United States
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 quarterly period ended June 30, 1995
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or
Transition Report Pursuant to Section 13 or 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 June 30, 1995 - 18,933,437 shares
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This report includes a total of 10 pages.
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)
June 30, December 31,
ASSETS 1995 1994
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 9,009 $ 38,542
Short-term investments 29,780 ---
Accounts receivable, net 7,027 10,591
Inventories 4,549 3,786
Prepaid expenses and other 1,134 1,223
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Total current assets 51,499 54,142
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PROPERTY AND EQUIPMENT, net 7,145 6,565
DEFERRED COSTS, net 3,910 3,644
OTHER ASSETS 2,056 1,468
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$ 64,610 $ 65,819
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable $ 2,296 $ 3,138
Accrued expenses 1,002 573
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Total current liabilities 3,298 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 10,101 9,997
Retained earnings 53,509 54,039
Treasury stock, at cost (4,643) (4,272)
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59,065 59,861
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$ 64,610 $ 65,819
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See accompanying notes to financial statements
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
June 30
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1995 1994
---- ----
(Unaudited)
NET SALES $ 10,068 $ 21,793
COST OF SALES 7,309 15,596
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Gross Profit 2,759 6,197
RESEARCH AND DEVELOPMENT 712 473
SELLING, GENERAL, AND ADMINISTRATIVE 1,612 1,633
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Income before income taxes 435 4,091
INCOME TAXES 131 1,475
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NET INCOME $ 304 $ 2,616
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NET INCOME PER SHARE $ .02 $ .14
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Weighted Average Common and Common
Equivalent Shares Outstanding 18,988 19,112
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See accompanying notes to financial statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
For the
Six Months
Ended
June 30
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1995 1994
---- ----
(Unaudited)
NET SALES $ 22,048 $ 43,737
COST OF SALES 15,345 32,034
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Gross Profit 6,703 11,703
RESEARCH AND DEVELOPMENT 1,477 787
SELLING, GENERAL, AND ADMINISTRATIVE 3,171 3,268
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Income before income taxes 2,055 7,648
INCOME TAXES 695 2,755
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NET INCOME $ 1,360 $ 4,893
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NET INCOME PER SHARE $ .07 $ .26
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Weighted Average Common and Common
Equivalent Shares Outstanding 18,977 19,178
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See accompanying notes to financial statements
TSENG LABS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
For the
Six Months
Ended
June 30
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1995 1994
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(Unaudited)
OPERATING ACTIVITIES:
Net income $ 1,360 $ 4,893
Adjustments to reconcile net income
to cash provided by operating activities -
Depreciation and amortization 850 963
(Increase) decrease in -
Accounts receivable 3,564 (2,207)
Inventories (763) 1,190
Prepaid expenses and other 89 993
Increase (decrease) in -
Accounts payable (842) 1,567
Accrued expenses 429 305
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Net cash provided by operating activities 4,976 7,704
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INVESTING ACTIVITIES:
Purchases of short-term investments (29,780) ----
Purchases of property and equipment (1,116) (941)
Increase in deferred costs (580) (1,164)
Increase in other assets (588) (107)
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Net cash used in investing activities (32,353) (2,212)
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FINANCING ACTIVITIES:
Proceeds from exercise of stock options 105 4
Purchase of treasury stock (371) (2,072)
Dividends paid (1,890) (107)
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Net cash used in financing activities (2,156) (3,992)
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Net (decrease) increase in cash and cash equivalents (29,533) 1,500
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,542 35,027
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,009 $ 36,527
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See accompanying notes to financial statements
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 June 30,
1995, the results of operations and the changes in financial position for the
periods covered.
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:
June 30, December 31,
1995 1994
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(In Thousands)
Purchased parts $ 4,009 $ 3,379
Finished goods 540 407
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$ 4,549 $ 3,786
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4. SHORT-TERM INVESTMENTS
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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 June 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.
5. OTHER ASSETS
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In April 1995, the Company converted approximately $881,000 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 $269,000 in the form
of a secured interest bearing note. The total investment of $1,150,000 is
included in other assets.
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 June 30, 1995 were $10,068,000, a 54%
decrease from the corresponding period in 1994. Revenues for the six months
ended June 30, 1995 were $22,048,000, a 50% decrease from the corresponding
period in 1994. The decrease in revenues in the three and six month periods
ended June 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 products were not sufficient to offset lower 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 involved in bringing new technologies to market, the risks inherent 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.
With respect to total sales of the Company's products, sales to three OEM
customers represented approximately 49% of the Company's revenues in the three
month period ended June 30, 1995 and sales to two OEM customers accounted for
31% of the Company's revenues for the six month period ended June 30, 1995. For
the three and six month periods ended June 30, 1994, sales to two OEM customers
represented approximately 53% of the Company's revenues.
Cost of sales as a percentage of revenues was approximately 73% in both the
three-month periods ended June 30, 1995 and 1994. For the six month periods
ended June 30, 1995 and 1994, cost of sales as a percentage of revenues
decreased from 73% in 1994 to 70% 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 the first
half 1995. Also, the Company's video processor, VIPeR, began contributing to
sales late in the third quarter of 1994. Average margin levels for the VIPeR are
greater than those of 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.
Operating expenses increased to 16% and 14% of revenues in the three and six
month periods ended June 30, 1995, respectively, from 7.5% 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 50.5% and 87.7% in the three and
six month periods ended June 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 30% and 34% for the three and six
month periods ended June 30, 1995 , compared to 36% in the corresponding periods
in 1994. The primary reason for the decrease in the effective income tax rate is
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 1995
working capital requirements. Total working capital was $48,201,000 and
$50,431,000 at June 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 during the three months ended June 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.
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
June 30, 1995.
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.
Date: August 10, 1995 By: /s/ Jack H-N Tseng
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Jack H-N Tseng
Chairman and President
Date: August 10, 1995 By: /s/ John J. Gibbons
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John J. Gibbons
Vice-Chairman
Date: August 10, 1995 By: /s/ Mark H. Karsch
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Mark H. Karsch
Senior Vice President
Chief Financial Officer
Date: August 10, 1995 By: /s/ Barbara J. Hawkins
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Barbara J. Hawkins
Treasurer