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 September 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 October 31, 1996, 19,144,780 shares of common stock were outstanding.
This Form 10-Q consists of 11 pages (including Exhibits). The Index to Exhibits
is set forth on page 9.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $10,920,648 $ 8,551,919
Marketable securities 49,981,280 1,950,354
Accounts receivable, net 10,828,412 7,830,793
Inventories 5,764,508 11,100,909
Prepaid expenses and other current assets 1,849,056 997,674
Deferred income taxes 559,000 879,000
----------- -----------
Total current assets 79,902,904 31,310,649
Property and equipment, net 763,799 558,999
Patents and trademarks, net 81,830 126,887
Certificate of deposit, restricted 320,000 320,000
Deferred income taxes 24,000 24,000
----------- -----------
$81,092,533 $32,340,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 6,738,767 4,947,193
Accrued income taxes 66,644 508,000
----------- -----------
Total current liabilities 6,805,411 5,455,193
----------- -----------
Stockholders' equity:
Common stock - $.01 par value; authorized 50,000,000 shares;
issued and outstanding, 19,144,780 shares at September 30, 1996
and 17,387,852 shares at December 31, 1995 191,448 173,878
Additional paid-in capital 63,169,819 25,828,434
Retained earnings 10,925,855 883,030
----------- -----------
Total stockholders' equity 74,287,122 26,885,342
----------- -----------
$81,092,533 $32,340,535
=========== ===========
The accompanying notes are an integral part of
the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $19,375,529 $10,287,980 $61,315,223 $36,565,663
Cost of goods sold 8,000,174 3,512,658 24,798,655 13,434,983
----------- ----------- ----------- -----------
Gross profit 11,375,355 6,775,322 36,516,568 23,130,680
----------- ----------- ----------- -----------
Operating expenses:
Marketing and selling 4,861,910 4,836,659 19,209,070 10,764,407
General and administrative 759,723 638,616 2,142,567 1,316,437
Product development 336,440 3,500 833,768 10,633
----------- ----------- ----------- -----------
Total operating expenses 5,958,073 5,478,775 22,185,405 12,091,477
----------- ----------- ----------- -----------
Operating income 5,417,282 1,296,547 14,331,163 11,039,203
Interest income 696,135 214,000 1,536,662 422,469
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes 6,113,417 1,510,547 15,867,825 11,461,672
Income tax provision 2,219,000 150,000 5,825,000 1,060,000
----------- ----------- ----------- -----------
Income from continuing operations 3,894,417 1,360,547 10,042,825 10,401,672
Loss from operations of discontinued division 0 0 0 (459,901)
Gain on disposal of discontinued division 0 0 0 1,225,890
----------- ----------- ----------- -----------
Net income $ 3,894,417 $ 1,360,547 $10,042,825 $11,167,661
=========== =========== =========== ===========
Net income per common and
common equivalent share:
From continuing operations $ .19 $ .07 $ .51 $ .57
From discontinued operations .00 .00 .00 .04
----------- ----------- ----------- -----------
Net income per share $ .19 $ .07 $ .51 $ .61
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 20,246,000 18,657,000 19,680,000 18,343,000
=========== =========== =========== ===========
The accompanying notes are an integral part of
the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
------------------------------
1996 1995
------------ ------------
Operating activities:
Net income $ 10,042,825 $ 11,167,661
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 185,509 154,544
Deferred income taxes 320,000 0
Changes in operating assets and liabilities:
Accounts receivable (2,997,619) (6,458,044)
Inventories 5,336,401 (7,889,927)
Prepaid expenses and other current assets (851,382) (1,740,933)
Accounts payable and accrued expenses 1,350,218 7,159,888
------------ ------------
Net cash from operating activities 13,385,952 477,299
------------ ------------
Investing activities:
Change in marketable securities (48,030,926) (4,843,195)
Payments for purchases of property and equipment (331,980) (300,092)
Payments for patents and trademarks (13,272) (50,856)
Purchase of certificate of deposit 0 (320,000)
------------ ------------
Net cash from investing activities (48,376,178) (5,514,143)
------------ ------------
Financing activities:
Net proceeds from sale of discontinued operations 0 5,000,000
Net proceeds from public stock offering 35,465,175 0
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 2,931 19,602
Proceeds from the exercise of stock options 1,890,849 999,912
------------ ------------
Net cash from financing activities 37,358,955 6,019,514
------------ ------------
Net change in cash and cash equivalents 2,368,729 982,670
Cash and cash equivalents:
Beginning of period 8,551,919 2,051,957
------------ ------------
End of period $ 10,920,648 $ 3,034,627
============ ============
The accompanying notes are an integral part of
the condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of September 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 $19.4 million for the third quarter of 1996 from $10.3
million for the same period of 1995 and were $61.3 million for the first nine
months of 1996 compared to $36.6 million for the same period of 1995.
International sales were $7.8 million for the third quarter of 1996 and were
$19.1 million for the first nine 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 nine months of 1995, which
reflected an increase in inventory levels at existing and new retail outlets,
domestic sales during the first nine months of 1996 approximated off the shelf
movement at retail due to increased consumer demand. Based on independent
research data reflecting sale of product during four week periods, the Company
believes that domestic off-the-shelf movement of product at retail during 1996
has been approximately twice the level in corresponding periods of 1995.
Gross profit was $11.4 million for the third quarter of 1996 compared to $6.8
million for the same period of 1995 and was $36.5 million for the first nine
months of 1996 compared to $23.1 million for the same period of 1995. Gross
profit as a percentage of net sales was 58.7% for the third quarter of 1996
compared to 65.9% for the same period of 1995 and was 59.6% for the first nine
months of 1996 compared to 63.3% for the same period of 1995. The lower gross
profit in 1996 was due to the higher level of international sales in the third
quarter and first nine 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 international operating expenses and a portion of the
packaging costs of the product. Gross profit as a percentage of net sales for
both domestic and international sales for the third quarter of 1996 was
approximately 2 percentage points higher than the second quarter of 1996 due to
lower costs resulting from the Company bringing a portion of the packaging
operation in-house and increased production levels.
Marketing and selling expenses were $4.9 million for the third quarter of 1996
compared to $4.8 million for the same period of 1996 and were $19.2 million for
the first nine months of 1996 compared to $10.8 million for the same period of
1995. The increase for the nine month period resulted primarily from marketing
expenses associated with national television and radio advertising.
General and administrative expenses were $760,000 for the third quarter of 1996
compared to $639,000 for the same period of 1995 and were $2.1 million for the
first nine months of 1996 compared to $1.3 million for the same period of 1995.
This increase resulted from additional personnel and systems expenses required
to support growth of the Breathe Right nasal strip business.
Product development expenses were $336,000 for the third quarter of 1996
compared to $4,000 for the same period of 1995 and were $834,000 for the first
nine months of 1996 compared to $11,000 for the same period of 1995. This
increase resulted from costs related to evaluation and testing of potential new
products.
Interest income was $696,000 for the third quarter of 1996 compared to $214,000
for the same period of 1995 and was $1.5 million for the first nine months of
1996 compared to $422,000 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 third quarter of 1996 was $6.1 million
compared to $1.5 million for the same period of 1995 and was $15.9 million for
the first nine months of 1996 compared to $11.5 million for the same period of
1995. Income before income taxes as a percentage of net sales was 31.6% for the
third quarter of 1996 compared to 14.7% for the same period of 1995 and was
25.9% for the first nine months of 1996 compared to 31.4% for the same period of
1995. The increase in income before income taxes primarily reflects increased
net sales in 1996.
Income tax expense for the third quarter of 1996 was $2.2 million or 36.3% of
income before income taxes and was $5.8 million or 36.7% for the first nine
months 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 third quarter of 1996 was $.19 compared to $.07 per
share from continuing operations for the same period of 1995 and was $.51 for
the first nine months of 1996 compared to $.57 for the same period of 1995. Net
income per share from continuing operations would have been $.05 for the third
quarter of 1995 and $.39 for the first nine months of 1995 on a fully taxed
basis.
Seasonality
The Company believes that approximately 50% 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. For
this reason the Company expects its net sales to be relatively higher in the
first and fourth quarters.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash and cash equivalents and marketable
securities of $60.9 million and working capital of $73.1 million. The Company
believes that its existing funds and funds generated from operations will be
sufficient to support its planned operations for the foreseeable future.
The Company provided cash from operations of $13.4 million for the first nine
months of 1996 compared with $477,000 for the same period of 1995. Cash flow for
the first nine 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 $48.0 million of marketable securities in the first nine
months of 1996 and property and equipment of $332,000.
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 $35.5
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 nine months of
1996.
Forward Looking Statements
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
There are no new material legal proceedings pending against or by
the Company and there have been no material developments in the
pending legal proceeding previously reported by the Company.
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 of Form 8-K Page
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income Per Share 11
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: November 8, 1996 By: /s/ Richard E. Jahnke
--------------------------- ---------------------------------
Richard E. Jahnke
President & Chief Operating Officer
Date: November 8, 1996 By: /s/ David J. Byrd
--------------------------- ---------------------------------
David J. Byrd
Vice President of Finance and Chief
Financial Officer