- ------------------------------------------------------------------------------- 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 ------------------------------------------------ or [ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------------- ------------------------ Commission file number 0-13502 -------------------------------------------------------- TSENG LABS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) UTAH 87-0391229 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6 Terry Drive, Newtown, PA 18940 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 968-0502 - ------------------------------------------------------------------------------- (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 - ------------------------------------------------------------------------------- Outstanding at March 31, 1996 - 18,969,237 shares - ------------------------------------------------------------------------------- This report includes a total of 9 pages. PART I. FINANCIAL INFORMATION Item 1. Financial Statements TSENG LABS, INC. ---------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (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 ------- ------- Total current assets 46,750 51,120 ------- ------- PROPERTY AND EQUIPMENT, net of of accumulated depreciation of $4,680 and $4,326 8,336 7,696 ------- ------- DEFERRED COSTS, net 4,288 3,817 ------- ------- OTHER ASSETS 2,111 2,038 ------- ------- $ 61,485 $ 64,671 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,702 $ 2,834 Accrued expenses 461 1,131 ------- ------- Total current liabilities 2,163 3,965 ------- ------- DEFERRED INCOME TAXES 2,311 2,311 ------- ------- 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) ------- ------- 57,011 58,395 ------- ------- $ 61,485 $ 64,671 ======= ======= See accompanying notes to financial statements. TSENG LABS, INC. ---------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (In thousands, except per share amounts) For the Three Months Ended March 31 ---------------------- 1996 1995 -------- -------- (Unaudited) NET SALES $ 4,107 $ 11,482 COST OF SALES 3,830 8,036 -------- -------- Gross Profit 277 3,446 RESEARCH AND DEVELOPMENT 1,287 765 SELLING, GENERAL AND ADMINISTRATIVE 1,625 1,559 -------- -------- OPERATING INCOME (LOSS) (2,635) 1,122 INTEREST INCOME 454 498 -------- -------- Income (loss) before income taxes (2,181) 1,620 INCOME TAXES (764) 564 -------- -------- NET INCOME (LOSS) $ (1,417) $ 1,056 ======== ======== NET INCOME (LOSS) PER SHARE $ (.07) $ .06 ======== ======== Weighted Average Common and Common Equivalent Shares Outstanding 18,967 18,965 ======== ======== See accompanying notes to financial statements TSENG LABS, INC. ---------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (In thousands) For the Three Months Ended March 31 -------------------- 1996 1995 -------- -------- (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 -------- -------- Net cash (used in) provided by operating activities (332) 6,337 -------- -------- 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) -------- -------- Net cash used in investing activites (1,512) (25,636) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 32 -- Purchase of Treasury stock -- (371) Dividends paid -- (946) -------- -------- Net cash (used in) provided by financing activities 32 (1,317) -------- -------- Net decrease in cash and cash equivalents (1,812) (20,616) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,004 38,542 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,192 $ 17,926 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for income taxes $ -- $ 564 ======== ======== See accompanying notes to financial statements 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 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: ------------ Inventories are stated at the lower of weighted average cost or market and consist of the following: March 31, December 31, 1996 1995 --------- ------------ (In Thousands) Purchased parts $ 668 $ 662 Finished goods 3,546 2,746 ------ ------ $4,214 $3,408 ====== ====== 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. 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - --------------------- 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 - ------------------------------- 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. 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. 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 ------------- Jack H-N Tseng Chairman, President and CEO Dated: May 14, 1996 /s/JOHN A. VIGNA ---------------- John A. Vigna Executive Vice President Chief Operating Officer Dated: May 14, 1996 /s/MARK H. KARSCH ----------------- Mark H. Karsch Senior Vice President Chief Financial Officer Dated: May 14, 1996 /s/BARBARA J. HAWKINS --------------------- Barbara J. Hawkins Vice President Chief Administrative Officer