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, 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 May 15, 1995, 8,533,528 shares of common stock were outstanding.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,645,629 $ 6,024,366
Accounts receivable 5,245,190 2,390,651
Inventories:
Finished goods 299,490 1,405,406
Work in process 755,414 56,086
Components and subassemblies 1,683,475 1,720,464
Total Inventories 2,738,379 3,181,956
Prepaid expenses 147,810 262,864
TOTAL CURRENT ASSETS 15,777,008 11,859,837
PROPERTY AND EQUIPMENT
less accumulated depreciation of
$761,691 and $719,752,
respectively 560,745 542,906
OTHER ASSETS
Intangible assets
less accumulated amortization of
$65,423 and $50,312,
respectively 135,568 131,008
$ 16,473,321 $ 12,533,751
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
LIABILITIES AND 1995 1994
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,108,036 $ 662,534
Accrued expenses 1,024,662 383,080
Deferred maintenance revenues 289,502 281,602
TOTAL CURRENT LIABILITIES 3,422,200 1,327,216
SHAREHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized 10,000,000 shares;
issued and outstanding,
8,532,928 shares at
March 31, 1995 and
8,520,828 shares at
December 31, 1994. 85,329 85,208
Additional paid-in capital 24,356,494 24,314,791
Accumulated deficit (11,390,702) (13,193,464)
TOTAL SHAREHOLDERS' EQUITY 13,051,121 11,206,535
$ 16,473,321 $ 12,533,751
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
1995 1994
(Unaudited)
Sales $ 9,011,575 $ 2,101,694
Cost of goods sold 3,948,490 1,180,206
Gross profit 5,063,085 921,488
Operating expenses:
Marketing and selling 2,646,540 944,427
General and administrative 514,600 228,182
Research and development 183,358 214,448
Total operating expenses 3,344,498 1,387,057
Operating profit (loss) 1,718,587 (465,569)
Interest income 84,175 326
Interest expense - (2,800)
Net income (loss) $ 1,802,762 $ (468,043)
Net income (loss) per common
& common equivalent share $ .20 $ (.07)
Weighted average number of
common & common equivalent shares 9,086,788 6,601,552
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1995 1994
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 1,802,762 $ (468,043)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 57,050 35,393
Changes in operating assets and
liabilities:
Accounts receivable (2,854,539) (367,570)
Inventories 443,577 20,710
Prepaid expenses 115,054 (49,123)
Accounts payable and accrued expenses 2,094,984 229,716
Net cash provided by (used in)
operating activities 1,658,888 (598,917)
INVESTING ACTIVITIES:
Payments for purchases of property
and equipment (59,778) (54,820)
Payments for intangible assets (19,671) (41,939)
Net cash used in investing activities (79,449) (96,759)
FINANCING ACTIVITIES:
Proceeds from short term borrowing -- 600,000
Proceeds from exercise of stock options 41,824 --
Net cash provided by financing
activitiies 41,824 600,000
Net increase (decrease) in cash and
cash equivalents 1,621,263 (95,676)
Cash and cash equivalents:
Beginning of period 6,024,366 347,224
End of period $ 7,645,929 $ 251,548
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, 1995 were taken
from audited financial statements at that time and the condensed financial
statements as of March 31, 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 condensed balance sheets at March 31, 1995 and at December 31, 1994 were
taken from the audited financial statements at that date.
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 basis. Net income per common share for the three month
period ended March 31, 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 month period ended March
31, 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
March 31, 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 and
50% of eligible sleep products accounts receivable. There were no
borrowings against this line of credit as of March 31, 1995. The
credit expires on March 31, 1996.
3. On May 9, 1995, the Company announced that it has executed a
definitive agreement with Aequitron Medical, Inc. under which
Aequitron will acquire the Company's assets of the sleep disorders
diagnostic business. The transaction is expected to close on or about
June 1, 1995. The sleep diagnostics business had net sales and gross
profits of:
Three months ended
1994 March 31, 1995
---- --------------
Net sales $7,057,875 $1,552,337
Gross profit $3,326,593 $514,132
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Sales for the first quarter of 1995 were $9.0 million, a 329% increase from the
first quarter of 1994 sales of $2.1 million. Sales of the Breathe Right nasal
strip during the first quarter of 1995 were $7.5 million compared to $344,000 in
the first quarter of 1994. The significant increase in Breathe Right nasal strip
sales was due to increased consumer awareness as a result of the use of the
Breathe Right nasal strip by professional athletes in several sports, as well as
the commencement of national consumer advertising in newspapers and magazines
and the expansion of the Company's distribution network in the fourth quarter of
1994 and the first quarter of 1995. The Company believes that Breathe Right
nasal strip sales to wholesalers and retailers represented an expansion of their
inventories as well as a replenishment of product sold to consumers. At March
31, 1995 the Company had unfilled orders in excess of the total amount shipped
during the first quarter. The Company expects that these unfilled orders will be
shipped early in the second quarter of 1995. As a result of the uncertainty
associated with the introduction of a new consumer product and the unanticipated
media exposure of the Breathe Right nasal strip during the NFL playoffs, orders
for the Breathe Right nasal strip in the fourth quarter of 1994 and the first
quarter of 1995 may not necessarily be indicative of future rates of orders of
the product. Foreign sales of the Breathe Right nasal strip were $308,000 for
the first quarter of 1995.
Sales of sleep disorders diagnostic products during the first quarter of 1995
were $1.6 million compared to $1.8 million in the first quarter of 1994. The
decrease was due to a large sale in the first quarter of 1994 of apnea screening
devices, a line of portable devices sold in international markets only. The
Company does not expect any significant short term increase in its sleep
disorders diagnostic product sales.
Gross profit for the first quarter of 1995 was $5.1 million, a 449% increase
from gross profit from 1994 of $921,000. As a percentage of sales, gross profit
was 56.2% for the first quarter of 1995 compared to 43.8% for the first quarter
of 1994. Gross profit from sales of the Breathe Right nasal strip increased to
61.0% from 27.8% as a result of efficiencies realized from the higher level of
Breathe Right nasal strip sales. Gross profit from sales of sleep diagnostic
products in the first quarter of 1995 decreased to 33.1% from 47.0% in the first
quarter of 1994 as a result of a shift in sales to lower margin products. The
Company expects overall gross profit to continue to increase from the
efficiencies realized from an anticipated higher level of Breathe Right nasal
strip sales.
Marketing and selling expenses for the first quarter of 1995 were $2.6 million,
a 180% increase from the first quarter of 1994 marketing and selling expenses of
$944,000. This increase resulted 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. As a percentage of sales, marketing and selling expenses decreased
to 29.4% from 44.9% as a result of the higher level of sales. Marketing and
selling expenses are expected to increase significantly in 1995 as a result of
increased marketing and advertising of the Breathe Right nasal strip.
General and administrative expenses for the first quarter of 1995 were $515,000,
a 126% increase from the first quarter of 1994 general and administrative
expenses of $228,000. This increase primarily reflects earned incentive bonuses
and the addition of administrative personnel to implement systems to control
present and anticipated sales increases. As a percentage of sales, general and
administrative expenses decreased to 5.7% from 10.9% as a result of the higher
level of sales.
Research and development expenses for the first quarter of 1995 were $183,000, a
14.5% decrease from 1994 research and development expenses of $214,000. As a
percentage of sales, research and development decreased to 2.0% in the first
quarter of 1995 from 10.2% in the first quarter of 1994, reflecting primarily an
increased level of sales and, to a lesser extent, a reduction in new research
and development projects. The Company's research and development expenses have
historically been in the Company's sleep disorders diagnostic products business.
The Company expects that future research and development expenses will be lower.
Interest income was $84,000 in the first quarter of 1995 and was negligible in
the first quarter of 1994 reflecting the increased cash available for investment
and higher interest rates during the quarter. Interest expense was minimal in
both periods.
Liquidity and Capital Resources:
At March 31, 1995, the Company had cash and cash equivalents of $7.6 million,
working capital of $12.4 million and a $1.25 million line of credit with a bank,
subject to certain borrowing base restrictions. The Company had total assets at
March 31, 1995 of $16.5 million, an increase of $4.0 million from $12.5 million
at December 31, 1994. The increase primarily reflects the Company's net income
together with the increases in accounts payable and accrued expenses during the
quarter ended March 31, 1995.
The Company generated cash flow from operations of approximately $1.7 million
for the three months ended March 31, 1995 compared with a use of cash of
$599,000 for the three months ended March 31, 1994. Cash provided by operations
was primarily the result of an increase in accounts payable of $1.4 million, an
increase in accrued expenses of $642,000 and a decrease in inventories of
$444,000 offset by an increase in accounts receivable of $2.9 million.
With respect to investing activities, the Company made purchases of property and
equipment totaling $60,000 during the first quarter of 1995 compared to $55,000
in the first quarter of 1994. Capitalized patent and trademark costs were
approximately $20,000 in the first quarter of 1995 compared to $42,000 in the
first quarter of 1994. The Company presently does not have any significant
commitments for capital equipment.
At March 31, 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, 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 and 50% of eligible sleep products accounts receivable.
There were no borrowings against this line of credit as of March 31, 1995. The
credit line expires on March 31, 1996.
In the first quarter of 1995, the Company experienced a substantial increase in
orders of its Breathe Right product and a corresponding inability to have
sufficient quantities of product manufactured to expeditiously fill such orders.
At March 31, 1995, the Company had unfilled orders in excess of the total amount
shipped during the first quarter. The Company expects that these unfilled orders
will be shipped early in the second quarter of 1995.
During the quarter ended March 31, 1995, the Company utilized net operating loss
carryforwards totaling $2,066,000. The remaining net operating loss and credit
carryforwards at March 31, 1995 which are available to reduce income taxes
payable in future years total $9,650,000 and $312,000 respectively, and expire
at various times through 2009.
On May 9, 1995, the Company announced that it has executed a definitive
agreement with Aequitron Medical, Inc. under which Aequitron will acquire the
Company's assets of the sleep disorders diagnostic business. The transaction is
expected to close on or about June 1, 1995.
The Company believes that the proceeds from this transaction, together with 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.
On July 28, 1994, Byron G. Ellingson commenced a lawsuit against
the Company, Bruce Johnson (the inventor of the Breathe Right
device), and Creative Integration and Design, Inc., which is
wholly owned by Johnson and which licenses the Breathe Right
device to the Company (the "Licensor"), in Minnesota State
District Court. The trial is scheduled to begin on August 14,
1995. Ellingson is claiming that he entered into an oral
partnership agreement with Johnson concerning the Breathe Right
device and that the Company tortiously interfered with this
agreement. Ellingson is seeking 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.
The Company has denied all material allegations in Ellingson's
complaint and is vigorously defending itself based upon what it
considers meritorious defenses. In addition, the Company has
interposed a counterclaim against Ellingson seeking monetary
damages for alleged acts of Ellingson in seeking to dissuade
investment in the Company. Under the terms of the License
Agreement, the Company has contractual indemnification rights
against the Licensor. Although the Company believes that this
matter will not have a material adverse effect on the Company
because it has good and sufficient defenses to Ellingson's claims
and because the Company will be indemnified by the Licensor,
there can be no assurance that, in the event an adverse decision
is rendered against the Company, the Licensor will be able to
completely indemnify the Company from all damages.
CNS, Inc. v. Bollinger Industries, Inc. On March 24, 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 an imitation of the Breathe Right nasal strip,
for deceptive trade practices and unfair competition. On April
11, 1995, the Court issued a temporary restraining order
enjoining Bollinger from using certain misleading advertising but
declined to restrain Bollinger from selling its product.
Bollinger has brought a counterclaim against the Company seeking
money damages and alleging that the Company misrepresented to
Bollinger's existing and prospective customers that Bollinger's
product is required to have FDA approval to market its product.
The Company has denied all material allegations in the
counterclaim and will vigorously defend itself based on 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
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits:
No. Description
10.1 Amendment No. 1 to Employment Agreement dated
as of January 1, 1994 between
Richard E. Jahnke and the Company.
10.2 Amendment No. 2 to Employment Agreement
dated as of January 1, 1994 between
Daniel E. Cohen and the Company.
10.3 Loan Agreement with Riverside Bank dated
March 31, 1995.
10.4 Asset Purchase Agreement
10.5 Non-Exclusive Distributorship Agreement
11.0 Calculation of Income (Loss) Per Share.
27.0 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Not Applicable
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 15, 1995 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: May 15, 1995 By: /s/ Ronald D. Cox
Ronald D. Cox
Vice President of Finance