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, 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 July 31, 1997, 19,294,570 shares of common stock were outstanding.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1997 1996
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,348,587 $12,109,150
Marketable securities 61,276,033 50,339,193
Accounts receivable, net 6,966,323 14,665,731
Inventories 9,983,773 8,314,826
Prepaid expenses and other current assets 2,928,333 1,647,055
Deferred income taxes 961,000 961,000
----------- -----------
Total current assets 89,464,049 88,036,955
Property and equipment, net 1,375,701 839,415
Patents and trademarks, net 1,356,180 192,633
Certificate of deposit, restricted 349,814 340,064
----------- -----------
$92,545,744 $89,409,067
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 8,037,192 8,314,627
Accrued income taxes 579,533 1,319,533
----------- -----------
Total current liabilities 8,616,725 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, 19,277,570 shares at June 30, 1997
and 19,145,445 shares at December 31, 1996 192,776 191,454
Additional paid-in capital 63,395,763 63,177,939
Retained earnings 20,340,480 16,405,514
----------- -----------
Total stockholders' equity 83,929,019 79,774,907
----------- -----------
$92,545,744 $89,409,067
=========== ===========
The accompanying notes are an integral
part of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $13,593,309 $21,118,933 $32,988,245 $41,939,694
Cost of goods sold 4,456,161 9,146,850 10,701,364 16,798,481
----------- ----------- ----------- -----------
Gross profit 9,137,148 11,972,083 22,286,881 25,141,213
----------- ----------- ----------- -----------
Operating expenses:
Marketing and selling 4,899,604 6,917,420 16,024,019 14,347,517
General and administrative 811,766 644,953 1,574,118 1,382,613
Product development 288,930 339,941 490,790 497,202
----------- ----------- ----------- -----------
Total operating expenses 6,000,300 7,902,314 18,088,927 16,227,332
----------- ----------- ----------- -----------
Operating income 3,136,848 4,069,769 4,197,954 8,913,881
Interest income 776,625 685,702 1,487,012 840,527
----------- ----------- ----------- -----------
Income before income taxes 3,913,473 4,755,471 5,684,966 9,754,408
Income tax provision 1,300,000 1,708,000 1,750,000 3,606,000
----------- ----------- ----------- -----------
Net income $ 2,613,473 $ 3,047,471 $ 3,934,966 $ 6,148,408
=========== =========== =========== ===========
Net income per common and
common equivalent share $ .13 $ .15 $ .20 $ .32
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 19,979,000 20,295,000 20,022,000 19,440,000
=========== =========== =========== ===========
The accompanying notes are an integral
part of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
------------------------------
1997 1996
------------ ------------
Operating activities:
Net income $ 3,934,966 $ 6,148,408
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 216,632 118,046
Deferred income taxes 0 316,000
Changes in operating assets and liabilities:
Accounts receivable 7,699,408 (1,631,994)
Inventories (1,668,947) 2,172,911
Prepaid expenses and other current assets (1,281,278) 257,320
Accounts payable and accrued expenses (1,017,435) 1,440,743
------------ ------------
Net cash from operating activities 7,883,346 8,821,434
------------ ------------
Investing activities:
Change in marketable securities (10,936,840) 941,790
Payments for purchases of property and equipment (643,088) (254,332)
Payments for patents and trademarks (1,273,377) (13,272)
Purchase of certificate of deposit, restricted (9,750) 0
------------ ------------
Net cash from investing activities (12,863,055) 674,186
------------ ------------
Financing activities:
Net proceeds from public stock offering 0 35,415,176
Proceeds from issuance of common stock
under Employee Stock Purchase Plan 1,322 2,931
Proceeds from the exercise of stock options 217,824 1,890,849
------------ ------------
Net cash from financing activities 219,146 37,308,956
------------ ------------
Net change in cash and cash equivalents (4,760,563) 46,804,576
Cash and cash equivalents:
Beginning of period 12,109,150 2,593,113
------------ ------------
End of period $ 7,348,587 $ 49,397,689
============ ============
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, 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 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.
Results of Operations:
Net sales were $13.6 million for the second quarter of 1997 compared to $21.1
million for the same quarter of 1996 and were $33.0 million for the first six
months of 1997 compared to $41.9 million for the same period of 1996. Domestic
sales were $12.6 million for the second quarter of 1997, the same as the second
quarter of 1996. During the second quarter of 1997, domestic retail sell-through
of Breathe Right nasal strips was estimated to be approximately 6% higher than
the second quarter of 1996. The Company believes the major contributor to this
increase was growth in repeat use of the product. In addition to this retail
sell-through, the Company believes that a substantial amount of new trial was
also generated by sample packages of Breathe Right strips included in the
promotion with Tylenol PM, which is not reported in the sell-through data. The
Company's consumer awareness study shows that approximately 1.2 million
households first tried the product during the quarter, an increase of 50% over
the new trial generated in the second quarter of 1996.
Domestic sales for the first six months of 1997 were $29.5 compared to $30.6
million for the same period of 1996. This decline was primarily a result of
decreases in inventory levels at retail outlets during the first quarter of
1997. For the first six months of 1997 domestic retail sell-through of Breathe
Right nasal strips was estimated to be approximately 11% higher than the same
period of 1996.
International sales were $1.0 million for the second quarter of 1997 compared to
$8.5 million for the same quarter of 1996 and were $3.5 million for the first
six months of 1997 compared to $11.3 million for the same period 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 believe international sales for 1997 will be as great as 1996.
Gross profit was $9.1 million or 67.2% of net sales for the second quarter of
1997 compared to $12.0 million or 56.7% for the same quarter of 1996 and was
$22.3 million or 67.6% for the first six months of 1997 compared to $25.1
million or 60.0% for the same period of 1996. The higher gross profit percentage
was primarily due to lower manufacturing costs resulting from the Company
bringing a portion of the packaging operation in-house and the lower level of
international sales in the second 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 $4.9 million for the second quarter of 1997
compared to $6.9 million for the same quarter of 1996 and were $16.0 million for
the first six months of 1997 compared to $14.3 million for the same period in
1996. The Company's strategy for 1997 is to keep advertising relatively light
during the second and third quarters with higher levels of advertising during
the first and fourth quarter cold seasons.
General and administrative expenses were $812,000 for the second quarter of 1997
compared $645,000 for the same quarter of 1996 and were $1.6 million for the
first six months of 1997 compared to $1.4 million for the same period in 1996.
This increase was primarily due to expenses associated with patent litigation.
Product development expenses were $289,000 for the second quarter of 1997
compared to $340,000 for the same quarter of 1996 and were $491,000 for the
first six months of 1997 comparable to $497,000 for the same period in 1996.
Interest income was $777,000 for the second quarter of 1997 compared to $686,000
for the same quarter of 1996 and was $1.5 million for the first six months of
1997 compared to $840,000 for the same period in 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 tax expense for the second quarter of 1997 was $1.3 million or 33.2% of
income before income taxes compared to $1.7 million or 35.9% for the same
quarter of 1996 and was $1.7 million or 30.8% and for the first six months of
1997 compared to $3.6 million or 37.0% for the same period of 1996. The lower
effective income tax rate was due primarily to the higher level of tax exempt
interest income as a percentage of income before income taxes.
Net income for the second quarter of 1997 was $2.6 million or $.13 per share
compared to $3.0 million or $.15 per share for the same quarter of 1996 and was
$3.9 million or $.20 per share for the first six months of 1997 compared to $6.1
million or $.32 per share for the same period of 1996. The lower net income was
due primarily to lower international sales. Net income increased to 19.2% of net
sales for the second quarter of 1997 compared to 14.4% for the same quarter of
1996 and was 11.9% for the first six months of 1997 compared to 14.7% for the
same period of 1996.
Seasonality
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.
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 quarter of 1997 and the
first and fourth quarters of 1996.
Liquidity and Capital Resources:
At June 30, 1997, the Company had cash and cash equivalents and marketable
securities of $68.6 million and working capital of $80.8 million.
The Company provided cash from operations of $7.9 million for the first six
months of 1997 compared with $8.8 million for the same period of 1996. The
reduced cash flow was due primarily to a decrease in net income offset by a
decrease net operating assets and liabilities.
The Company invested $10.9 million in marketable securities, $1.3 million in
product patent rights and $643,000 in property and equipment in the first six
months of 1997.
The Company received $218,000 during the first six months 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. No shares have
been purchased as of June 30, 1997.
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 (see Item 3, Legal Proceedings in the Company's Form 10-K for
the year ended December 31, 1996 and Item 5, Other Information in this Form
10-Q); (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 suit is still in
the discovery stage and is impossible to comprehensively assess. The
Company believes that it does not infringe any valid patent claims.
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 23, 1997, CNS, Inc. held its annual meeting of shareholders.
Of the 19,256,243 shares of Common Stock eligible to vote, 15,982,949
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. 15,802,938 180,011
Richard E. Jahnke 15,702,760 280,189
Patrick Delaney 15,801,416 181,533
R. Hunt Greene 15,799,956 182,993
Andrew J. Greenshields 15,796,555 186,394
Richard W. Perkins 15,801,247 181,702
2. The votes cast to approve amendments to the Company's 1994 Stock
Plan:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
15,083,036 551,522 159,235
3. The votes cast to approve the appointment of KPMG Peat Marwick LLP
as independent auditors for the fiscal year ending December 31, 1997
were:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
15,853,402 35,662 93,885
Item 5. Other Information
The Company issued a press release on July 17, 1997 concerning a
foreign reference to a nasal dilator. In relevant part the press
release read as follows:
The company also announced today that it has become aware of a
foreign reference to a nasal dilator, not commercially
available, that will result in narrower protection in the
future from the patents licensed by CNS for its Breathe Right
nasal strips. The company said it is planning to file
proceedings in the U.S. Patent and Trademark office to
consider the effect of the reference. The company's patent
counsel has advised that the company will continue to own
exclusive and enforceable patent protection for the Breathe
Right strip.
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: August 12, 1997 By: /s/ Richard E. Jahnke
--------------------------- --------------------------
Richard E. Jahnke
President & Chief Operating Officer
Date: August 12, 1997 By: /s/ David J. Byrd
--------------------------- ----------------------
David J. Byrd
Vice President of Finance and Chief
Financial Officer