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United States
Securities and Exchange Commission
Washington, DC 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 March 31, 1996
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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
incorporation or organization) Identification No.)
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 March 31, 1996 - 18,969,237 shares
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This report includes a total of 9 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)
March 31 December 31,
ASSETS 1996 1995
- ------------------------------------------- --------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 7,192 $ 9,004
Short-term investments 30,071 30,210
Accounts receivable, net 1,778 5,924
Inventories 4,214 3,408
Prepaid expenses and other 3,495 2,574
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Total current assets 46,750 51,120
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PROPERTY AND EQUIPMENT, net of
of accumulated depreciation
of $4,680 and $4,326 8,336 7,696
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DEFERRED COSTS, net 4,288 3,817
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OTHER ASSETS 2,111 2,038
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$ 61,485 $ 64,671
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,702 $ 2,834
Accrued expenses 461 1,131
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Total current liabilities 2,163 3,965
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DEFERRED INCOME TAXES 2,311 2,311
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SHAREHOLDERS' EQUITY:
Common stock 97 97
Additional paid-in capital 10,348 10,316
Retained earnings 51,209 52,625
Treasury stock, at cost (4,643) (4,643)
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57,011 58,395
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$ 61,485 $ 64,671
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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
March 31
----------------------
1996 1995
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(Unaudited)
NET SALES $ 4,107 $ 11,482
COST OF SALES 3,830 8,036
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Gross Profit 277 3,446
RESEARCH AND DEVELOPMENT 1,287 765
SELLING, GENERAL AND ADMINISTRATIVE 1,625 1,559
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OPERATING INCOME (LOSS) (2,635) 1,122
INTEREST INCOME 454 498
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Income (loss) before income taxes (2,181) 1,620
INCOME TAXES (764) 564
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NET INCOME (LOSS) $ (1,417) $ 1,056
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NET INCOME (LOSS) PER SHARE $ (.07) $ .06
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Weighted Average Common and Common
Equivalent Shares Outstanding 18,967 18,965
======== ========
See accompanying notes to financial statements
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TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
For the
Three Months
Ended
March 31
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1996 1995
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ (1,417) $ 1,056
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities -
Depreciation and amortization 540 555
(Increase) decrease in -
Accounts receivable 4,146 3,585
Inventories (806) 989
Prepaid expenses and other (921) 211
Other assets (72) (418)
Increase (decrease) in -
Accounts payable (1,132) 104
Accrued expenses (670) 255
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Net cash (used in) provided by operating activities (332) 6,337
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (994) (330)
Increase in deferred costs (657) (417)
Decrease (increase) in short-term investments 139 (24,889)
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Net cash used in investing activites (1,512) (25,636)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 32 --
Purchase of Treasury stock -- (371)
Dividends paid -- (946)
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Net cash (used in) provided by financing activities 32 (1,317)
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Net decrease in cash and cash equivalents (1,812) (20,616)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,004 38,542
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,192 $ 17,926
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ -- $ 564
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See accompanying notes to 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 March 31,
1996, 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 (LOSS) PER SHARE:
----------------------------
Net income (loss) 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:
March 31, December 31,
1996 1995
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(In Thousands)
Purchased parts $ 668 $ 662
Finished goods 3,546 2,746
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$4,214 $3,408
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4. SHORT-TERM INVESTMENTS
----------------------
In connection with its purchase of short-term investments, in 1995 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 March 31,
1996, 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.
5. ADVANCES
--------
Subsequent to March 31, 1996, the Company amended and expanded a secured
agreement with the entity that designed, manufactures and markets MDRAM. Under
the expanded agreement, the Company advanced this entity $6,500,000 in the form
of a secured, interest bearing loan. The note has a term of 24 months, with
$5,000,000 subject to call at the Company's option in November 1996. The Company
has the right, at its option, to convert a portion of the advance into equity at
valuations specified in the agreement. Advances to this entity were
approximately $803,000 at March 31, 1996.
6. RECLASSIFICATIONS
-----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
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7. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Effective January 1, 1996, the Company adopted Statement of Accounting Standards
Nos. 121 and 123. The adoption of these standards did not have a material impact
on the Company's financial position or results of operations.
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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 March 31, 1996 were $4,107,000, a 64%
decrease from the corresponding period in 1995. The decrease in revenues in the
three-month period ended March 31, 1996 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.
The Company had previously announced its focus on its next generation of graphic
accelerator, the ET6000. In mid-March 1996, the Company announced the first
customer shipments of the ET6000 to customers in the Early Adopter Program. As
such, the first quarter of 1996 included only initial shipments of the new
product. Because of the risks in bringing new technologies to market, in the
production process of custom integrated circuits, 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 54% and 36% of the
Company's revenues in the three-month periods ended March 31, 1996 and 1995,
respectively.
Cost of sales as a percentage of revenues increased to 93% of revenues in the
three-month period ended March 31, 1996 from 70% in the corresponding period in
1995. The increase between periods is largely due to lower margins on older
products due to significant competitive pressures on these products and a
write-down of $600,000 on older technology based inventory. Because of the price
competitive nature of the market and anticipated pricing pressures on mature
products, the Company expects increased pricing pressures impacting margins on
its existing W32 product line.
Research and development expense increased by 68% in the three month period
ended March 31, 1996 when compared to the corresponding period in 1995. This
increase is due primarily to increased personnel to support the development of
the ET6000 family of graphics accelerators, and the pursuit of new opportunities
to expand the Company's line of products addressing multimedia and
communications 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 and
communications applications.
Operating expenses increased to 40% of revenues in the three-month period ended
March 31, 1996 from 14% in the corresponding period in 1995. The increase is due
to lower revenue levels between periods, increased investments in personnel to
enhance the Company's operations, marketing and sales efforts, and the fixed
nature of certain of the Company's operating expenses.
The Company's effective income tax rate was a benefit if 35% for the three-month
period ended March 31, 1996, compared to an expense of 35% in the corresponding
period in 1995. The primary reason for the change is the difference in pretax
income between periods.
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 $44,587,000
and $47,155,000 at March 31, 1996 and December 31, 1995, 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 March 31, 1996.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 22, 1996, the plaintiffs in the Class Action lawsuit filed against the
Company in May 1993 filed a notice of appeal with the United Stated Court of
Appeals for the Third Circuit of Judge Robert Kelly's motion for Summary
Judgment which dismissed the case in its entirety. The Company is confident that
the Court of Appeals will affirm the District Court's summary judgment order
that there is no merit to the allegations in the complaint.
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 March 31, 1996.
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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: May 14, 1996 /s/JACK TSENG
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Jack H-N Tseng
Chairman, President and CEO
Dated: May 14, 1996 /s/JOHN A. VIGNA
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John A. Vigna
Executive Vice President
Chief Operating Officer
Dated: May 14, 1996 /s/MARK H. KARSCH
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Mark H. Karsch
Senior Vice President
Chief Financial Officer
Dated: May 14, 1996 /s/BARBARA J. HAWKINS
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Barbara J. Hawkins
Vice President
Chief Administrative Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,192
<SECURITIES> 30,071
<RECEIVABLES> 2,661
<ALLOWANCES> (883)
<INVENTORY> 4,214
<CURRENT-ASSETS> 46,750
<PP&E> 13,016
<DEPRECIATION> (4,680)
<TOTAL-ASSETS> 61,485
<CURRENT-LIABILITIES> 1,702
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 56,914
<TOTAL-LIABILITY-AND-EQUITY> 61,485
<SALES> 4,107
<TOTAL-REVENUES> 4,107
<CGS> 3,830
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,912
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454
<INCOME-PRETAX> (2,181)
<INCOME-TAX> (764)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,417)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
