<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
| X | Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
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or
| | Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-13502
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TSENG LABS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 87-0391229
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 Terry Drive, Newtown, PA 18940
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 968-0502
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(Former name, former address and former fiscal year, if changed since
last report.)
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
| X | Yes | | No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report (applicable
only to corporate issuers).
Class -- Common Stock, $.005 Par Value
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Outstanding at September 30, 1995 - 18,944,037 shares
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This report includes a total of 10 pages.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(In thousands)
September 30, December 31,
ASSETS 1995 1994
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,940 $38,542
Short-term investments 30,325 --
Accounts receivable, net 8,232 10,591
Inventories 5,074 3,786
Prepaid expenses and other 852 1,223
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Total current assets 50,423 54,142
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PROPERTY AND EQUIPMENT, net 7,355 6,565
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DEFERRED COSTS, net 4,095 3,644
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OTHER ASSETS 2,094 1,468
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$63,967 $65,819
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 1,540 $ 3,138
Accrued expenses 942 573
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Total current liabilities 2,482 3,711
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DEFERRED INCOME TAXES 2,247 2,247
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SHAREHOLDERS' EQUITY:
Common stock 98 97
Additional paid-in-capital 10,174 9,997
Retained earnings 53,609 54,039
Treasury stock, at cost (4,643) (4,272)
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59,238 59,861
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$63,967 $65,819
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See accompanying notes to financial statements
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TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
For the
Three Months
Ended
September 30
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1995 1994
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(Unaudited)
NET SALES $ 9,433 $19,270
COST OF SALES 6,973 14,018
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Gross profit 2,460 5,252
RESEARCH AND DEVELOPMENT 787 516
SELLING, GENERAL, AND ADMINISTRATIVE 1,543 1,607
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Income before income taxes 130 3,129
INCOME TAXES 30 1,127
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NET INCOME $ 100 $ 2,002
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NET INCOME PER SHARE .01 .11
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Weighted Average Common and Common
Equivalent Shares Outstanding $19,028 $19,015
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See accompanying notes to financial statements
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TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
For the
Nine Months
Ended
September 30
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1995 1994
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(Unaudited)
NET SALES $31,481 $63,007
COST OF SALES 22,318 46,052
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Gross profit 9,163 16,955
RESEARCH AND DEVELOPMENT 2,264 1,303
SELLING, GENERAL, AND ADMINISTRATIVE 4,714 4,875
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Income before income taxes 2,185 10,777
INCOME TAXES 725 3,882
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NET INCOME $ 1,460 $ 6,895
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NET INCOME PER SHARE $ .08 $ .36
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Weighted Average Common and Common
Equivalent Shares Outstanding $18,994 $19,124
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See accompanying notes to financial statements
<PAGE>
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
For the
Nine Months
Ended
September 30
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1995 1994
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,460 $ 6,895
Adjustments to reconcile net income
to cash provided by operating activities -
Depreciation and amortization 1,941 1,460
(Increase) decrease in -
Accounts receivable 2,359 1,066
Inventories (1,288) 766
Prepaid expenses and other 371 939
Increase (decrease) in -
Accounts payable (1,598) (884)
Accrued expenses 369 419
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Net cash provided by operating activities 3,614 10,661
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (30,325) --
Purchases of property and equipment (1,598) (1,559)
Increase in deferred costs (1,584) (1,801)
Increase in other assets (626) (184)
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Net cash (used in) investing activities (34,133) (3,544)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 178 18
Purchase of treasury stock (371) (2,228)
Dividends paid (1,890) (2,873)
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Net cash (used in) financing activities (2,083) (5,083)
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Net (decrease) increase in cash and
cash equivalents (32,602) 2,034
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,542 35,027
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,940 $ 37,061
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See accompanying notes to financial statements
<PAGE>
TSENG LABS, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS:
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In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1995, the results of operations and the changes in financial position for
the periods presented.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes included in the Company's latest annual
report on Form 10-K. The results of operations for the interim periods presented
are not necessarily indications of the results for the full year.
2. NET INCOME PER SHARE:
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Earnings per share was computed using the weighted average number of common
shares and share equivalents outstanding during the periods.
3. INVENTORIES:
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Inventories are stated at the lower of weighted average cost or market and
consist of the following:
September 30, December 31,
1995 1994
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(In Thousands)
Raw materials and work-in-process $4,702 $3,379
Finished goods 372 407
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$5,074 $3,786
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4. SHORT-TERM INVESTMENTS
----------------------
In connection with its purchase of short-term investments, the Company adopted
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates such designation as of each balance sheet date. At September 30,
1995, all short-term investments have been classified as held-to-maturity.
Held-to-maturity securities are carried at amortized cost, with coupon interest
and dividends and discount and premium amortization included in income each
period.
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5. OTHER ASSETS
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In April 1995, the Company converted approximately $818,000 of a secured loan
receivable into a minority interest in preferred stock in a start-up multimedia
products company. The Company also has advanced this entity $332,000 in the form
of a secured interest bearing note. The total investment of $1,150,000 is
included in other assets. The Company has also advance funded approximately
$200,000 of customer receivables for this entity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
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Revenues for the three months ended September 30, 1995 were $9,433,000, a 51%
decrease from the corresponding period in 1994. Revenues for the nine months
ended September 30, 1995 were $31,481,000, a 50% decrease from the corresponding
period in 1994. The decrease in revenues in the three- and nine- month periods
ended September 30, 1995 was primarily due to lower shipments and selling prices
of the Company's second generation accelerator products as these products
reached maturation in a rapidly evolving personal computer marketplace. Unit
shipments of older W32- and W32i-based products decreased significantly between
periods. Higher sales of W32p-based products were not sufficient to offset lower
unit shipments of the W32 and W32i and lower selling prices on all of the
Company's graphics accelerator products. Included in the accelerator products
during 1995 is the Company's video accelerator, the VIPeR, which began
contributing to sales in the third quarter of 1994. The Company had previously
announced its focus on its next generation of graphic accelerator, the ET6000.
Due to short product design cycles in the computer industry as a whole,
announced and anticipated new product introductions by competitors of the
Company, and anticipated design changes from major customers, the Company
expects that pricing pressures on existing products will continue to intensify
and revenues and earnings will continue to be lower than 1994 levels until the
ET6000, being introduced in late 1995, becomes a commercially successful
product. In addition, because of the risk in bringing new technologies to
market, in the production process and in the adequate availability of necessary
materials, and the competitive nature of the graphics market as a whole, there
can be no assurance that revenues and earnings from the ET6000 will be
sufficient to return the Company's operating results to historic levels.
Sales to two OEM customers represented approximately 53% and 30% of the
Company's revenues in the three- and nine- month periods ended September 30,
1995. For the three- and nine- month periods ended September 30, 1994, sales to
two OEM customers represented approximately 54% of the Company's revenues.
Cost of sales as a percentage of revenues was approximately 74% and 73% in the
three-month periods ended September 30, 1995 and 1994. The increase between
periods is due to the fact that the impact of cost reduction programs on the
W32i and W32p graphics accelerator products has not been sufficient to offset
lower selling prices on all of the Company's products. For the nine- month
periods ended September 30, 1995 and 1994, cost of sales as a percentage of
revenues decreased from 73% in 1994 to 71% in 1995 due to decreased production
costs as a result of the Company's increased cost reduction efforts on certain
products. In 1994, the Company undertook active cost reduction programs on its
W32i and W32p graphics accelerator products. As a result, unit cost of the W32i
and W32p decreased substantially in the second half of 1994, carrying over into
1995. Average margin levels for the VIPeR, which began contributing to sales
late in the third quarter of 1994, are greater than those of more mature
products, having a positive impact on overall Company margins. However, because
of the price competitive nature of the market, anticipated pricing pressures on
mature products and the current volatility in the yen/dollar exchange rate, the
Company expects increased pricing pressures impacting margins on its existing
W32 product line.
<PAGE>
Operating expenses increased to 16% and 15% of revenues in the three- and nine-
month periods ended September 30, 1995, respectively, from 8% in the
corresponding periods in 1994. The increase is due to both increased legal costs
associated with the Company's efforts in defending allegations associated with
an ongoing class action lawsuit and the fixed nature of certain of the Company's
operating expenses.
Research and development expense increased by 53% and 74% in the three and nine
month periods ended September 30, 1995 when compared to the corresponding
periods in 1994. This increase is due primarily to increased personnel and
outside consulting costs to support the development of the next generation
graphics accelerator, the ET6000, and due to the pursuit of new opportunities to
expand the Company's line of products addressing multimedia applications. The
Company currently expects that its research and development expenditures will
continue to increase as the Company continues to attempt to respond to both
shorter product life cycles in the graphics and PC market as a whole and develop
new technologies to address multimedia applications.
The Company's effective income tax rate was 23 % and 33% for the three- and
nine- month periods ended September 30, 1995, compared to 36% in the
corresponding periods in 1994. The primary reason for the decrease in the
effective income tax rate is the small benefit derived from higher tax credits
resulting from increased research and development expenditures and a lower
effective state income tax rate.
Inflation is not expected to have a significant adverse impact on the Company's
operations.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's ability to generate cash adequate to meet its requirements results
primarily from operating cash flow and the availability of bank borrowing. The
Company believes that these sources are sufficient to fund the Company's
short-term working capital requirements. Total working capital was $47,941,000
and $50,431,000 at September 30, 1995 and December 31, 1994, respectively. The
Company also has a bank line of credit providing total availability of
$2,500,000. There were no borrowings under this line in the during the three
months ended September 30, 1995.
In August 1995, the Company's Board of Directors, based upon current net income
levels, voted to suspend the Company's quarterly cash dividend.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
On October 30, 1995, the Company announced that John A. Vigna had been
appointed to the newly created positions of Executive Vice President and Chief
Operating Officer effective November 1, 1995. The Company also announced that
effective December 31, 1995, John J. Gibbons will withdraw from direct
management activities, but will continue to serve as a Director, Vice Chairman
of the Board and as a consultant to the Company.
Item 6. Exhibits and Reports on Report 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q:
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 1995.
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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.
TSENG LABS, INC.
Dated: November 10, 1995 By: /s/ Jack H-N Tseng
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Jack H-N Tseng
Chairman and President
Dated: November 10, 1995 By: /s/ John J. Gibbons
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John J. Gibbons
Vice-Chairman
Dated: November 10, 1995 By: /s/ Mark H. Karsch
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Mark H. Karsch
Senior Vice President
Chief Financial Officer
Dated: November 10, 1995 By: /s/ Barbara J. Hawkins
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Barbara J. Hawkins
Treasurer
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,940
<SECURITIES> 30,325
<RECEIVABLES> 9,214
<ALLOWANCES> 982
<INVENTORY> 5,074
<CURRENT-ASSETS> 50,423
<PP&E> 11,409
<DEPRECIATION> 4,054
<TOTAL-ASSETS> 63,967
<CURRENT-LIABILITIES> 2,482
<BONDS> 0
<COMMON> 98
0
0
<OTHER-SE> 59,230
<TOTAL-LIABILITY-AND-EQUITY> 63,967
<SALES> 8,925
<TOTAL-REVENUES> 9,433
<CGS> 6,973
<TOTAL-COSTS> 6,973
<OTHER-EXPENSES> 2,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 130
<INCOME-TAX> 30
<INCOME-CONTINUING> 100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> 0.01
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