-----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, T2DJWFewTEUfpFzeqpa5Bonu9DkVWU/BNyICK04zKTfZgu6blus37uipb2oTVOCa 4IX4pViCM6r551YtrlmUMA== 0000897101-97-001168.txt : 19971113 0000897101-97-001168.hdr.sgml : 19971113 ACCESSION NUMBER: 0000897101-97-001168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-16612 FILM NUMBER: 97715946 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 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 EX-11 2 COMPUTATION OF NET INCOME EXHIBIT NO. 27 CNS, INC. COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- NET INCOME Net income $ 2,558,472 $ 3,894,417 $ 6,493,438 $10,042,825 =========== =========== =========== =========== PRIMARY EARNINGS PER SHARE: Average number of common and common equivalent shares outstanding: Average common shares outstanding 19,274,000 19,145,000 19,244,000 18,556,000 Incentive stock options 395,000 635,000 461,000 646,000 Non qualified stock options 232,000 391,000 271,000 402,000 Warrants 0 75,000 0 76,000 ----------- ----------- ----------- ----------- 19,901,000 20,246,000 19,976,000 19,680,000 =========== =========== =========== =========== Primary earnings per share $ .13 $ .19 $ .33 $ .51 =========== =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE Average number of common and common equivalent shares outstanding: Average common shares outstanding 19,274,000 19,145,000 19,244,000 18,556,000 Incentive stock options 399,000 635,000 461,000 646,000 Non qualified stock options 235,000 391,000 271,000 402,000 Warrants 0 75,000 0 76,000 ----------- ----------- ----------- ----------- 19,908,000 20,246,000 19,976,000 19,680,000 =========== =========== =========== =========== Fully diluted earnings per share $ .13 $ .19 $ .33 $ .51 =========== =========== =========== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,483,930 62,106,859 7,877,679 0 9,485,513 90,231,344 1,687,702 0 93,561,668 7,881,940 0 0 0 192,946 85,486,782 93,561,668 45,631,043 45,631,043 14,598,201 23,850,037 0 0 0 9,443,438 2,950,000 6,493,438 0 0 0 6,493,438 0.33 0.33
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