<PAGE>
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 September 30, 1996
------------------------------------------
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, 1996 - 19,047,338 shares
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This report includes a total of 10 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TSENG LABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31,
ASSETS 1996 1995
- -------------------------------------------------- ------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,692 $ 9,004
Short-term investments 17,011 30,210
Accounts receivable, net 8,744 5,924
Inventories 3,725 3,408
Prepaid expenses and other 3,428 1,771
------------ -----------
Total current assets 37,600 50,317
------------ -----------
PROPERTY AND EQUIPMENT, net of
of accumulated depreciation
of $5,399 and $4,326 9,138 7,696
------------ -----------
DEFERRED COSTS, net 5,119 3,817
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NOTES RECEIVABLE 6,499 803
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OTHER ASSETS 2,104 2,038
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$ 60,460 $ 64,671
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,012 $ 2,834
Accrued expenses 895 1,131
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Total current liabilities 1,907 3,965
------------ -----------
DEFERRED INCOME TAXES 2,311 2,311
------------ -----------
SHAREHOLDERS' EQUITY:
Common stock 98 97
Additional paid-in capital 11,073 10,316
Retained earnings 49,714 52,625
Treasury stock, at cost (4,643) (4,643)
------------ -----------
56,242 58,395
------------ -----------
$ 60,460 $ 64,671
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TSENG LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
Three Months
Ended
September 30
---------------------------------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
NET SALES $ 12,360 $ 8,880
COST OF SALES 9,694 6,973
------------ ------------
Gross Profit 2,666 1,907
RESEARCH AND DEVELOPMENT 1,771 787
SELLING, GENERAL AND ADMINISTRATIVE 1,909 1,543
------------ ------------
OPERATING INCOME (LOSS) (1,014) (423)
INTEREST INCOME 292 553
------------ ------------
Income (loss) before income taxes (722) 130
INCOME TAXES (BENEFIT) (259) 30
------------ ------------
NET INCOME (LOSS) $ (463) $ 100
============ ============
NET INCOME (LOSS) PER SHARE $ (.02) $ .01
============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 19,047 19,028
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
TSENG LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
Nine Months
Ended
September 30
---------------------------------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
NET SALES $ 23,211 $ 29,860
COST OF SALES 19,039 22,318
------------ ------------
Gross Profit 4,172 7,542
RESEARCH AND DEVELOPMENT 4,357 2,264
SELLING, GENERAL AND ADMINISTRATIVE 5,417 4,714
------------ ------------
OPERATING INCOME (LOSS) (5,602) 564
INTEREST INCOME 1,113 1,621
------------ ------------
Income (loss) before income taxes (4,489) 2,185
INCOME TAXES (BENEFIT) (1,578) 725
------------ ------------
NET INCOME (LOSS) $ (2,911) $ 1,460
============ ============
NET INCOME (LOSS) PER SHARE $ (.15) $ .08
============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 19,001 18,994
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
TSENG LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
Nine Months
Ended
September 30
----------------------------
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,911) $ 1,460
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities -
Depreciation and amortization 2,000 1,941
(Increase) decrease in -
Accounts receivable (2,820) 2,359
Inventories (317) (1,288)
Prepaid expenses and other (1,657) 371
Other assets (65) (626)
Increase (decrease) in -
Accounts payable (1,822) (1,598)
Accrued expenses (236) 369
--------- ---------
Net cash (used in) provided by operating activities (7,828) 2,988
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,515) (1,598)
Increase in deferred costs (2,229) (1,584)
Decrease (increase) in short-term investments 13,199 (30,325)
Increase in notes receivable (5,697) --
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Net cash provided by (used in) investing activites 2,758 (33,507)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 758 178
Purchase of Treasury stock -- (371)
Dividends paid -- (1,890)
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Net cash provided by (used in) financing activities 758 (2,083)
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Net decrease in cash and cash equivalents (4,312) (32,602)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,004 38,542
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,692 $ 5,940
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ -- $ 675
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
1. SUMMARY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS:
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, 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:
Inventories are stated at the lower of weighted average cost or market and
consist of the following:
September 30, December 31,
1996 1995
--------- -------
(In Thousands)
Purchased parts $ 1,012 $ 662
Finished goods 2,713 2,746
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$ 3,725 $ 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 September 30,
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. RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
6. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1996 were $12,360,000, a 39%
increase from the corresponding period in 1995. The revenue growth was due to a
full quarter of shipments of the Company's ET6000 graphics chip, which offset
anticipated lower demand for the Company's older second generation accelerator
products. The Company began volume shipments of the ET6000 late in the second
quarter of 1996. Higher shipments of the ET6000 during the September quarter
contributed to an 83% increase in revenues from the immediately preceding 1996
quarter. While sales in the current quarter increased over both prior year and
prior quarter levels, the ET6000-based solutions are high performance solutions
competing in a mature and price competitive 2D graphics market. The Company
anticipates that there will be continued pressure to further reduce prices for
2D graphics products and solutions. The Company has implemented a program to
reduce the total cost of ET6000 based solutions but does not expect to realize
the full benefit of this effort in the fourth quarter of 1996. Accordingly, it
is likely that fourth quarter 1996 revenues and operating margins will be below
third quarter 1996 levels. In addition, because of the competitive nature of the
2D graphics market, there can be no assurance that the Company will achieve the
necessary long-term price reductions to maintain and/or increase unit shipments
of the ET6000. It should be recognized that the Company has focused considerable
resources on developing product for the emerging 3D graphics and multimedia
markets.
Revenues for the nine months ended September 30, 1996 were $23,211,000, a 22%
reduction from the corresponding period in 1995. The decrease was due to a
product transition during which sales of ET6000-based products were not
sufficient to offset anticipated lower sales and selling prices for the
Company's second generation accelerator products.
Sales to two customers represented approximately 46% and 43% of the Company's
revenues in the three-and nine-month periods ended September 30, 1996. Sales to
two customers represented approximately 53% and 30% of the Company's revenues in
the corresponding periods in 1995.
Cost of sales as a percentage of revenues was 78% and 79% in the three-month
periods ended September 30, 1996 and 1995, and 82% and 75% in the nine-month
periods ended September 30, 1996 and 1995, respectively. While margins in the
three-month periods ended September 30, 1996 and 1995 remained relatively
constant, the product mix changed substantially, with margins on ET6000 products
in the 1996 quarter replacing margins generated by the Company's second
generation accelerator products during the corresponding period in 1995. The
increase in costs as a percentage of revenue in the nine-month period ended
September 30, 1996, when compared to the corresponding period in 1995, is due to
lower margins on older products which represented a significant percentage of
total sales in the first half of 1996 and a $600,000 write-down on older
technology based inventory recorded in the first quarter of 1996. As discussed
above, the Company expects pricing pressures to intensify in the 2D graphics
market.
Research and development expense increased by 125% and 92% in both the three-and
nine-month periods ended September 30, 1996 when compared to the corresponding
periods in 1995. This increase is due primarily to increased personnel to
support the development of the ET6000 family of 2D and 3D graphics accelerators,
the cost of licensing certain technologies included in the Company's products,
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 life cycles in
the graphics and PC market as a whole and develop new technologies to address
multimedia and communications applications.
Operating expenses decreased to 15% of revenues in the three-month period ended
September 30, 1996 from 17% in the corresponding prior year period. The decrease
is due to the higher revenue levels between periods and the fixed nature of
certain of the Company's operating expenses. Operating expenses increased to 23%
of revenues in the nine-month period ended September 30, 1996 from 16% in the
<PAGE>
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 of 36% and 35% in the
three- and nine-month periods ended September 30, 1996 compared to an expense of
23% and 33% in the corresponding periods of 1996. The primary reason for the
change is the difference in pretax income levels between periods.
Inflation is not expected to have a significant adverse impact on the Company's
operations.
LIQUIDITY AND CAPITAL RESOURCES
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 $35,693,000
and $46,352,000 at September 30, 1996 and December 31, 1995, respectively. The
decrease in working capital was caused primarily by the Company's investment in
facilities, equipment and tools to enhance its advanced research and product
development facilities, systems and functions and its secured advance to the
entity that designs, manufactures and markets specialty graphics memory. The
Company also has a bank line of credit providing total availability of
$2,500,000. There were no borrowings under this line during the three months
ended September 30, 1996.
<PAGE>
PART II. OTHER INFORMATION
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, 1996.
<PAGE>
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 14, 1996 By: /s/JACK TSENG
----------------------------
Jack H-N Tseng
Chairman, President and CEO
Dated: November 14, 1996 By: /s/JOHN A. VIGNA
----------------------------
John A. Vigna
Executive Vice President
Chief Operating Officer
Dated: November 14, 1996 By: /s/MARK H. KARSCH
----------------------------
Mark H. Karsch
Senior Vice President
Chief Financial Officer
Dated: November 14, 1996 By: /s/BARBARA J. HAWKINS
----------------------------
Barbara J. Hawkins
Vice President
Chief Administrative Officer
<PAGE>
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 14, 1996 By:
----------------------------
Jack H-N Tseng
Chairman, President and CEO
Dated: November 14, 1996 By:
----------------------------
John A. Vigna
Executive Vice President
Chief Operating Officer
Dated: November 14, 1996 By:
----------------------------
Mark H. Karsch
Senior Vice President
Chief Financial Officer
Dated: November 14, 1996 By:
----------------------------
Barbara J. Hawkins
Vice President
Chief Administrative Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,692
<SECURITIES> 17,011
<RECEIVABLES> 9,385
<ALLOWANCES> (641)
<INVENTORY> 3,725
<CURRENT-ASSETS> 37,600
<PP&E> 14,537
<DEPRECIATION> (5,399)
<TOTAL-ASSETS> 60,460
<CURRENT-LIABILITIES> 1,907
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 56,144
<TOTAL-LIABILITY-AND-EQUITY> 60,460
<SALES> 12,360
<TOTAL-REVENUES> 12,360
<CGS> 9,694
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 292
<INCOME-PRETAX> (722)
<INCOME-TAX> (259)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
