ===========
The accompanying notes are an integral part
of the condensed financial statements.
</TABLE>
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
Net sales $19,394,936 $20,820,761
Cost of goods sold 6,245,203 7,651,631
----------- -----------
Gross profit 13,149,733 13,169,130
----------- -----------
Operating expenses:
Marketing and selling 11,124,415 7,430,097
General and administrative 762,352 737,660
Product development 201,860 157,261
----------- -----------
Total operating expenses 12,088,627 8,325,018
----------- -----------
Operating income 1,061,106 4,844,112
Interest income 710,387 154,825
----------- -----------
Income before income taxes 1,771,493 4,998,937
Income tax provision 450,000 1,898,000
----------- -----------
Net income $ 1,321,493 $ 3,100,937
=========== ===========
Net income per common and common equivalent share $ .07 $ .17
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 20,044,000 18,706,000
=========== ===========
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,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 1,321,493 $ 3,100,937
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 76,200 54,617
Deferred income taxes 0 316,000
Changes in operating assets and liabilities:
Accounts receivable 3,869,088 (2,014,448)
Inventories (1,784,707) 3,466,257
Prepaid expenses and other current assets (40,341) (152,723)
Accounts payable and accrued expenses (2,170,631) 1,571,252
------------ ------------
Net cash from operating activities 1,271,102 6,341,892
------------ ------------
Investing activities:
Change in marketable securities (551,714) (2,953,787)
Payments for purchases of property and equipment (350,452) (141,210)
Payments for patents and trademarks (1,200,000) (13,272)
------------ ------------
Net cash from investing activities (2,102,166) (3,108,269)
------------ ------------
Financing activities:
Proceeds from the exercise of stock options 211,955 769,149
------------ ------------
Net cash from financing activities 211,955 769,149
------------ ------------
Net change in cash and cash equivalents (619,109) 4,002,772
Cash and cash equivalents:
Beginning of period 12,109,150 2,593,113
============ ============
End of period $ 11,490,041 $ 6,595,885
============ ============
The accompanying notes are an integral part
of the condensed financial statements.
</TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of March 31, 1997 and 1996
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, 1996, and reference is hereby made to
that report for detailed information on accounting policies.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's 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 and temporarily
relieve nasal congestion and temporarily relieve breathing difficulties due to a
deviated nasal septum. During the first quarter of 1997 the Company began the
national rollout of TheraPatch, an external analgesic patch designed for the
temporary relief of pain from arthritis, simple backaches and muscular aches and
strains. 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. The latest clinical studies on the Pollen Guard Gel
product have not shown sufficient efficacy to warrant further investment to
commercialize the product.
Results of Operations:
Net sales were $19.4 million for the first quarter of 1997 compared to $20.8
million for the same quarter of 1996. Domestic sales decreased to $16.9 million
for the first quarter of 1997 compared to $18.0 million for the same quarter of
1996 primarily as a result of decreases in inventory levels at retail outlets.
During the first quarter of 1997, domestic retail sell-through of Breathe Right
nasal strips was estimated to be approximately 15% higher than the first quarter
of 1996. The major contributor to this increase was growth in repeat use of the
product. Based on our most recent market research, we believe sales for repeat
usage during the first eight weeks of the quarter were approximately twice the
level of the prior year.
International sales were $2.5 million for the first quarter of 1997 compared to
$2.8 million for the same quarter of 1996. International sales for 1996
represented primarily initial inventory purchases by 3M, the Company's
international distributor, and initial stocking of inventory at international
retail outlets in certain countries. As a result, the Company does not expect
that the quarterly international sales patterns for 1997 will be directly
comparable to the quarters of 1996.
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
seasonality of sales as described below, as well as increases and decreases in
purchases by distributors and retailers in anticipation of future demand by
consumers.
Gross profit was $13.1 million for the first quarter of 1997 compared to $13.2
million for the same quarter of 1996. Gross profit as a percentage of net sales,
improved to 67.8% for the first quarter of 1997 compared to 63.3% for the same
quarter of 1996 primarily due to lower manufacturing costs resulting from the
Company bringing a portion of the packaging operation in-house.
Gross profit as a percentage of net sales was higher than the fourth quarter of
1996 level of 65.2% primarily due to the lower level of international sales in
the first quarter of 1997. The Company obtains lower gross profit margins on
international sales because the Company sells product to 3M at a price lower
than its sales price in domestic markets. In connection with these international
sales, 3M is responsible for substantially all of the operating expenses and a
portion of the packaging costs
Marketing and selling expenses were $11.1 million for the first quarter of 1997
compared to $7.4 million for the same quarter of 1996. This increase resulted
primarily from marketing expenses associated with a higher level of national
television and print advertising.
General and administrative expenses were $762,000 for the first quarter of 1997
comparable to $738,000 for the same quarter of 1996.
Product development expenses were $202,000 for the first quarter of 1997
compared to $157,000 for the same quarter of 1996. This increase resulted from
costs related to evaluation and testing of potential new products.
Interest income was $710,000 for the first quarter of 1997 compared to $155,000
for the same quarter of 1996. This increase resulted primarily from investment
of net proceeds from the public offering of common stock completed in the second
quarter of 1996.
Income before income taxes for the first quarter of 1997 was $1.8 million
compared to $5.0 million for the same quarter of 1996. Income before income
taxes as a percentage of net sales was 9.1% for the first quarter of 1997
compared to 24.0% for the same quarter of 1996. This decrease was due primarily
to increased marketing expenses in the first quarter of 1997.
Income tax expense for the first quarter of 1997 was $450,000 or 25.4% of income
before income taxes compared to $1.9 million or 38.0% for the same quarter of
1996. The lower effective income tax rate for the first quarter of 1997 was due
primarily to the higher level of tax exempt interest income as a percentage of
income before income taxes.
Seasonality
The Company believes that approximately 50 percent of Breathe Right nasal strip
users currently use the product for the temporary relief of nasal congestion.
Sales of nasal congestion remedies are higher during the fall and winter seasons
because of increased use during the cold season. For this reason the Company's
domestic net sales were relatively higher in the first and fourth quarters of
1996.
Liquidity and Capital Resources:
At March 31, 1997, the Company had cash and cash equivalents and marketable
securities of $62.4 million and working capital of $78.5 million.
The Company provided cash from operations of $1.3 million for the first quarter
of 1997 compared with $6.3 million for the same quarter of 1996. The reduced
cash flow was primarily from a decrease in net income, an increase in
inventories and a decrease in accounts payable and accrued expenses, offset by a
decrease in accounts receivable.
The Company expended $1.2 million for product patent rights, $552,000 million
for marketable securities and $350,000 for property and equipment in the first
quarter of 1997.
The Company received $212,000 during the first quarter of 1997 from the exercise
of stock options. The Board of Directors has authorized the Company to purchase
from time-to-time up to 1 million shares of its common stock to be used to meet
the Company's obligations under its employee stock ownership plan and stock
option plans, and for possible future acquisitions.
The Company believes that its existing funds and funds generated from operations
will be sufficient to support its planned operations for the foreseeable future.
Forward Looking Statements:
This Form 10-Q contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that 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 comparable terminology.
Factors that could cause actual results to differ from the results discussed in
the forward-looking statements include, but are not limited to: (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 the Company has been sued for patent infringement (see
Item 3, Legal Proceedings in the Company's Form 10-K for the year ended December
31, 1996); (iii) the markets in which the Company competes are highly
competitive; and (iv) the risk factors included in the Company's Prospectus
dated March 29, 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1997, the Company was sued for patent infringement in
U.S. District Court for the Central District of California by
Acutek Adhesive Specialties, Inc. ("Acutek"). Acutek claims to be
an exclusive licensee in the United States Reissue Patent RE.
35,408. The plaintiff seeks compensatory damages, interest, costs
and fees. The Company has counterclaimed for a declaration of
invalidity of the patent asserted by Acutek and for a declaration
that the Company does not infringe the Reissue Patent. The Company
has also filed a claim against Acutek for the false advertising
and related offenses by Acutek related to claims Acutek has made
about its products and patent rights. Earlier, the Company sued
Acutek and Mabco, Inc., a related corporation, for patent
infringement. Upon the Company receiving representations that
those companies had not made, used, or sold products infringing
the patents that protect the Company's Breathe Right nasal strip,
the suit was settled. The Company will defend the current suit
brought against it by Acutek and pursue its counterclaims
vigorously. The Company believes that it does not infringe any
valid patent claims.
In October 1995, an individual commenced a lawsuit against the
Company in U.S. District Court for the Northern District of Ohio
claiming that the Breathe Right nasal strip infringed the
plaintiff's patents relating to a facial cleanser. In May 1996,
the suit was dismissed by the District Court and in June 1996 the
plaintiff filed an appeal to the U.S. Court of Appeals for the
Sixth Circuit. The appeal was transferred to the court of appeals
for the Federal Circuit. In April 1997, the Federal Circuit
affirmed the dismissal of this action. The plaintiff was seeking
an undefined amount of monetary damages from the Company and an
order enjoining the Company from infringing on his patents.
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income Per Share
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 12, 1997 By: /s/ Richard E. Jahnke
--------------------------
Richard E. Jahnke
President & Chief Operating Officer
Date: May 12, 1997 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
(unaudited)
Three months ended March 31,
---------------------------
1997 1996
----------- -----------
NET INCOME
Income from continuing operations $ 1,321,493 $ 3,100,937
Loss from discontinued operations 0 0
----------- -----------
Net income $ 1,321,493 $ 3,100,937
=========== ===========
PRIMARY EARNINGS PER SHARE:
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding 19,205,000 17,446,000
Incentive stock options 520,000 709,000
Non qualified stock options 319,000 399,000
Warrants 0 75,000
----------- -----------
20,044,000 18,629,000
=========== ===========
Earnings per share from continuing operations $ .07 $ .17
Loss per share from discontinued operations .00 .00
----------- -----------
Primary earnings per share $ .07 $ .17
=========== ===========
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common and
common equivalent shares outstanding:
Weighted average common shares outstanding 19,205,000 17,446,000
Incentive stock options 520,000 756,000
Non qualified stock options 319,000 426,000
Warrants 0 78,000
----------- -----------
20,044,000 18,706,000
=========== ===========
Earnings per share from continuing operations $ .07 $ .17
Loss per share from discontinued operations .00 .00
----------- -----------
Fully diluted earnings per share $ .07 $ .17
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,490,041
<SECURITIES> 50,890,907
<RECEIVABLES> 10,796,643
<ALLOWANCES> 0
<INVENTORY> 10,099,533
<CURRENT-ASSETS> 85,925,520
<PP&E> 1,139,137
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,771,884
<CURRENT-LIABILITIES> 7,463,529
<BONDS> 0
0
0
<COMMON> 192,766
<OTHER-SE> 81,115,589
<TOTAL-LIABILITY-AND-EQUITY> 88,771,884
<SALES> 19,394,936
<TOTAL-REVENUES> 19,394,936
<CGS> 6,245,203
<TOTAL-COSTS> 12,088,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,771,493
<INCOME-TAX> 450,000
<INCOME-CONTINUING> 1,321,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,321,493
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
