-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CS6tpuNqWQM73vIoEpY6T7Qyh8m+j6F040HeevT1t15t1Drr9Ffqlhq5aZUlXJNM hqMSrmha00zktZIpsJSjiw== 0000897101-97-000884.txt : 19970813 0000897101-97-000884.hdr.sgml : 19970813 ACCESSION NUMBER: 0000897101-97-000884 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNS INC /DE/ CENTRAL INDEX KEY: 0000814258 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411580270 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16612 FILM NUMBER: 97656350 BUSINESS ADDRESS: STREET 1: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128206696 MAIL ADDRESS: STREET 2: PO BOX 39802 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 10-Q 1 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 EX-11 2 COMPUTATION OF NET INCOME PER SHARE Exhibit No. 11 CNS, INC. Computation of Net Income per Share of Common Stock
Three months ended June 30, Six Months ended June 30, --------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- NET INCOME Net income $ 2,613,473 $ 3,047,471 $ 3,934,966 $ 6,148,408 =========== =========== =========== =========== PRIMARY EARNINGS PER SHARE: Average number of common and common equivalent shares outstanding: Average common shares outstanding 19,277,000 19,106,000 19,241,000 18,258,000 Incentive stock options 436,000 667,000 485,000 651,000 Non qualified stock options 266,000 426,000 296,000 407,000 Warrants 0 77,000 0 76,000 ----------- ----------- ----------- ----------- 19,979,000 20,276,000 20,022,000 19,392,000 =========== =========== =========== =========== Primary earnings per share $ .13 $ .15 $ .20 $ .32 =========== =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE Average number of common and common equivalent shares outstanding: Average common shares outstanding 19,277,000 19,106,000 19,241,000 18,258,000 Incentive stock options 436,000 676,000 485,000 674,000 Non qualified stock options 266,000 435,000 296,000 430,000 Warrants 0 78,000 0 78,000 ----------- ----------- ----------- ----------- 19,979,000 20,295,000 20,022,000 19,440,000 =========== =========== =========== =========== Fully diluted earnings per share $ .13 $ .15 $ .20 $ .32 =========== =========== =========== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,348,587 61,276,033 6,966,323 0 9,983,773 89,464,049 1,375,701 0 92,545,744 8,616,725 0 0 0 192,776 83,736,234 92,545,744 32,988,245 32,988,245 10,701,364 18,088,927 0 0 0 5,684,966 1,750,000 3,934,966 0 0 0 3,934,966 .20 .20
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