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, 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 October 31, 1997, 18,981,270 shares of common stock were outstanding.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,483,930 $ 12,109,150
Marketable securities 62,106,859 50,339,193
Accounts receivable, net 7,877,679 14,665,731
Inventories 9,485,513 8,314,826
Prepaid expenses and other current assets 3,275,363 1,647,055
Deferred income taxes 1,002,000 961,000
------------ ------------
Total current assets 90,231,344 88,036,955
Property and equipment, net 1,687,702 839,415
Patents and trademarks, net 1,292,808 192,633
Certificate of deposit, restricted 349,814 340,064
------------ ------------
$ 93,561,668 $ 89,409,067
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 6,691,407 8,314,627
Accrued income taxes 1,190,533 1,319,533
------------ ------------
Total current liabilities 7,881,940 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, 19,294,570 shares at September 30, 1997
and 19,145,445 shares at December 31, 1996 192,946 191,454
Additional paid-in capital 63,495,718 63,177,939
Treasury shares, at cost; 100,000 shares at September 30, 1997 (907,888) 0
Retained earnings 22,898,952 16,405,514
------------ ------------
Total stockholders' equity 85,679,728 79,774,907
------------ ------------
$ 93,561,668 $ 89,409,067
============ ============
Theaccompanying 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,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $12,642,798 $19,375,529 $45,631,043 $61,315,223
Cost of goods sold 3,896,836 8,000,174 14,598,201 24,798,655
----------- ----------- ----------- -----------
Gross profit 8,745,962 11,375,355 31,032,842 36,516,568
----------- ----------- ----------- -----------
Operating expenses:
Marketing and selling 4,581,778 4,861,910 20,605,798 19,209,070
General and administrative 933,104 759,723 2,507,220 2,142,567
Product development 246,229 336,440 737,019 833,768
----------- ----------- ----------- -----------
Total operating expenses 5,761,111 5,958,073 23,850,037 22,185,405
----------- ----------- ----------- -----------
Operating income 2,984,851 5,417,282 7,182,805 14,331,163
Interest income 773,621 696,135 2,260,633 1,536,662
----------- ----------- ----------- -----------
Income before income taxes 3,758,472 6,113,417 9,443,438 15,867,825
Income tax provision 1,200,000 2,219,000 2,950,000 5,825,000
----------- ----------- ----------- -----------
Net income $ 2,558,472 $ 3,894,417 $ 6,493,438 $10,042,825
=========== =========== =========== ===========
Net income per common and
common equivalent share $ .13 $ .19 $ .33 $ .51
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 19,901,000 20,246,000 19,976,000 19,680,000
=========== =========== =========== ===========
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,
----------------------------
1997 1996
------------ ------------
Operating activities:
Net income $ 6,493,438 $ 10,042,825
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 335,241 185,509
Deferred income taxes (41,000) 320,000
Changes in operating assets and liabilities:
Accounts receivable 6,788,052 (2,997,619)
Inventories (1,170,687) 5,336,401
Prepaid expenses and other current assets (1,628,308) (851,382)
Accounts payable and accrued expenses (1,752,220) 1,350,218
------------ ------------
Net cash from operating activities 9,024,516 13,385,952
------------ ------------
Investing activities:
Change in marketable securities (11,767,666) (42,072,120)
Payments for purchases of property and equipment (1,010,325) (331,980)
Payments for patents and trademarks (1,273,378) (13,272)
Purchase of certificate of deposit, restricted (9,750) 0
------------ ------------
Net cash from investing activities (14,061,119) (42,417,372)
------------ ------------
Financing activities:
Net proceeds from public stock offering 0 35,465,175
Proceeds from stock option and
employee stock purchase plans 319,271 1,893,780
Purchase of treasury shares (907,888) 0
------------ ------------
Net cash from financing activities (588,617) 37,358,955
------------ ------------
Net change in cash and cash equivalents (5,625,220) 8,327,535
Cash and cash equivalents:
Beginning of period 12,109,150 2,593,113
------------ ------------
End of period $ 6,483,930 $ 10,920,648
============ ============
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, 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.
1. In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share, which simplifies the standards for computing
earnings per share. SFAS No. 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per share,
which excludes dilution. SFAS No. 128 must be adopted for financial
statements issued for periods ending after December 15, 1997, with
earlier application not permitted. Under SFAS No. 128 for the three
months ended September 30, 1997, basic earnings per share would be the
same as the reported primary earnings per share of $0.13. For the nine
months ended September 30, 1997, basic earnings per share would be
$0.34 compared to the reported primary earnings per share of $0.33. The
Company plans to adopt SFAS No. 128 during the fourth quarter of 1997.
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(R) 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(TM), an external analgesic patch designed for the
temporary relief of pain from arthritis, simple backaches and muscular aches and
strains. Early in 1998, the Company will introduce a new product, Banish(TM)
personal smoke deodorizer, which removes smoke odor from clothing and hair. The
Company also has entered into several agreements to market or license certain
other new consumer products that are in various stages of evaluation and
testing.
Results of Operations:
Net sales were $12.6 million for the third quarter of 1997 compared to $19.4
million for the same quarter of 1996 and were $45.6 million for the first nine
months of 1997 compared to $61.3 million for the same period of 1996. Domestic
sales were $12.4 million for the third quarter of 1997 compared to $11.6 million
for the same quarter of 1996. During the third quarter of 1997, domestic retail
sell-through of Breathe Right nasal strips was estimated to be approximately 9%
higher than the third quarter of 1996. The Company believes the major
contributor to this increase was growth in repeat use of the product.
Domestic sales for the first nine months of 1997 were $41.9 compared to $42.2
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 nine months of 1997 domestic retail sell-through of Breathe
Right nasal strips was estimated to be approximately 10% higher than the same
period of 1996.
International sales were $291,000 for the third quarter of 1997 compared to $7.8
million for the same quarter of 1996 and were $3.7 million for the first nine
months of 1997 compared to $19.1 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,
international sales for 1997 are not as great as 1996.
Gross profit was $8.7 million or 69.2% of net sales for the third quarter of
1997 compared to $11.4 million or 58.7% for the same quarter of 1996 and was
$31.0 million or 68.0% for the first nine months of 1997 compared to $36.5
million or 59.6% for the same period of 1996. The higher gross profit percentage
was primarily due to the lower level of international sales in 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. The higher gross profit percentage was also due to lower
manufacturing costs and changes in product mix and pricing to retailers of
Breathe Right nasal strips
Marketing and selling expenses were $4.6 million for the third quarter of 1997
compared to $4.9 million for the same period in 1996 and were $20.6 million for
the first nine months of 1997 compared to $19.2 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 $933,000 for the third quarter of 1997
compared to $760,000 for the same quarter of 1996 and were $2.5 million for the
first nine months of 1997 compared to $2.1 million for the same period in 1996.
This increase was primarily due to expenses associated with patent litigation.
Product development expenses were $246,000 for the third quarter of 1997
compared to $336,000 for the same quarter of 1996 and were $737,000 for the
first nine months of 1997 comparable to $834,000 for the same period in 1996.
Interest income was $774,000 for the third quarter of 1997 compared to $696,000
for the same quarter of 1996 and was $2.3 million for the first nine months of
1997 compared to $1.5 million 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 third quarter of 1997 was $1.2 million or 31.9% of
income before income taxes compared to $2.2 million or 36.3% for the same
quarter of 1996 and was $3.0 million or 31.2% and for the first nine months of
1997 compared to $5.8 million or 36.7% 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 third quarter of 1997 was $2.6 million or $.13 per share
compared to $3.9 million or $.19 per share for the same quarter of 1996 and was
$6.5 million or $.33 per share for the first nine months of 1997 compared to
$10.0 million or $.51 per share for the same period of 1996. The lower net
income was due primarily to lower international sales.
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 September 30, 1997, the Company had cash and cash equivalents and marketable
securities of $68.6 million and working capital of $82.3 million.
Company operations provided cash of $9.0 million for the first nine months of
1997 compared with $13.4 million for the same period of 1996. The reduced cash
flow was due primarily to a decrease in net income.
The Company invested $11.8 million in marketable securities, $1.3 million in
product patent rights and $1.0 million in property and equipment in the first
nine months of 1997.
The Company received $318,000 during the first nine 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. The Company had
purchased 100,000 shares as of September 30, 1997 for aggregate cash
consideration of $908,000.
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.
Trutek Corp. ("Trutek") commenced an action against the Company in
August 1997, asserting a claim for breach of contract arising from a
Licensing Agreement entered into between the parties in April 1996.
Trutek seeks breach of contract damages in the amount of $150,000 and
damages for lost royalties in the amount of $250,000,000. The action
was filed in the Superior Court of New Jersey. The Company removed the
action to the United States District Court for the District of New
Jersey. The Company answered the complaint, denying any liability to
Trutek. The Company intends to vigorously defend this action.
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: November 12, 1997 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: November 12, 1997 By: /s/ David J. Byrd
David J. Byrd
Vice President of Finance and Chief
Financial Officer